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ALR > SEC Filings for ALR > Form 10-Q on 5-Nov-2013All Recent SEC Filings

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Form 10-Q for ALERE INC.


5-Nov-2013

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 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 information solutions technology platform, our ability to improve care and lower healthcare costs for both providers and patients, the effect of the Affordable Care Act and other initiatives to reduce healthcare expenses, the potential for divestitures of non-core assets and the effects of any such divestitures, 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, 2012 and other risk factors identified herein or from time to time in our periodic filings with the SEC. 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 greater control of their health at home, under the supervision of their healthcare providers, by combining near-patient diagnostics, health monitoring capabilities and health information solutions. A leading global provider of point-of-care diagnostics and services, we have developed a strong commercial presence in cardiology, infectious disease, toxicology, and diabetes. Our products and services help healthcare practitioners make earlier, more effective treatment decisions and improve outcomes for individuals living with chronic disease.

During 2012, we focused on completing the foundation for this business model by expanding our presence in toxicology and diabetes through acquisitions. Our toxicology group is now a full-service provider to a broad range of domestic and foreign employers in industries that require rigorous drug testing. We built a strong presence in diabetes through targeted acquisitions. Including the effect of acquisitions completed in early 2013, we now service more than 670,000 active diabetes customers. We believe that the strong foundation that we have built in diabetes, specifically in our mail-order diabetes testing supply business, has provided us with a competitive advantage in dealing with the impact of Centers for Medicare and Medicaid Services', or CMS', reduction in reimbursement rates for diabetes testing supplies by approximately 70% effective July 1, 2013.

Core to our strategy are health information solutions that enable diagnostic data to be fed directly into an information exchange that integrates the diagnostic data with other patient-related information in a single health record. In recent periods, we have focused on acquiring health information solutions that will supplement our internally developed information solutions, including Apollo, and improve our ability to execute our business strategy. We offer a variety of connectivity tools, software-based analytics, clinical decision support tools, and health improvement programs that enable healthcare providers to initiate earlier interventions, personalize treatment plans, lower costs by reducing hospital readmissions, and measure improvements in outcomes at both a patient and population level.

We remain focused on enhancing shareholder value through our three-point plan to accelerate organic growth, improve operational execution and deleverage our capital structure. We continue to build momentum behind our next generation of novel diagnostic platforms that we expect will drive our growth in future years. With our novel molecular diagnostic platforms in the late stages of development and nearing launch, we have now begun to refocus our research and development efforts away from long-term projects towards product enhancements and menu expansion for our existing and recently launched platforms. We are also focused on improving our operational efficiency, including reducing selling, general and administrative expense, in order to generate dependable, long-term cash flow. To achieve this we are implementing a variety of global shared service initiatives, particularly in the areas of distribution and information technology, as well as implementing and expanding services from our recently established global in-sourcing facility in the Philippines. Additionally, with the foundation of our business essentially complete, we are exploring divestures of non-core businesses, with the $32.0 million sale of our Spinreact operations in Spain in July 2013 representing the first such disposition. We expect to use our improved cash flow, as well as the proceeds from non-core divestitures, or portions thereof, to reduce our indebtedness without compromising our core businesses.


Table of Contents

Financial Highlights

• Net revenue increased by $62.5 million, or 9%, to $753.9 million for the three months ended September 30, 2013, from $691.4 million for the three months ended September 30, 2012. Net revenue increased by $194.1 million, or 9%, to $2.3 billion for the nine months ended September 30, 2013, from $2.1 billion for the nine months ended September 30, 2012.

• Gross profit increased by $22.9 million, or 7%, to $368.6 million for the three months ended September 30, 2013, from $345.8 million for the three months ended September 30, 2012. Gross profit increased by $62.9 million, or 6%, to $1,117.4 million for the nine months ended September 30, 2013, from $1,054.5 million for the nine months ended September 30, 2012.

• For the three months ended September 30, 2013, we generated a net loss available to common stockholders of $24.8 million, or $0.30 per basic and diluted common share, compared to a net loss available to common stockholders of $9.2 million, or $0.11 per basic and diluted common share, for the three months ended September 30, 2012. For the nine months ended September 30, 2013, we generated a net loss available to common stockholders of $83.5 million, or $1.03 per basic and diluted common share, compared to a net loss available to common stockholders of $31.4 million, or $0.39 per basic and diluted common share, for the nine months ended September 30, 2012.

• Net loss for the nine months ended September 30, 2013 includes a $35.6 million loss on extinguishment of debt in connection with the repurchase of our 9% senior subordinated notes in the second quarter this year.

