Alere Management Discusses Q3 2012 Results - Earnings Call Transcript

Nov. 8.12 | About: Alere Inc. (ALR)

Alere (NYSE:ALR)

Q3 2012 Earnings Call

November 08, 2012 8:30 am ET

Executives

Doug Guarino - Director of Corporate Communications & Corporate Relations

Ron Zwanziger - Chairman, Chief Executive Officer and President

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

Analysts

Zarak Khurshid - Wedbush Securities Inc., Research Division

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

Jonathan P. Groberg - Macquarie Research

Daniel L. Leonard - Leerink Swann LLC, Research Division

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

Anthony Petrone - Jefferies & Company, Inc., Research Division

Isaac Ro - Goldman Sachs Group Inc., Research Division

John M. Putnam - Capstone Investments, Research Division

Eric Criscuolo - Mizuho Securities USA Inc., Research Division

Operator

Good morning, and welcome to the Alere Inc. conference call to discuss third quarter 2012 results. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Doug Guarino. Please go ahead.

Doug Guarino

Thank you, Sue, and good morning and welcome to the Alere conference call to discuss our results for the quarter ended September 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 to recognize the expected benefits of this strategy; the impact of health care reform legislation, as well as future reform initiative; the content and [indiscernible] regulatory decisions and actions, including the results and consequences of FDA inspections and the OIG subpoena, 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 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. Despite strong cash flow, this quarter has been very difficult, particularly given the problems with Triage in Europe. Fortunately, with the exception of Europe, the issues affecting this quarter were primarily transitory.

Throughout the third quarter, we worked with the FDA to agree on revised release specifications for the Triage products manufactured in San Diego, and at the very end of the quarter, we were able to reach final agreement. While the agreed release criteria is quite rigid and resulted in more acute yield and manufacturing issues in October than anticipated, shipments of the affected products are now beginning to increase, and we believe that while U.S. Triage supply will remain a challenge in the near future, by the end of this quarter, we should have reached a threshold of manufacturing efficiency that will enable us to move -- effectively supply the market by early in the first quarter of 2013.

In terms of business lost as a result of these supply constraints, we believe that a recovery of 50% of the lost accounts by the end of 2013 is an achievable but challenging target, which will hinge on our ability to reestablish dependable supply into the market early in the year.

A second challenge, which we have regularly been reporting on in each of our quarterly calls, has been the macroeconomic environment in Europe. As has been broadly reported in the earnings call of other companies and in the general press, European economic activity has continued to deteriorate throughout the third quarter and the impact of both that factor, as well as our supply constraints with Triage in the U.S. can be seen in our Q3 reported results.

As in prior quarters, we continue to expect difficulties in Europe to continue for the foreseeable feature with the actual impact on any given quarter quite difficult to predict.

The magnitude of these 2 issues outpaced our continued strong performance in Asia and emerging markets around the world, despite the supply constraint in Asia, which reduced Q3 revenues but should be resolved by the end of Q4.

Within Asia, China and Japan, and particularly -- performed well yet again. As health care systems in emerging economies continue to mature and embrace better and more timely information to improve outcomes and lower costs, we expect an increasing amount of our revenues to derive from these regions with a corresponding increase in our overall organic growth rates.

Our Toxicology business has also continued to expand particularly in the U.S. as a result of our unique combination of point-of-care screening tests, plus comprehensive lab services.

Despite the challenges with Triage and in Europe as an organization, we remain focused on improving our operational effectiveness. As part of a greater emphasis on execution, investors should expect a Chief Operating Officer appointment during -- in the near future as we reach the conclusion to the search, which has been underway for some time.

In addition, several other changes have already taken place to reinforce our operational leadership, and we're continuing to strengthen quality personnel and systems throughout the world with several key hires having occurred in the third quarter.

Additionally, we continue to consider opportunities for partnership or other transactions for parts of our Health Management business. We've also begun looking at the potential sale of other noncore assets.

Despite any minor short-term increases in debt as a result of our likely acquisition of Epocal and select diabetes assets, we are now entering a phase in which we expect to improve our leverage ratio, lower our debt and improve our ROIC.

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. As a result of a comment that we received from the SEC on our 2011 10-K and our Q2 2012 earnings press release, we have deleted from our press release for Q3 2012 the tables that we historically provided summarizing a non-GAAP full income statement. We've replaced this disclosure with reconciliations of GAAP to non-GAAP operating income, net income available to common shareholders and diluted earnings per common share.

We've also made available on our website, in a file labeled Q3 2012 Reconciliations of non-GAAP Adjusted P&L Categories, a reconciliation of GAAP to non-GAAP results for each line of the P&L.

Adjusted net revenues for the quarter were $692.3 million compared to $585.8 million in Q3 2011 and $701.6 million in Q2 2012. The effects of foreign currency translation decreased Q3 2012 adjusted revenues by $14.2 million compared to Q3 2011; and by $1.2 million compared to Q2 2012. Adjusted earnings per diluted share for Q3 2012 were $0.43.

