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ALR > SEC Filings for ALR > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for ALERE INC.

Form 10-Q for ALERE INC.


8-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. You can identify these statements by forward-looking words such as "may," "could," "should," "would," "intend," "will," "expect," "anticipate," "believe," "estimate," "continue" or similar words. You should read statements that contain these words carefully because they discuss our future expectations, contain projections of our future results of operations or of our financial condition or state other "forward-looking" information. Forward-looking statements in this item include, without limitation, statements regarding anticipated expansion and growth in certain of our product and service offerings, the impact of our research and development activities, potential new product and technology achievements, the potential for selective acquisitions, our ability to improve our working capital and operating margins, our expectations with respect to Apollo, our integrated health management technology platform, our ability to improve care and lower healthcare costs for both providers and patients, our predictions regarding the regulatory matters relating to our Triage products and the resulting financial consequences, the impact of recent and planned changes to our quality control release specifications, our predictions regarding our ability to meet customer demand, and our funding plans for our future working capital needs and commitments. Actual results or developments could differ materially from those projected in such statements as a result of numerous factors, including, without limitation, those risks and uncertainties set forth in Part I, Item 1A, "Risk Factors," of our Annual Report on Form 10-K, as amended, for the year ended December 31, 2011 and other risk factors identified herein or from time to time in our periodic filings with the Securities and Exchange Commission. We do not undertake any obligation to update any forward-looking statements. This report and, in particular, the following discussion and analysis of our financial condition and results of operations, should be read in light of those risks and uncertainties and in conjunction with our accompanying consolidated financial statements and notes thereto.

Overview

We enable individuals to take charge of improving their health and quality of life at home, under medical supervision, by developing new capabilities in near-patient diagnosis, monitoring and health management. Our global, leading products and services, as well as our new product development efforts, currently focus on cardiology, infectious disease, toxicology, diabetes, oncology and women's health. We are continuing to expand our product and service offerings in all of these categories.

As a global, leading supplier of near-patient monitoring tools, as well as value-added healthcare services, we are well positioned to improve care and lower healthcare costs for both providers and patients. Our home coagulation monitoring business, which supports doctors' and patients' efforts to monitor warfarin therapy using our INRatio blood coagulation monitoring system, continues to represent an early example of this. We have also continued to introduce our integrated health management technology platform, called Apollo, to our customers since its launch on January 1, 2010. Using a sophisticated data engine for acquiring and analyzing information, combined with a state of the art touch engine for communicating with individuals and their health partners, we expect Apollo to benefit healthcare providers, health insurers and patients alike by enabling more efficient and effective health management programs.

We have continued to grow through strategic acquisitions. With our November 2011 acquisitions of Axis-Shield plc, or Axis-Shield, and Arriva Medical, LLC, we have entered the diabetes diagnostics market, and we expect our presence in this field to grow. We also continued to expand our toxicology business, particularly in the growing market for pain management and medication monitoring services. We have also acquired software solutions that will further our efforts to connect healthcare providers with point of care and other patient data.

We have also continued to lay the groundwork for future revenue and earnings growth by focusing our efforts on new product development and introductions. Our important new product offerings, including the epoc System, the Alere CD4 Analyzer and the Alere Heart Check System, have begun to penetrate the markets into which they have been launched, and we expect this trend to continue. We are also focused on expanding our global sales force. We also continued to build awareness and acceptance for our two novel biomarkers, NGAL and placental growth factor, or PLGF.

FDA and OIG Matters Relating to Alere Triage Products

In March 2012, the Food & Drug Administration, or FDA, began an inspection of our San Diego facility related to our Alere Triage products. During the inspection, the FDA expressed concern about the alignment between certain aspects of our labeling for the Alere Triage products and the quality control release specifications that had been in effect prior to the inspection. As a result and as previously disclosed, we implemented two recalls of Alere Triage products during the second quarter of 2012, as well as interim quality control release specifications. In June 2012, the FDA closed the inspection, and we received inspectional observations on FDA Form 483. In July 2012, we provided the FDA with a detailed response to its inspectional observations which included a plan for how


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we proposed to address each observation as well as a timeline for doing so. Since submitting this response, we have been working diligently to address each of these observations. Also, on or about September 28, 2012, we agreed with the FDA on a set of final release specifications for our Alere Triage meter-based products that further align the product release specifications to the package insert.