Results of Operations

Where discussed, results excluding the impact of foreign 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. Total net product sales and services revenue increased by $63.5 million, or 9%, to $749.7 million for the three months ended September 30, 2013, from $686.2 million for the three months ended September 30, 2012. Excluding the impact of currency translation, net product sales and services revenue for the three months ended September 30, 2013 increased by $68.0 million, or 10%, compared to the three months ended September 30, 2012. Total net product sales and services revenue increased by $192.3 million, or 9%, to $2.2 billion for the nine months ended September 30, 2013, from $2.1 billion for the nine months ended September 30, 2012. Excluding the impact of currency translation, net product sales and services revenue for the nine months ended September 30, 2013 increased by $203.7 million, or 10%, compared to the nine months ended September 30, 2012. Net product sales and services revenue by business segment for the three and nine months ended September 30, 2013 and 2012 are as follows (in thousands):

                                            Three Months Ended September 30,            %              Nine Months Ended September 30,            %
                                               2013                   2012           Change              2013                   2012           Change
Professional diagnostics                 $        587,313       $        528,754          11 %     $      1,765,538       $      1,581,076          12 %
Health information solutions                      134,233                135,078          (1 )%             403,215                404,452          -  %
Consumer diagnostics                               28,152                 22,396          26 %               75,250                 66,201          14 %

Net product sales and services revenue   $        749,698       $        686,228           9 %     $      2,244,003       $      2,051,729           9 %

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, 2013 and 2012 (in
thousands):



                                             Three Months Ended September 30            %              Nine Months Ended September 30,            %
                                               2013                   2012           Change              2013                   2012            Change
Cardiology                               $        116,281       $        122,372          (5 )%    $        349,650       $        386,795          (10 )%
Infectious disease                                172,739                136,561          26 %              520,289                425,398           22 %
Toxicology                                        166,536                156,074           7 %              481,469                437,736           10 %
Diabetes                                           53,150                 35,670          49 %              178,138                100,628           77 %
Other                                              78,607                 78,077           1 %              235,992                230,519            2 %

Professional diagnostics net product
sales and services revenue               $        587,313       $        528,754          11 %     $      1,765,538       $      1,581,076           12 %


Table of Contents

Net product sales and services revenue from our professional diagnostics business segment increased by $58.6 million, or 11%, to $587.3 million for the three months ended September 30, 2013, from $528.8 million for the three months ended September 30, 2012. Excluding the impact of currency translation, net product sales and services revenue from our professional diagnostics business segment increased by $63.8 million, or 12%, comparing the three months ended September 30, 2013 to the three months ended September 30, 2012. Revenue increased primarily as a result of acquisitions, which contributed an aggregate of $30.6 million of the non-currency-adjusted increase. Partly driving the increase in net product sales and services revenue was an increase in our North American flu-related net product sales during the three months ended September 30, 2013, as compared to the three months ended September 30, 2012. Net product sales from our North American flu-related sales increased approximately $8.4 million, from $9.9 million during the three months ended September 30, 2012 to $18.3 million during the three months ended September 30, 2013. Net product sales and services revenue from our professional diagnostics business segment were negatively impacted by the FDA matters related to our Alere Triage® meter-based products. Net product sales of meter-based Triage products in the U.S. totaled $17.7 million during the three months ended September 30, 2013, as compared to $34.9 million during the three months ended September 30, 2012. Excluding the impact of acquisitions and the disposition of our Spinreact operations in Spain, the increase 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 $44.3 million, or 9%, from the three months ended September 30, 2012 to the three months ended September 30, 2013. This growth rate was adversely impacted by the change in CMS' reimbursement rates which became effective on July 1, 2013 for our U.S. mail order diabetes business.

Within our professional diagnostics business segment, net product sales and services revenue for our cardiology business decreased by approximately $6.1 million, or 5%, to $116.3 million for the three months ended September 30, 2013, from $122.4 million for the three months ended September 30, 2012, driven principally by the impact of the FDA review of certain of our meter-based Triage products in the U.S. Net product sales and services revenue for our infectious disease business increased by approximately $36.2 million, or 26%, to $172.7 million for the three months ended September 30, 2013, from $136.6 million for the three months ended September 30, 2012. The change was driven principally by a growth in HIV, flu and malaria revenues during the comparable periods. Net product sales and services revenue for our toxicology business increased by approximately $10.5 million, or 7%, to $166.5 million for the three months ended September 30, 2013, from $156.1 million for the three months ended September 30, 2012, with our recent toxicology-related acquisitions contributing a combined net $3.0 million of the non-currency adjusted increase. Offsetting the increase in net product sales and services revenue for our toxicology business contributed by acquisitions was a $7.3 million decrease in net product sales related to our Triage toxicology products. Net product sales and services revenue from our diabetes business increased by approximately $17.5 million, or 49%, to $53.2 million for the three months ended September 30, 2013, from $35.7 million for the three months ended September 30, 2012. The increase was primarily the result of our recent acquisitions of NationsHealth, Discount Diabetic, LLC, or Discount Diabetic, and the Medicare fee-for-service assets of Liberty Medical, or the Liberty business, which contributed a combined net $26.5 million of the non-currency adjusted increase. Included in the $53.2 million of revenue from our diabetes business for the three months ended September 30, 2013 were $34.3 million of mail order diabetes sales, compared to $22.8 million for the three months ended September 30, 2012. The $34.3 million of mail order diabetes sales reflect the negative impact of the reduction in CMS' reimbursement rates for diabetes testing supplies which became effective on July 1, 2013, offset by incremental sales related to our April 2013 acquisition of the Liberty business.