By business segment, adjusted net revenues from our Professional Diagnostics segment were $529.7 million in Q3 2012 as compared to $426.3 million in Q3 2011. Acquisitions accounted for $134.6 million of this increase. Revenues from North American flu sales were $9.9 million in Q3 2012 compared to $16.0 million in Q3 2011.

Excluding the change in flu sales and excluding the impact of the reduction in our U.S. meter-based Triage product sales, which I will discuss in a moment, the currency adjusted organic growth rate for the quarter was 1% for our Professional Diagnostics segment, primarily as a result of the transitory matters, which I'll discuss.

Included in our Q3 2012 Professional Diagnostics net product and services revenues are combined revenues of $5.8 million from the Q3 2012 acquisitions of Amedica Biotech, a U.S. drugs of abuse manufacturer, as well as a small Danish distribution business; and MedApps, a developer of remote health monitoring solutions.

Within our Professional Diagnostics segment, net product revenues for our Cardiology business were $122.4 million in Q3 2012 and $127.9 million in Q3 2011.

Sales of Triage-based products in the U.S. totaled $34.9 million in Q3 2012 compared to $48.2 million in Q3 2011, and included $7.1 million of cardiac panel sales in Q3 2012 compared to $18.3 million in Q3 2011. Q3 2012 also included $27.8 million of combined BNP, D-dimer and Toxicology sales compared to $29.9 million in Q3 2011.

Q3 2012 U.S. Triage revenues of $34.9 million compared to revenues of $40.6 million in Q2 2012 and $50.5 million in Q1 2012. As compared to Q2 2012, reduced revenues resulted primarily from limitations in product supply, particularly in relation to the cardiac panel tests.

As we indicated in our October 3, 2012, 8-K, we reached an agreement with the FDA on product release specifications for the U.S. meter-based products. To address these release specifications, we are increasing our production capacity in our San Diego facility. This capacity, which was approximately 1.5 million tests in September increased to 1.8 million tests in October and will increase to approximately 3.3 million tests per month by the close of 2012. The capacity expansions result from increasing the number of automated and manual lines that are running in the facility, as well as expanding our operations to 24/7.

Since implementing the final release specifications, we have seen the reduced yields that we have expected. We indicated in the 8-K that we expected product shortfalls in October and overall Q4 revenues from panel sales to be approximately $6 million to $8 million and approximately $4 million to $5 million for meter-based Toxicology revenues. Despite the lower yields, as a result of the ongoing capacity expansions that I just mentioned, our current estimate for panel sales remain unchanged at $6 million to $8 million. This estimate includes the impact of a Troponin only cardiac configuration that we introduced in October and our plan to provide customers with a Troponin and CKMB cardiac configuration during the fourth quarter.

However, to achieve the cardiac sales, we've had to devote more capacity than we expected to the panel products and away from the TOX products. Therefore, we now expect Q4 2012 TOX revenues to be approximately $2 million. We are working with our hospital-based toxicology customers on supplying a variety of our existing visual rapid tests until such time as our Triage TOX supplies reach adequate levels.

Net product revenues in our Infectious Disease business were $136.6 million in Q3 2012 compared to $142.6 million in Q3 2011. The decrease in revenue from Q3 2011 relates to the reduction in U.S. flu revenues that I discussed earlier, as well as reductions in both HIV and malaria revenues, both of which compare to particularly strong prior year comparable results and suffered from a delay in shipments in Q3, which should be reversed in the fourth quarter.

The Toxicology business grew from $93.5 million in Q3 2011 to $156.1 million in Q3 2012. The recent acquisitions of Avee, eScreen and Amedica contributing net revenues of $63.7 million of the increase. Adjusted gross margins from Professional Diagnostics segment were 55.8% in Q3 2012 compared to 58.9% in Q3 2011. The inclusion of $40.4 million of revenues from eScreen at a gross margin of 33% reduced our Q3 2012 adjusted gross margins in this segment by 188 basis points.

This, along with a combined 69 basis point reduction in margins as a result of the reduced U.S. Triage and flu revenues in the quarter that I discussed earlier, accounted for most of the year-over-year decrease in margins.

Foreign exchange related headwinds, particularly relating to Europe, also contributed to Q3 2012 gross margin results.

Adjusted operating income in the Professional Diagnostics segment was $117.7 million or 22.1% of adjusted net revenues in Q3 2012 compared to $120.8 million or 28.1% of net revenues in Q3 2011.

Net revenues from our Health Management segment were $135.1 million in Q3 2012 compared to $129.9 million in Q3 2011 and $138.6 million in Q2 2012. Compared to Q2 2012, reduction in revenues principally relates to seasonal lower wellness revenues from our Alere Wellness business, which more than offset improvements in our disease and case management businesses and patient self testing business. Adjusted gross margins from our Health Management segment were 46.2% in Q3 2012 compared to 46.5% in Q2 2012. Adjusted operating income from our Health Management segment was $2.9 million in Q3 2012 compared to $3 million in Q2 2012.

Product and services revenues from our consumer diagnostic business segment were $22.4 million in Q3 2012 compared to $24.3 million in Q3 2011. Q3 2012 revenues include $16.1 million of manufacturing and service revenues for products and services provided to the joint venture compared to $19.7 million in Q3 2011. Adjusted gross margins from our Consumer Diagnostics segment were 24.6% in Q3 2012 compared to 23.8% in Q3 2011.