On October 9, 2012, we received a warning letter from the FDA citing the same inspectional observations set forth in the FDA Form 483 received in June. The warning letter, which was subsequently reissued as of October 22, 2012, acknowledged our July response but did not take into account the timeline that we had proposed or any of our efforts taken after our July response. On October 30, 2012, we responded to the warning letter and submitted evidence of our completion of most of the actions detailed in our July response, including all of the actions then due under our timeline. We will continue to provide the FDA with further periodic updates on the status of the actions that remain to be completed over the next several months to fully address the issues that the FDA has identified. We intend to continue to work diligently to address all of the FDA's inspectional observations, but we cannot provide any assurance that the FDA will find our efforts satisfactory.

As we anticipated, the final release specifications agreed to with the FDA for our Alere Triage products have resulted in lower manufacturing yields for those products. While we continue to make significant progress in controlling our manufacturing process to improve overall yields, we also continue to expand our manufacturing capacity to address the lower yield rates. These efforts, as well as our efforts to address the FDA's observations set forth in the FDA Form 483 and the warning letter, have increased our manufacturing costs and reduced our margins on these products.

Also, in May 2012, we received a subpoena from the Office of Inspector General of the Department of Health and Human Services. The subpoena seeks documents relating primarily to the quality control testing and performance characteristics of Alere Triage products. We are cooperating with the government and are in the process of responding to the subpoena.

We are unable to predict when these matters will be resolved or what further action, if any, the government will take in connection with these matters. Also, except for increases in manufacturing costs and decreased profitability for our Alere Triage products, we are unable to predict what impact, if any, these matters or ensuing proceedings, if any, will have on our financial condition, results of operations or cash flows. Please see Part II, Item 1A, "Risk Factors" for a further discussion of the risks to our business, financial condition and results of operations arising from these matters.

Financial Highlights

• Net revenue increased by $105.6 million, or 18%, to $691.4 million for the three months ended September 30, 2012, from $585.8 million for the three months ended September 30, 2011. Net revenue increased by $327.6 million, or 19%, to $2.1 billion for the nine months ended September 30, 2012, from $1.7 billion for the nine months ended September 30, 2011.

• Gross profit increased by $39.8 million, or 13%, to $345.8 million for the three months ended September 30, 2012, from $306.0 million for the three months ended September 30, 2011. Gross profit increased by $149.6 million, or 17%, to $1.1 billion for the nine months ended September 30, 2012, from $904.9 million for the nine months ended September 30, 2011.

• For the three months ended September 30, 2012, we generated a net loss available to common stockholders of $9.2 million, or $0.11 per basic common share. For the three months ended September 30, 2011, we generated net income available to common stockholders of $234.2 million, or $2.48 per diluted common share. For the nine months ended September 30, 2012, we generated a net loss available to common stockholders of $31.4 million, or $0.39 per basic common share. For the nine months ended September 30, 2011, we generated net income available to common stockholders of $237.6 million, or $2.56 per diluted common share.

• During the third quarter of 2011, the Procter & Gamble Company's, or P&G's, option to require us to acquire its interest in SPD at fair market value expired. In connection with the expiration of the option, we recognized a gain totaling approximately $288.9 million during the third quarter of 2011.

Results of Operations

Results excluding the impact of currency translation are calculated on the basis of local currency results, using foreign currency exchange rates applicable to the earlier comparative period. We believe presenting information using the same foreign currency exchange rates helps investors isolate the impact of changes in those rates from other trends. Our results of operations were as follows:

Net Product Sales and Services Revenue, Total and by Business Segment. Net product sales and services revenue increased by $105.7 million, or 18%, to $686.2 million for the three months ended September 30, 2012, from $580.5 million for the three months ended September 30, 2011. Excluding the impact of currency translation, net product sales and services revenue for the three months ended September 30, 2012 increased by $119.9 million, or 21%, compared to the three months ended September 30, 2011. Net product sales and services revenue increased by $334.0 million, or 19%, to $2.1 billion for the nine months ended