Net product sales and services revenue from our professional diagnostics business segment increased by $184.5 million, or 12%, to $1.8 billion for the nine months ended September 30, 2013, from $1.6 billion for the nine months ended September 30, 2012. Excluding the impact of currency translation, net product sales and services revenue from our professional diagnostics business segment increased by $197.2 million, or 12%, comparing the nine months ended September 30, 2013 to the nine months ended September 30, 2012. Revenue increased primarily as a result of acquisitions, which contributed an aggregate of $140.1 million of the non-currency-adjusted increase. Contributing to the increase in net product sales and services revenue was an increase in our North American flu-related net product sales during the nine months ended September 30, 2013, as compared to the nine months ended September 30, 2012. Net product sales from our North American flu-related sales increased approximately $34.0 million, from $20.6 million during the nine months ended September 30, 2012 to $54.6 million during the nine months ended September 30, 2013. Net product sales and services revenue from our professional diagnostics business segment were negatively impacted by the FDA matters related to our Alere Triage® meter-based products. Net product sales of meter-based Triage products in the U.S. totaled $58.6 million during the nine months ended September 30, 2013, as compared to $126.0 million during the nine months ended September 30, 2012. Excluding the impact of acquisitions and the disposition of our Spinreact operations in Spain, the increase 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 $92.8 million, or 6%, from the nine months ended September 30, 2012 to the nine months ended September 30, 2013. This growth rate was adversely impacted by the change in CMS' reimbursement rates which became effective on July 1, 2013 for our U.S. mail order diabetes business.


Table of Contents

Within our professional diagnostics business segment, net product sales and services revenue for our cardiology business decreased by approximately $37.1 million, or 10%, to $349.7 million for the nine months ended September 30, 2013, from $386.8 million for the nine months ended September 30, 2012, driven principally by the impact of the FDA review of certain of our meter-based Triage products in the U.S. Net product sales and services revenue for our infectious disease business increased by approximately $94.9 million, or 22%, to $520.3 million for the nine months ended September 30, 2013, from $425.4 million for the nine months ended September 30, 2012. The change was driven principally by an increase in HIV, flu and malaria-related sales during the comparable periods. Net product sales and services revenue for our toxicology business increased by approximately $43.7 million, or 10%, to $481.5 million for the nine months ended September 30, 2013, from $437.7 million for the nine months ended September 30, 2012, with our recent toxicology-related acquisitions contributing a combined net $52.9 million of the non-currency adjusted increase. Partially offsetting the increase in net product sales and services revenue for our toxicology business contributed by acquisitions was a $22.6 million decrease in net product sales related to our Triage toxicology products and a reduction in commercial pricing for our pain and rehab businesses which was implemented in the second quarter of 2012. Our diabetes business increased by approximately $77.5 million, or 77%, to $178.1 million for the nine months ended September 30, 2013, from $100.6 million for the nine months ended September 30, 2012. The increase was primarily the result of our recent acquisitions of AmMed, NationsHealth, Discount Diabetic, and the Liberty business, which contributed a combined net $78.8 million of the non-currency adjusted increase. Included in the $178.1 million of revenue from our diabetes business for the nine months ended September 30, 2013 were $123.8 million of mail order diabetes sales, compared to $60.7 million for the nine months ended September 30, 2012. The $123.8 million of mail order diabetes sales from the nine months ended September 30, 2013 reflect the negative impact of the reduction in CMS' reimbursement rates for diabetes testing supplies which became effective on July 1, 2013, offset by incremental sales related to our April 2013 acquisition of the Liberty business.