Adjusted selling, general and administrative expenses were $212.9 million or 30.8% of adjusted net revenues in Q3 2012 compared to $216.7 million or 30.9% of adjusted net revenues in Q2 2012.

Q3 acquisitions added $1.7 million of incremental adjusted SG&A expense compared to Q2 2012, offset by reduced spending principally in our European and Health Management businesses.

Adjusted research and development expense of $38.5 million or approximately 5.6% of net revenues compared to $38.1 million in Q2 2012. We expect R&D expense to be approximately $40 million in the fourth quarter. Adjusted interest and other expense was $54.6 million in Q3 2012 compared to $36.1 million in Q3 2011.

Adjusted interest expense, net of interest income, was $53.1 million in Q3 2012 compared to $45.0 million in Q3 2011.

In Q3 2012, our adjusted tax rate was approximately 35.3% of pretax income compared to 39.2% in Q3 2012. On a year-to-date basis, our adjusted tax rate was 34.0%.

Adjusted EBITDA for the quarter was $140.7 million, which included deductions for restructuring charges of $3.2 million and $800,000 of acquisition-related expenses.

Adjusted free cash flow for the quarter was $59.7 million, reflecting cash flow from operations of $87.5 million, offset by capital expenditures of $27.8 million.

Now let me turn the call back over to Ron.

Ron Zwanziger

Thanks, Dave. With the results of the election on Tuesday, there is -- we're pleased to see that there's increased certainty regarding the future of health care reform. This clarity should speed decision making and favor companies like Alere that are generally focused on improving outcomes and reducing costs. In particular, the use of technology and support for health information technology should accelerate as the health care industry now moves forward to implement the programs required by the Affordable Care Act.

Our overall health care IT strategy is beginning to emerge as a comprehensive and highly differentiated offering with several key developments in Q3. Our health information exchange programs, which we discussed at the JPMorgan conference at the beginning of the year, are being consistently expanded, first, in Hawaii and now more recently in New Jersey.

Additionally, we signed 2 partnership agreements during the quarter. The first was for an end-to-end mobile health solution that will help individuals with Type 2 diabetes manage their health and engage with their caregivers; and the second was for adoption of a device which provides wireless continuous activity monitor for participants in our Weight Talk program.

We also acquired 2 companies during the quarter, which will support our comprehensive technology solution. MedApps, which was renamed AlereConnect, provides state-of-the-art wireless communication capabilities to our existing and in-development home monitoring diagnostics and services, allowing our systems to directly receive and analyze data from the home at very low costs.

Also during the quarter, we acquired DiagnosisOne, a provider of clinical decision support solutions which support better patient care, reduced errors and better clinical outcomes. DiagnosisOne provides cloud-based clinical decision support and analytics capabilities, along with a configurable collection of more than 25,000 actionable clinical alert observations and analytics.

The combination of these companies with our existing and in-development products and services provides us with a turnkey solution for accountable care organizations dedicated to improving outcomes while reducing the cost of care. As this business expands, we'll continue to add to our care solutions and point-of-care diagnostics into the mix, driving high utilization of our products to further improve outcomes and lower costs.

So Alere has grown through acquisition for many years. This phase is now substantially complete. While investors should still expect some M&A activity with diabetes remaining an area of particular interest to us, in the next few quarters, we'll begin to rationalize elements of our product lines and services unrelated to chronic care management, and we're placing an increasing focus on operational effectiveness.

Before going into Q&A, I'll briefly update on R&D developments during the quarter. A major recent development has been FDA clearance of chloride and creatinine on the epoc platform. This is a significant milestone as not only is a comprehensive test menu a key differentiator for the Epoc System, but it also opens up new addressable market segments in the emergency department and radiology. Epocal is currently building saleable test cards, which includes chloride and creatinine for anticipated U.S. launch in early 2013. CE marking is expected in December followed by an outside U.S. launch including Japan later in 2013.

Epocal recently provided us with preliminary notice that they achieved the milestones, which trigger Alere's right to acquire Epocal. This is likely to occur in the next several months.

Whilst to us, CD4 platform had a weak quarter of new instrument placements, the revenue stream from the consumption of the disposables, plus the level of negotiating with existing and new customers gives us strong optimism that 2013 will see significant growth.

Additionally, in early October, the results of the PELICAN study featuring the Alere PLGF test were presented at the 20th World Congress of Obstetrics and Gynecology in Rome. This study has shown that PLGF testing before 35 weeks enables physicians to categorize women into low and high risk for disease progression and to adjust clinical management appropriately, which will substantially reduce unnecessary health care expenditures incurred by managing women at low risk for needing preterm delivery.

The Alere Triage PLGF test is currently available for use as an aid in the diagnosis of preeclampsia in women with suspected preeclampsia before 35 weeks gestation. Based on results of the PELICAN study, an expanded indication for use as an aid in disease risk assessment will soon be CE marked. The product is not yet available for sale or distribution in the U.S. As with many other tests, Alere is driving PLGF into the POC setting, where we have a strong competitive advantage and where the test can truly make a difference in pregnancy management.