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September 30, 2012, from $1.7 billion for the nine months ended September 30, 2011. Excluding the impact of currency translation, net product sales and services revenue for the nine months ended September 30, 2012 increased by $365.5 million, or 21%, compared to the nine months ended September 30, 2011. Net product sales and services revenue by business segment for the three and nine months ended September 30, 2012 and 2011 are as follows (in thousands):

                                     Three Months Ended                           Nine Months Ended
                                        September 30,             %                 September 30,               %
                                     2012          2011        Change           2012            2011         Change

Professional diagnostics           $ 528,754     $ 426,251          24 %     $ 1,581,076     $ 1,240,251          27 %
Health management                    135,078       129,931           4 %         404,452         408,566          (1 )%
Consumer diagnostics                  22,396        24,338          (8 )%         66,201          68,878          (4 )%

Net product sales and services
revenue                            $ 686,228     $ 580,520          18 %     $ 2,051,729     $ 1,717,695          19 %

Professional Diagnostics

The following table summarizes our net product sales and services revenue from
our professional diagnostics business segment by groups of similar products and
services for the three and nine months ended September 30, 2012 and 2011 (in
thousands):



                                    Three Months  Ended                           Nine Months  Ended
                                       September 30,              %                  September 30,               %
                                     2012          2011         Change           2012            2011          Change
Cardiology                        $  122,372     $ 127,943           (4 )%    $   386,795     $   390,652           (1 )%
Infectious disease                   136,561       142,639           (4 )%        425,398         405,559            5 %
Toxicology                           156,074        93,497           67 %         437,736         267,834           63 %
Diabetes                              35,670            -           N/A           100,628              -           N/A
Other                                 78,077        62,172           26 %         230,519         176,206           31 %

Professional diagnostics net
product sales and services
revenue                           $  528,754     $ 426,251           24 %     $ 1,581,076     $ 1,240,251           27 %

Net product sales and services revenue from our professional diagnostics business segment increased by $102.5 million, or 24%, to $528.8 million for the three months ended September 30, 2012, from $426.3 million for the three months ended September 30, 2011. Excluding the impact of currency translation, net product sales and services revenue from our professional diagnostics business segment increased by $116.5 million, or 27%, comparing the three months ended September 30, 2012 to the three months ended September 30, 2011. Revenue increased primarily as a result of acquisitions, which contributed an aggregate of $133.6 million of the non-currency adjusted increase. Net product sales from our North American flu-related sales decreased approximately $6.1 million, from $16.0 million during the three months ended September 30, 2011 to $9.9 million during the three months ended September 30, 2012. Net product sales and services revenue from our professional diagnostics business segment were negatively impacted by the FDA recall matters related to our Alere Triage® meter-based products. Net product sales of meter-based Triage products in the U.S. totaled $34.9 million during the three months ended September 30, 2012, as compared to $48.2 million during the three months ended September 30, 2011. Excluding the impact of acquisitions, the decrease in flu-related sales during the comparable periods and the impact of the reduction in net product sales from meter-based Triage products in the U.S., the currency-adjusted organic growth for our professional diagnostics net product sales and services revenue was approximately $3.0 million, or 1%, from the three months ended September 30, 2011 to the three months ended September 30, 2012.

Within our professional diagnostics business segment, net product sales and services revenue for our cardiology business decreased by approximately $5.6 million, or 4%, to $122.4 million for the three months ended September 30, 2012, from $127.9 million for the three months ended September 30, 2011, driven principally by the impact of the FDA recall of certain of our meter-based Triage products in the U.S. Net product sales and services revenue for our infectious disease business decreased by approximately $6.1 million, or 4%, to $136.6 million for the three months ended September 30, 2012, from $142.6 million for the three months ended September 30, 2011. The change was driven principally by a decrease in flu-related sales during the comparable periods as well as a decrease in both HIV and Malaria sales, both of which compare to particularly strong sales during the comparable periods, and suffered certain delays in shipments during the three months ended September 30, 2012, but should be reversed in the fourth quarter of 2012. Our toxicology business increased by approximately $62.6 million, or 67%, to $156.1 million for the three months ended September 30, 2012, from $93.5 million for the three months ended September 30, 2011, with our recent acquisitions of Avee Laboratories Inc., or Avee, eScreen, Inc., or eScreen, and Amedica Biotech, Inc., or Amedica, contributing a combined net $62.5 million of the non-currency adjusted increase.