Health Information Solutions

The following table summarizes our net product sales and services revenue from
our health information solutions business segment by groups of similar products
and services for the three and nine months ended September 30, 2013 and 2012 (in
thousands):



                                                Three Months Ended September 30,            %              Nine Months Ended September 30,            %
                                                   2013                   2012           Change              2013                   2012           Change
Disease and case management                  $         56,554       $         57,383          (1 )%    $        163,258       $        165,277          (1 )%
Wellness                                               22,223                 24,290          (9 )%              75,753                 80,881          (6 )%
Women's & children's health                            28,431                 29,136          (2 )%              86,767                 90,220          (4 )%
Patient self-testing services                          27,025                 24,269          11 %               77,437                 68,074          14 %

Health information solutions net product
sales and services revenue                   $        134,233       $        135,078          (1 )%    $        403,215       $        404,452          -  %

Our health information solutions net product sales and services revenue decreased by $0.8 million, or 0.6%, to $134.2 million for the three months ended September 30, 2013, from $135.1 million for the three months ended September 30, 2012. Net product sales and services revenues from our disease and case management, wellness and women's and children's health businesses each decreased during the three months ended September 30, 2013, compared to the three months ended September 30, 2012, as we experienced customer terminations, lower state enrollments in wellness programs and lower revenue from homecare services in these businesses, respectively. Our patient self-testing services net product sales and services revenue increased approximately $2.8 million, or 11%, to $27.0 million for the three months ended September 30, 2013, from $24.3 million for the three months ended September 30, 2012, principally driven by an increase in our home coagulation monitoring programs resulting from a larger patient population and a simultaneous reduction in customer attrition rates.

Our health information solutions net product sales and services revenue was $403.2 million for the nine months ended September 30, 2013, and was relatively flat compared to $404.5 million for the nine months ended September 30, 2012. Net product sales and service revenue from our disease and case management, wellness and women's and children's health businesses each decreased during the nine months ended September 30, 2013, compared to the nine months ended September 30, 2012, as we experienced customer terminations, lower state enrollments in wellness programs and lower revenue from homecare services in these businesses, respectively. Given the challenging contracting season, we expect weak sales in the fourth quarter of 2013 and in the first quarter of 2014, and then expect to resume sequential growth, adjusting for seasonality within this segment through 2014, from the first quarter of 2014 base. Our patient self-testing services net product sales and services revenue increased approximately $9.4 million, or 14%, to $77.4 million for the nine months ended September 30, 2013, from $68.1 million for the nine months ended September 30, 2012, principally driven by an increase in our home coagulation monitoring programs resulting from a larger patient population and a simultaneous reduction in customer attrition rates.


Table of Contents

Consumer Diagnostics

Net product sales and services revenue from our consumer diagnostics business segment revenue increased by $5.8 million, or 26%, to $28.2 million for the three months ended September 30, 2013, from $22.4 million for the three months ended September 30, 2012. Net product sales by our 50/50 joint venture with P&G, Swiss Precision Diagnostics GmbH, or SPD, were $50.6 million during the three months ended September 30, 2013, as compared to $47.6 million during the three months ended September 30, 2012.

Net product sales and services revenue from our consumer diagnostics business segment revenue increased by $9.0 million, or 14%, to $75.2 million for the nine months ended September 30, 2013, from $66.2 million for the nine months ended September 30, 2012. Net product sales by our 50/50 joint venture with P&G, or SPD, were $134.3 million during the nine months ended September 30, 2013, as compared to $145.0 million during the nine months ended September 30, 2012.

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 decreased by approximately $1.0 million, or 19%, to $4.2 million for the three months ended September 30, 2013, from $5.2 million for the three months ended September 30, 2012. The decrease in royalty revenue for the three months ended September 30, 2013, compared to the three months ended September 30, 2012, is primarily a result of new licensing agreements and higher royalties earned under existing licensing agreements.

License and royalty revenue increased by approximately $1.8 million, or 16%, to $13.1 million for the nine months ended September 30, 2013, from $11.3 million for the nine months ended September 30, 2012. The increase in royalty revenue for the nine months ended September 30, 2013, compared to the nine months ended September 30, 2012, is primarily a result of new licensing agreements and higher royalties earned under existing licensing agreements.

Gross Profit and Margin. Gross profit increased by $22.9 million, or 7%, to $368.6 million for the three months ended September 30, 2013, from $345.8 million for the three months ended September 30, 2012. The increase in gross profit during the three months ended September 30, 2013, compared to the three months ended September 30, 2012, was largely attributed to the increase in net product sales and services revenue resulting from acquisitions.

Gross profit increased by $62.9 million, or 6%, to $1,117.4 million for the nine months ended September 30, 2013, from $1,054.5 million for the nine months ended September 30, 2012. The increase in gross profit during the nine months ended September 30, 2013, compared to the nine months ended September 30, 2012, was largely attributed to the increase in net product sales and services revenue resulting from acquisitions.

Cost of net revenue included amortization expense of $18.2 million and $18.4 million for the three months ended September 30, 2013 and 2012, respectively. Included in the cost of net revenue for the three months ended September 30, . . .

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