With our greatest focus on operational execution, we have concluded that it's an appropriate time to begin redirecting our R&D spending more towards short-term programs with an increased bias towards product extensions rather than longer-term projects, which has been our focus up until this point.

As a result, we plan to transition our R&D investment proportion from 75% to platform -- new platform development and 25% product enhancement as it has been in the past to 50-50 for 2013.

And now let me open the call to questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Zarak Khurshid of Wedbush Securities.

Zarak Khurshid - Wedbush Securities Inc., Research Division

Yes, Zarak at Wedbush. Ron, you talked about -- I think, you mentioned that there's supply constraints in Asia. Can you just kind of go over that again and quantify the impact on the quarter and kind of the nature of the issue?

Ron Zwanziger

Yes, we've been using an outside testing group to test our products. And with shipments rising towards the end of the quarter, the external vendor wasn't able to keep up with the testing. And as a result, it caused quite a few shipments to spill into this quarter.

Zarak Khurshid - Wedbush Securities Inc., Research Division

Any sense for the number of orders that spilled over?

Ron Zwanziger

Dave, to you.

David A. Teitel

It was a couple of orders and a couple of million dollars worth of revenues.

Zarak Khurshid - Wedbush Securities Inc., Research Division

Got it. Okay. And then just on Europe, it seems like the deterioration there continues. Can you just maybe elaborate on, is it pricing, is it certain geographies? What is actually happening on the ground?

Ron Zwanziger

Well, I mean, you can't -- although we referred to Europe, of course, you can't generalize because you've got different responses in different countries. But in some countries, you've had reimbursement cuts. In others, the budgets are so constrained, you're seeing utilization drop in Southern Europe. So it's kind of a mixture. And so hard to predict where the next -- to us, it's hard to predict where the next shoe will drop. That's why we're taking a pretty cautious view of Europe.

Zarak Khurshid - Wedbush Securities Inc., Research Division

Okay. I mean, it seems like a little bit of a disconnect. A lot of the capital equipment players have posted pretty decent European revenues over the last couple of quarters. Can you just talk about sort of the, I guess, just the broader spending environment? I mean is it kind of the lower-priced disposable tests that are feeling the brunt of the weak macro-environment in that area?

Ron Zwanziger

Well, I mean, the reimbursement cuts are -- have been reimbursement cuts not just on our products but in others. We don't think we've been losing any share. We don't think there's been a movement in any countries, possibly with the exception of France, but towards centralized testing away from rapid testing. So it's hard to pin down.

Operator

Next question comes from Greg Simpson of Wunderlich Securities.

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

Dave, first of all, as far as the quarter is concerned, last quarter, you guys kind of broke out the EPS impact from all these FDA-related issues. Obviously, there’s a ton of moving parts from quarter-to-quarter. Can you try to quantify that at all? Is that possible?

David A. Teitel

Well, so if you think about it from a loss revenue compared to last year, an increment from manufacturing expenses, the net was about a $0.10 per share impact on EPS.

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

Okay, great. That's helpful. Yes, the way things fell, was it greater in Q3 than you expected as opposed to Q4? I mean is there any way to kind of parse the quarterly breakdown?

David A. Teitel

Well, broadly, the revenue was largely in line with what we had previously expected for the quarter for the Triage products. We do continue to see higher manufacturing expenses and a little bit of extra legal expenses where we work our way through the process with the FDA. Hopefully, the legal expenses have come down at this point dealing with the FDA. And we hopefully are continuing to make progress on increasing our manufacturing capacity and making some of the process changes that we hope will start to drive the yields back up. We do have the impact for Q4 of the change standards, which will, in general, reduce our yields in the near term here.

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

And I apologize. I'm juggling a couple of things this morning, so I didn't hear any mention of guidance. I assume the guidance is reiterated, though. Obviously, given the Q3 number, I assume we should probably think towards the lower end of that? The guidance is consistent with the prior range.

Ron Zwanziger

Yes, I mean, I think that -- I mean, the trouble with the guidance, it's so dependent primarily on the yield and the issues around Triage. But given what we just described that we're dealing with, we think will be at or towards the bottom end of the range on the previously given guidance.

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

Okay. And then Ron, timing of any potential action. I mean, I'm glad to hear you're still committed to moving forward in Health Management. Is there any way to give us a sense of timing when you can make a decision on that front?

Ron Zwanziger

Well, it's difficult to say. We did have something that we thought we would be able to execute and it fell apart in the last minute. So we're regrouping and looking at it again. So we still expect -- hoping to have something if not by the end of this year, early next year.

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

Okay. And then, you mentioned this was new. The commentary regarding potential divestiture of noncore assets. Can I push you to be a little more specific in terms maybe not identifying the specific businesses, but maybe give us a sense of kind of the size of what you're looking at?

Ron Zwanziger

Well, as we're looking to sort of improve operational efficiency, we're trying to weed out those elements or parts of the business which are not central to the core mission of what we're doing, which is, obviously, chronic care management and improving that aspect. And so there are some products, particularly ones which are not rapid testing. Over the years with the acquisitions we made, we've ended up with a little bit -- some revenues, which are not rapid testing. They're lab testing, and they can be a distraction in terms of improving operational efficiency. We're looking at seeing if we can move some of those -- possibly moving some of those out.