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Net product sales and services revenue from our professional diagnostics business segment increased by $340.8 million, or 27%, to $1.6 billion for the nine months ended September 30, 2012, from $1.2 billion for the nine months ended September 30, 2011. Excluding the impact of currency translation, net product sales and services revenue from our professional diagnostics business segment increased by $372.4 million, or 30%, comparing the nine months ended September 30, 2012 to the nine months ended September 30, 2011. Revenue increased primarily as a result of acquisitions, which contributed an aggregate of $363.5 million of the non-currency adjusted increase. Partially offsetting the increase in net product sales and services revenue contributed by acquisitions was a decrease in our North American flu-related net product sales during the nine months ended September 30, 2012, as compared to the nine months ended September 30, 2011. Net product sales from our North American flu-related sales decreased approximately $17.1 million, from $37.8 million during the nine months ended September 30, 2011 to $20.6 million during the nine months ended September 30, 2012, as a result of lower than normal flu levels observed in 2012 versus the more typical flu levels observed in 2011. Net product sales and services revenue from our professional diagnostics business segment were negatively impacted by the FDA recall matters related to our Alere Triage® meter-based products. Net product sales of meter-based Triage products in the U.S. totaled $126.0 million during the nine months ended September 30, 2012, as compared to $151.8 million during the nine months ended September 30, 2011. Excluding the impact of acquisitions, the decrease in flu-related sales during the comparable periods and the impact of the reduction in net product sales from meter-based Triage products in the U.S., the currency-adjusted organic growth for our professional diagnostics net product sales and services revenue was approximately $53.5 million, or 5%, from the nine months ended September 30, 2011 to the nine months ended September 30, 2012.

Within our professional diagnostics business segment, net product sales and services revenue for our cardiology business decreased by approximately $3.9 million, or 1%, to $386.8 million for the nine months ended September 30, 2012, from $390.7 million for the nine months ended September 30, 2011, driven by a $19.3 million decrease in our meter-based Triage net product sales in the U.S. during the nine months ended September 30, 2012, as compared to the nine months ended September 30, 2011, partially offset by $17.8 million contributed by the acquisition of Axis-Shield. Net product sales and services revenue for our infectious disease business increased by approximately $19.8 million, or 5%, to $425.4 million for the nine months ended September 30, 2012, from $405.6 million for the nine months ended September 30, 2011, with the acquisition of Axis-Shield contributing $23.8 million of such increase, and a $4.5 million increase in our CD4 net product sales during the comparable periods, partially offset by a $17.1 million decrease in our North American flu-related net product sales during the nine months ended September 30, 2012, as compared to the nine months ended September 30, 2011. Our toxicology business increased by approximately $169.9 million, or 63%, to $437.7 million for the nine months ended September 30, 2012, from $267.8 million for the nine months ended September 30, 2011, with our recent acquisitions of Avee, eScreen and Amedica contributing a combined net $154.4 million of the non-currency adjusted increase.

Health Management

The following table summarizes our net product sales and services revenue from
our health management business segment by groups of similar products and
services for the three and nine months ended September 30, 2012 and 2011 (in
thousands):



                                         Three Months  Ended                        Nine Months  Ended
                                            September 30,              %               September 30,             %
                                          2012          2011        Change          2012          2011        Change
Disease and case management            $   57,383     $  59,441          (3 )%    $ 165,277     $ 182,118          (9 )%
Wellness                                   24,290        24,427          (1 )%       80,881        80,369           1 %
Women's & children's health                29,136        28,509           2 %        90,220        85,550           5 %
Patient self-testing services              24,269        17,554          38 %        68,074        60,529          12 %

Health management net product sales
and services revenue                   $  135,078     $ 129,931           4 %     $ 404,452     $ 408,566          (1 )%

Our health management net product sales and services revenue increased by $5.1 million, or 4%, to $135.1 million for the three months ended September 30, 2012, from $130.0 million for the three months ended September 30, 2011. The increase in net product sales and services revenue was principally driven by an increase in our home coagulation monitoring programs due to the recognition of incremental patients and simultaneous reduction in patient attrition rates.