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

Okay. And then on the COO, again, I know it's something you've been looking at, you indicated, but it's going to be a new piece of news that I think people have been kind of hoping you would go that route again. Any idea of how -- it sounds like you've narrowed it down to...

Ron Zwanziger

Yes, we're in the final throws here.

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

Okay. So we should see something before year end.

Ron Zwanziger

I would think so, yes.

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

Okay. And then finally, I'm being a hog here, but I won't come back. R&D, that is a pretty interesting shift as well. Are there implied savings with respect to R&D? Because I know you guys have always spent a lot of money on really long term out-year projects. Is there implied savings as a result of this?

Ron Zwanziger

You mean in terms of savings in terms of the R&D line? I mean, I think, as a percentage of revenue, probably yes. And possibly even in an absolute number. I mean, I think, the shift is for 2 reasons. First of all, we have new platforms, whether it's the CD4, the viral load that we've got coming, via the Heart Check, the Epocal, which has just expanded the menu. So we have no shortage of game-changing diagnostics, point-of-care diagnostics for the future. What we need to make sure is that some of the issues that affected us on Triage at the moment, where if we can put a bit more focus on some of the existing products just to make some short term changes, it will protect the products in the marketplace and give time for the 5 or 6 platforms that we have coming through to develop. And so we're protecting the base by making some improvements to spending more time making improvements to the existing platforms, allowing the ones that we are -- the ones that we've already got in development as well as the viral load, which is coming through to break through for us.

Operator

Next question comes from Jon Groberg of Macquarie.

Jonathan P. Groberg - Macquarie Research

Ron, can you maybe just talk about -- you mentioned that you're going to be focused on lowering leverage ratios, improving ROIC. Are you going to kind of give your targets, what you -- like you said 3 years from now, what you'd like those to be?

Ron Zwanziger

Well, that's a good question. I think, we'll sort of work on those and come out with those probably in early next year. But the point here, the essential point here, is to sort of see what's happened to the company as a whole. I mean, we spent the last several years, 10, 11 years building up the size of the company both from a product perspective and a distribution perspective. And we now pretty much have all the assets that we need. And so the -- so the sort of the targets that we'd set ourselves are almost complete. Now you recall that I mentioned -- we mentioned in the call and you probably recall anyway that we have this agreement to distribute the Epocal product. And when it got to a certain level, we would buy the company so we have to do that. And then there's 1 or 2 diabetes assets. But setting those aside, we are now entering a period which, I think, will last for quite some time, certainly several years in which we'll focus on -- by focusing on improving operational effectiveness, we obviously, expect earnings to rise. We expect to start getting benefits by being more effective at the SG&A and so the marketing line. So G&A and sales and marketing, so we expect effectiveness across the board, which obviously will drive earnings. And by rationalizing some of our product lines as we mentioned, that will release cash. Again, helping improving utilization of the cash will again -- will help improve ROIC, and we expect to start paying down our debt. So it's the nature of where we've got to as the development of the company, which now puts us into position to be able to focus on those metrics.

Jonathan P. Groberg - Macquarie Research

So could we expect, say, in the next 6 months some targets there? I just remember in the past, I know you described almost -- you were very comfortable with a high-leverage ratio and you were focused on building out, as you said and almost seemed more like kind of a private equity type. You were willing to be at very high levels. Could we maybe the next, I don't know, 6 months or so, you'd be able to say, look, where we want to operate at is 2 to 3x debt-to-EBITDA, and we want to get an ROIC -- are we going to -- are you going to have some targets, some multi-year targets for us here?

Ron Zwanziger

Well, as I said at the beginning, we'll start thinking about that and talking about that towards possibly early next year. And we'll be focused on these reductions. And in due course, will allow the schedule of our expectations.

Jonathan P. Groberg - Macquarie Research

Okay. And then just one other one, Dave, I think you said in Infectious Disease that there was some timing of shipments. Could you say kind of what those – I don’t know if that was -- I think that was separate from the China thing you were talking about. So maybe the magnitude of that timing that you expect to fall into Q4.

David A. Teitel

It's Eric who actually asked that question. It was a couple of million dollars in the quarter that got pushed out into the fourth quarter, as well as some tenders that we saw delayed into the fourth quarter.

Operator

The next question comes from Dan Leonard of Leerink Swann.

Daniel L. Leonard - Leerink Swann LLC, Research Division

So in light of the new final release facts in comparison to what you thought they'd be in July, I'm wondering if you can characterize how you think the Triage gross margins will look like, coming out the other end of this process as compared to what they used to be in advance of this process?

David A. Teitel

On data, we'd be down from what they were. And we've said consistently that they were significantly above the average in the Professional Diagnostics space and even on the back end of this, they’ll continue to be above the average in the Professional Diagnostics space. So it's still very good and solid business. Exactly where it lands really is something that we’ll have a better handle on over the next quarter or so as we see the process improvements fully implemented and where the yield settled.

Daniel L. Leonard - Leerink Swann LLC, Research Division

Okay. And then my follow-up question on the new R&D strategy. How should we think about -- so it sounds like the viral load instrument is still going to happen. How should we think about the other molecular diagnostics instrument you were planning on developing? Is that affected at all by the new strategy?

Ron Zwanziger

No, because the product is so close, so in effect it's the same as focusing on the near term. So the molecular won't be affected. Its programs are sort of further out where we're diverting that R&D into product improvement on the existing platforms.

Operator

Next question comes from Nicholas Jansen of Raymond James.

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

Guys, maybe just a little bit more color on some of the more recent acquisitions and how they're ramping relative to expectations. Axis-Shield, eScreen would be a few. Just a little bit more color surrounding their growth profiles since you've had them under control.

Ron Zwanziger

Yes. Axis-Shield is an interesting one. We've had some improvement in sales and actually -- we are actually in a process of adding capacity to them. So our expectations -- so the early results have been -- we've been very pleased with early results, and we think the future is possibly even better than we expected when we bought the asset. In general, what's happening -- so we've had short-term benefits but in a longer-term benefit, what's happening around -- in general, around the treatment of diabetes has been the increasing focus by the medical community in many countries. I mean, I think pretty much everywhere around the performance standards of an A1C test and Axis-Shield has the best such rapid test. And so that is helping us. So the longer-term environment of the medical community is helping us. And in the shorter term, our units around the world have been picking it up and selling it. And eScreen, while it's early days, has been doing well so far as well. And so we're expecting a lot of benefit there. eScreen offers us quite a lot of opportunity to integrate with our products and services, and so we are seeing quite effective integration. So we're really pleased. We're really pleased with that as well. I think those 2 are going to -- those 2 particular acquisitions, I think, will work out quite well.

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

And then my second question would be on the health care reform legislation, 2 parts. A, have you kind of sized up the potential medical device headwind for '13; and secondly, thinking about health insurance exchanges and your capabilities with the ACO, what level of revenue or profit is that today, and where do you think that could be in 3 to 5 years if, in fact, the ACO model really does ramp up as originally intended?

Ron Zwanziger

Dave, why don't you talk about it, the tax?

David A. Teitel

On the first part, the medical device tax, we think the cost will be somewhere around $2.5 million to $3 million a quarter next year. There still is some guidance to come from the IRS, which was deferred until after the election and hopefully comes out shortly that clarifies how some of the cancellations are actually done, but that's our best estimate at this point.

Ron Zwanziger

In terms of quantifying and what's happening, well, so that's a very hard thing to do. And ACOs are being banded around -- and the words around ACOs are being banded around quite a bit. Just to be clear what we mean by it is really we provide a sort of – and the programs that we're doing are providing a mechanism to monitor and really understand cost and to be able to see what's going on medically across a whole population base and be able to provide alerts and guidance as an aid to doctors. So we're talking about real behavior change in what we're doing. And we think fundamentally, at the end of the day, it’s systems that provide behavior change are the ones that are going to prevail. And if you think about how a diagnostic timely feeding in, when there's an issue going on with a patient, and that information being timely received through the IT system to a physician and the physician getting a medical alert and a guidance at the same time in real time; that's when you see behavior change. So we feel that the model that we've been working on and rounding off, and we're really still at the stage where we're doing that, but it's beginning to get quite comprehensive now. I think it's probably one of the most effective ones at getting behavior change, both by the medical community themselves and their ability to interact with patients. So I think we'll see some success build up next year on top of what we've seen this year. And I think we have a potential for the business itself as an IT platform -- our ACO program as an IT platform to be quite successful or even very successful in its own right. Although, of course, our objective all along is to make sure that we're effectively feeding in data from our diagnostics in a timely fashion, and that remains our approach. Getting that data in from our dispersed units around particularly the ones in patients' hands and delivering it through the IT system to get effective readings and to get an effective action by a doctor. The point is about an ACO is that's what you need. If you're going to have an effective ACO, that's how it's going to operate because that's how you get change. And so it turns out the -- that what we're doing to improve what we're doing on the diagnostics turns out to be exactly the same as what you need in an effective ACO.

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

One more, if I can. If you think about new product revenue, can you give that what it was in the third quarter? And then I guess, as we kind of think about 2013 with regards to some of the, perhaps, some accelerating growth in that area, any way to frame how much we should get sequentially -- or not sequentially, but year-over-year pickup in terms of new product revenue?

David A. Teitel

So the actual revenues in Q3 were around $12 million. Epocal was about $4.8 million and CD4 was $2.4 million. And I think we'll talk about 2013 in the context of overall expectations for '13 rather than separately.

Ron Zwanziger

I think one of the issues in this quarter, the CD4 looks quite low, but the important thing about it is that the consumables, as a result of the placements that took place before, were very good. And our forward discussions with customers have improved in terms of new instrument placements. Also, the quality of interactions and also the quality of some of the customers that we're dealing with is improving and in fact, we recently got in this quarter, a nice order, so it's really shaping up quite nicely. And with the Epocal system, particularly with the new parameters giving us broader menu, and as we mentioned in our prepared remarks, it opens up more avenues and more parts of the hospital where these point-of-care platforms can be used. So we're increasingly optimistic about those. And there's the potential that we might actually get -- start seeing some activity in some of the other products, including the viral load. So we're actually -- even though it wasn't a great quarter for CD4, it was a good one for the Epocal. We're actually increasingly optimistic about it -- about these particular products in 2013.