Our health management net product sales and services revenue decreased by $4.1 million, or 1%, to $404.5 million for the nine months ended September 30, 2012, from $408.6 million for the nine months ended September 30, 2011. Net product sales and services revenue in our health management segment was adversely impacted by the increasingly competitive environment, including pricing pressures, the impact of health plans insourcing less differentiated services, such as disease and case management, and state budget pressures.


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Consumer Diagnostics

Net product sales and services revenue from our consumer diagnostics business segment decreased by $1.9 million, or 8%, to $22.4 million for the three months ended September 30, 2012, from $24.3 million for the three months ended September 30, 2011. Net product sales by our 50/50 joint venture with P&G, or SPD, were $47.6 million during the three months ended September 30, 2012, as compared to $54.8 million during the three months ended September 30, 2011.

Net product sales and services revenue from our consumer diagnostics business segment decreased by $2.7 million, or 4%, to $66.2 million for the nine months ended September 30, 2012, from $68.9 million for the nine months ended September 30, 2011. Net product sales by SPD, were $145.0 million during the nine months ended September 30, 2012, as compared to $160.0 million during the nine months ended September 30, 2011.

License and Royalty Revenue. License and royalty revenue represents license and royalty fees from intellectual property license agreements with third parties. License and royalty revenue was $5.2 million for both the three months ended September 30, 2012 and 2011. License and royalty revenue decreased by approximately $6.4 million, or 36%, to $11.3 million for the nine months ended September 30, 2012, from $17.7 million for the nine months ended September 30, 2011. The decrease in royalty revenue for the nine months ended September 30, 2012, compared to the nine months ended September 30, 2011, was largely driven by an amendment to our license agreement with Quidel during 2011 whereby the license agreement was converted to a fully paid-up license. As a result of the amendment, we did not record royalty revenue from Quidel during the nine months ended September 30, 2012 and do not anticipate recording royalty revenue from Quidel in the future.

Gross Profit and Margin. Gross profit increased by $39.8 million, or 13%, to $345.8 million for the three months ended September 30, 2012, from $306.0 million for the three months ended September 30, 2011. Gross profit increased by $149.6 million, or 17%, to $1.1 billion for nine months ended September 30, 2012, from $904.9 million for the nine months ended September 30, 2011. The increase in gross profit during the three and nine months ended September 30, 2012 compared to the three and nine months ended September 30, 2011 was attributed to the increase in net product sales and services revenue resulting from acquisitions.

Cost of net revenue included amortization expense of $18.4 million and $51.6 million for the three and nine months ended September 30, 2012, respectively, compared to $14.0 million and $48.2 million for the three and nine months ended September 30, 2011. Included in cost of net revenue for the nine months ended September 30, 2012 was a $4.7 million non-cash charge relating to the write-up of inventory to fair value in connection with the acquisition of Axis-Shield.

Overall gross margin for the three and nine months ended September 30, 2012 was 50% and 51%, respectively, compared to 52% for both the three and nine months ended September 30, 2011.

Gross Profit from Net Product Sales and Services Revenue, Total and by Business Segment. Gross profit from net product sales and services revenue increased by $40.0 million, or 13%, to $342.5 million for the three months ended September 30, 2012, from $302.4 million for the three months ended September 30, 2011. Gross profit from net product sales and services revenue increased by $156.1 million, or 17%, to $1.0 billion for the nine months ended September 30, 2012, from $892.4 million for the nine months ended September 30, 2011. Gross profit from net product sales and services revenue by business segment for the three and nine months ended September 30, 2012 and 2011 are as follows (in thousands):

                                        Three Months  Ended                         Nine Months  Ended
                                           September 30,              %                September 30,              %
                                         2012          2011        Change           2012           2011        Change
Professional diagnostics              $  276,906     $ 238,414          16 %     $   853,676     $ 687,131          24 %
Health management                         60,358        58,609           3 %         180,460       189,867          (5 )%
Consumer diagnostics                       5,221         5,421          (4 )%         14,379        15,390          (7 )%

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