Operator

Your next question comes from Anthony Petrone of Jefferies Group.

Anthony Petrone - Jefferies & Company, Inc., Research Division

Just one on the FDA and some of the releases. Are you still in close discussions with the FDA now that the release method has been agreed upon? And in light of having that agreement in place, does that change at all the timeline or the overall outcome of the OIG investigation?

Ron Zwanziger

I don't know how -- the 2 may or may not be related. And all I can say about OIG is that it will take its course and it'll take -- it'll probably take a long time. But as to the interactions, look, we're providing regular feedback on our 483 as we’ve stated, which presumably the FDA will come in and re-inspect to see all that we've done. So, yes, we'll probably -- there'll be probably an inspection in the few months again of the facility. That would be quite normal. And we can continue to have those kinds of attractions.

Anthony Petrone - Jefferies & Company, Inc., Research Division

And then, Ron, you mentioned a couple about M&As. It sounds like large-scale transactions may slow, but you still may be adding to some areas. And so in light of those comments, if we look at diabetes as potentially an area where you could continue to grow, can you sort of elaborate on what directions you may be looking at within diabetes?

Ron Zwanziger

No, not -- we're keeping our thoughts to ourselves at the moment about exactly where we're heading. But obviously, whatever we do, we're very focused on what can you do at any point in time where you can affect the outcome of an individual. So as we think about what it is we're doing in diabetes, how can we influence it? Now we did make in our prepared remarks that we've done a number of transactions, both acquisitions and relationships relating to mobile health, and most of that is actually focused around diabetes. So you can think about anything we're doing have to have [ph]. Some ways, some reason that we can actually think that we can actually improve the outcome for that individual so the person gets better and, of course, it lowers cost to the system.

Anthony Petrone - Jefferies & Company, Inc., Research Division

That helps. Two quick ones, and I'll get back in. Ron, can you speak at all to some of the impacts on INR over time as we're just seeing a lot of headlines coming out of PRADAXA and excessive bleeding and death such as that. Are you seeing any impact from that in INR? And then one follow-up for David.

Ron Zwanziger

Well, you may or may not recall, but when these products were getting launched, we had said that we thought the products -- our product would continue to grow. And you probably noticed in the prepared remarks that the -- we had some improvement in revenues year-on-year in Health Management. And that was driven by improvements in our INR -- in other management of patients who with -- taking Warfarin. So I -- so it's -- we're not really changing our position. We thought all along that tighter control – that our system provides tighter control, so it provides great benefits to the patient and lowers cost to the system. And I think that will remain the case and, I think, we can -- for many patients, I think, tighter control in Warfarin will outperform other systems.

Anthony Petrone - Jefferies & Company, Inc., Research Division

And David, just the last one. I know there was the integration of the EU operations in Ireland. I'm just wondering if the full tax benefit of that has been realized yet. And if not, what can we possibly expect into next year?

David A. Teitel

The full tax benefit hasn't been realized yet. Part of the challenge in ultimately driving a rate in significant improvement there has been just the overall performance of our European business. So the less income the European business produces, the less tax benefit you'll see fall from that strategy. That said, the most impactful thing in the quarter was less on the tax line and more on the operating expenses. And the fact that the decline quarter-over-quarter was, in part, driven by the fact that we're exiting sort of the transitional stage of this and some of the higher legal expenses, advisory expenses we incurred in the first half of the year are starting to work from what we have in the system.

Operator

Next question comes from Isaac Ro of Goldman Sachs.

Isaac Ro - Goldman Sachs Group Inc., Research Division

First one has to do with, I think, your comments earlier on potential divestitures. I just want to make it clear -- to clarify, did that relate exclusively to Health Management or were there other assets in the business there that might be on the table? And if so, could you maybe offer some color on what they might be?

Ron Zwanziger

Well, I actually sort of clarified that on a previous comment on a previous question. I mean, the sort of additional assets that we're looking to simplify our operations are within the diagnostics space assets, which are not point-of-care, which we inherited as a result of acquisitions where we, of course, we’re always focused on point of care. But we got other assets in parallel. These assets tend to be quite profitable. But from a company that's focused on chronic care management, with our approach of feeding rapid diagnostics results into a system so that they can be properly interpreted by the physician, we don't need those residual diagnostics that we have that fell into the lab. And so we're looking at possibly divesting some of those.

Isaac Ro - Goldman Sachs Group Inc., Research Division

Okay. And then if I can just maybe ask a longer-term question on EPS growth, you mentioned some -- the investments you've made in the channel and the fact that, that now poises the company for accelerated growth going forward. I mean, if I look at consensus numbers over the next few years, the Street doesn't afford you guys a ton of operating leverage. So I guess the question is without being specific on numbers, I mean, do you feel like there is a fundamental misunderstanding of the earnings power of the business? And specifically, if I look at the pipeline, you got a couple of products in the way of CD4 and Heart Check that I think are meant to kind of enter the home-based market pretty soon. And is it fair to say, given your earlier comments, you've got the investments for those products already kind of have been made, and so as they come online as revenue, that we should see some accelerated profitability?

Ron Zwanziger

Well, I mean, in general, of course, that's the whole plan that we've been working to for years. And as these products emerge, we should be getting operational leverage. Of course, that's true. Just one point that you made. I mean, the Alere Heart Check will require investments, just to be clear. CD4 may not require quite as much, but -- and we have our sales operation. But as we launch Alere Heart Check in more countries, that will require a bit. But generally, I think it's fair to say that we're probably at the point where we are at the peak expenditure levels. I think, probably 2012 will end up being the sort of the peak expenditure below the line relative to revenues. And I think from here on in, we're going to start seeing operational improvements.

Isaac Ro - Goldman Sachs Group Inc., Research Division

Okay. And would you guys maybe -- I think, in 2010, you'd done a very nice Analyst Day to help put some color on expectations for the pipeline. Would you consider doing something like that again to help us frame the long-term story now that you guys have kind of weathered the tough 2012?

Ron Zwanziger

Well, that's a good point. And it is something that we've been thinking about. We haven't concluded whether we'll do it or not, but we do think that we need to be better at explaining what our new products can do. And so perhaps as part of that, we might do something like that or figure out another way of explaining more effectively to investors what our new platforms can do.

Operator

Our next question comes from John Putnam of Capstone Investments.

John M. Putnam - Capstone Investments, Research Division

Ron, you talked about trying to -- or I guess, having a goal of getting back about 50% of the market share you've lost in Triage. How much have you lost, and what's your strategy for trying to regain that?

Ron Zwanziger

Okay. So what I -- just to be clear, what I said, John, I didn't say that we were only going to try and get 50%. What I actually said was that we were hoping to get 50% of what we lost by the end of next year. We actually expect to continue gaining in '14 as well. So I just -- I don't want people to think that we somehow think that we've got a permanent loss. We think we can get the 50% by the end. I mean, so roughly speaking, very crudely speaking, John, we had a $20 million -- if we focus primarily, which is where most of our losses have been on the panel, we had a $20 million business and we said -- and we're anticipating $6 million to $8 million in Q4. And we said we expect to get 50% of it back by the end of next year so at a run rate by the end of next year of 50%. So I mean does that kind of quantify it for you? These, of course, are very profitable products.

John M. Putnam - Capstone Investments, Research Division

That's $20 million a quarter, right?

Ron Zwanziger

Yes, a quarter. $20 million a quarter, and that's $6 million to $8 million this -- that we -- Dave confirmed -- reconfirmed that we think we're on track to do $6 million to $8 million this quarter.

John M. Putnam - Capstone Investments, Research Division

Do you have to use price to get it back or how will you get it back?

Ron Zwanziger

We don't have to particularly use price, although you may even noticed in our comments that we're also shipping a single Triage on -- a single Troponin on its own because that helps us with yield, and it's the most important one or one of the most important ones that customers want more quickly. And so when you sell a single versus selling a panel, of course, inherently that is less. But gradually, we're going to be increasing the sales of the panels again as well. Now as to how we're going to get it back, about 1/2 the lost revenues -- the revenues that migrated away from a rapid testing to the lab at the hospital and so if you think what's happening is you're getting less timely information of critical parameters, particularly in the emergency room. And so we're initially going to be focused on -- and obviously, those hospitals were forced into moving clinically the products away from the emergency room. So they have clinically made the decision correctly that they want more timely information because the patients are in distress and need early action. And so we're going to be very focused on winning that business back because the customers, of course, prefer, because they had already previously recognized that they wanted the rapid, and so those conversions are where we'll start focusing.

Operator

The next question comes from Eric Criscuolo of Mizuho.

Eric Criscuolo - Mizuho Securities USA Inc., Research Division

I'm just filling in for Peter this morning. On the medical device tax, where do you plan on recognizing that in your P&L?

David A. Teitel

Likely through G&A.

Eric Criscuolo - Mizuho Securities USA Inc., Research Division

G&A, okay. And did you say that was $2 million to $3 million per quarter on your latest estimate?

David A. Teitel

$2.5 million to $3 million per quarter.

Eric Criscuolo - Mizuho Securities USA Inc., Research Division

Okay, great. And then on the kind of the Health Management announcement that fell apart, was that a partnership that you were looking at, or was it something else?

Ron Zwanziger

That was a partnership. Okay. Well, to wrap up, folks, our goal at Alere remains -- was and is to become the world leading company in enabling individuals to take charge of their health under medical supervision at home everywhere in the world. And this requires a commitment to continued global market and product development, combined with an increased focus on operational effectiveness as we’ve described. As we continue to combine the new diagnostic platforms into an integrated technology-based solution focused on the most expensive chronic conditions, we expect to improve the financial performance of the company. As always, I'd like to thank you for your continued support and interest, and have a good day. Thank you very much.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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