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ALR > SEC Filings for ALR > Form 10-Q on 6-Aug-2014All Recent SEC Filings

Show all filings for ALERE INC.

Form 10-Q for ALERE INC.


6-Aug-2014

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 the impact of recent changes in our senior management and the anticipated timing of completion of our strategic review, the impact and timing of reductions in operating expenses, and the timing of potential divestures. 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, 2013 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 are a leading global provider of diagnostic products that deliver rapid and accurate results at the point of care, with particular emphasis in the fields of infectious diseases, cardiometabolic disease and toxicology. Our connected device technologies and health information solutions give providers the ability to speed up and customize treatment by enabling timely access to actionable data from our connected devices and our personal and electronic health record solutions, as well as decision-support software and analytic tools. Through our health information solutions business, we also offer programs for chronic condition management, coagulation monitoring, smoking cessation, pregnancy management, weight loss and healthy living.

On May 5, 2014, our board announced that we were undertaking a comprehensive review of our strategy and operations to identify opportunities to enhance shareholder value, and we engaged a major international management consulting firm to assist us. On June 30, 2014, as part of that review, our board accepted the resignation of Ron Zwanziger as Chief Executive Officer and President and as a member of our board of directors, and appointed Namal Nawana, our Chief Operating Officer, to serve in the additional capacity of Interim Chief Executive Officer and President. Our board expects to engage an executive search firm to assist it in identifying candidates to serve as our chief executive officer on a permanent basis. Also on June 30, 2014, our board accepted the resignations of Jerry McAleer, our Senior Vice President, Research and Development and a director, and David Scott, our Chief Scientific Officer.

While our strategic review is ongoing, we expect that over the course of the next few months our plans will be fully formed and communicated. We have announced the following near-term initiatives:

• We have already begun taking steps to rationalize our investment in connected health concepts and technologies and to reduce the substantial negative impact that this investment has had on operating results. We expect these steps to continue and to include efforts to divest certain of our connected health assets. While working through this process, we will balance the need to protect our investments in connected health assets that are essential to the long-term value of our core business with our objective to reduce expenses;

• We intend to divest of our health management business; and

• We have begun to wind down certain speculative, non-core research and development projects, and intend to reduce overall research and development expenditures.

Financial Highlights

• Net revenue decreased by $26.0 million, or 3%, to $737.9 million for the three months ended June 30, 2014, from $764.0 million for the three months ended June 30, 2013. Net revenue decreased by $48.7 million, or 3%, to $1,454.5 million for the six months ended June 30, 2014, from $1,503.2 million for the six months ended June 30, 2013.

• Gross profit decreased by $44.6 million, or 12%, to $339.9 million for the three months ended June 30, 2014, from $384.5 million for the three months ended June 30, 2013. Gross profit decreased by $57.6 million, or 8%, to $691.2 million for the six months ended June 30, 2014, from $748.7 million for the six months ended June 30, 2013.

• For the three months ended June 30, 2014, we generated a net loss available to common stockholders of $55.0 million, or $0.67 per basic and diluted common share, compared to a net loss available to common stockholders of $65.9 million, or


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$0.81 per basic and diluted common share, for the three months ended June 30, 2013. For the six months ended June 30, 2014, we generated a net loss available to common stockholders of $66.4 million, or $0.81 per basic and diluted common share, compared to a net loss available to common stockholders of $58.7 million, or $0.72 per basic and diluted common share, for the six months ended June 30, 2013.

• Net loss for the three and six months ended June 30, 2013 includes a $35.6 million loss on extinguishment of debt in connection with the repurchase of our 9% senior subordinated notes.

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 decreased by $27.8 million, or 4%, to $731.3 million for the three months ended June 30, 2014, from $759.1 million for the three months ended June 30, 2013. Excluding the impact of currency translation, net product sales and services revenue for the three months ended June 30, 2014 decreased by $33.3 million, or 4%, compared to the three months ended June 30, 2013. Total net product sales and services revenue decreased by $51.6 million, or 3%, to $1.4 billion for the six months ended June 30, 2014, from $1.5 billion for the six months ended June 30, 2013. Excluding the impact of currency translation, net product sales and services revenue for the six months ended June 30, 2014 decreased by $54.5 million, or 4%, compared to the six months ended June 30, 2013. Net product sales and services revenue by business segment for the three and six months ended June 30, 2014 and 2013 are as follows (in thousands):

                                             Three Months Ended June 30,            %            Six Months Ended June 30,           %
                                              2014                 2013          Change             2014             2013         Change

Professional diagnostics                 $      578,078       $      599,597          (4 )%    $    1,139,411     $ 1,178,225          (3 )%
Health information solutions                    125,815              134,775          (7 )%           249,483         268,982          (7 )%
Consumer diagnostics                             27,446               24,748          11 %             53,855          47,098          14 %

Net product sales and services revenue   $      731,339       $      759,120          (4 )%    $    1,442,749     $ 1,494,305          (3 )%

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 six months ended June 30, 2014 and 2013 (in
thousands):



                                          Three Months Ended June 30,            %             Six Months Ended June 30,           %
                                           2014                 2013           Change             2014             2013          Change
Infectious disease                    $      165,641       $      157,706            5 %     $      329,671     $   347,550           (5 )%
Toxicology                                   164,677              165,884           (1 )%           316,574         314,933            1 %
Cardiology                                   101,783              118,436          (14 )%           223,416         233,369           (4 )%
Diabetes                                      51,227               74,905          (32 )%           101,948         124,988          (18 )%
Other                                         94,750               82,666           15 %            167,802         157,385            7 %

Professional diagnostics net
product sales and services revenue    $      578,078       $      599,597           (4 )%    $    1,139,411     $ 1,178,225           (3 )%

Net product sales and services revenue from our professional diagnostics business segment decreased by $21.5 million, or 4%, to $578.1 million for the three months ended June 30, 2014, from $599.6 million for the three months ended June 30, 2013. Excluding the impact of currency translation, net product sales and services revenue from our professional diagnostics business segment decreased by $26.9 million, or 4%, comparing the three months ended June 30, 2014 to the three months ended June 30, 2013. Revenue decreased primarily as a result of lower U.S. revenues from our mail order diabetes business and a $6.8 million decrease in net revenue as a result of our 2013 disposition of Spinreact, partially offset by $8.4 million in non-currency-adjusted incremental revenues attributable to acquisitions. Revenue from mail order diabetes sales decreased by $23.2 million, or 41%, to $33.0 million for the three months ended June 30, 2014 from $56.2 million for the three months ended June 30, 2013, primarily as a result of a reduction in the Center for Medicare & Medicaid Services', or CMS', reimbursement rates for those products, which became effective on July 1, 2013, the effect of which was partially offset by an increase in patients served from 455,000 as of June 30, 2013 to 778,000 as of June 30, 2014. Revenues in the U.S. were further reduced by continued lower U.S. healthcare utilization levels during the second quarter of 2014 compared to the comparable period in 2013 and by the impact of product returns in our INRatio


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business as a result of the recall initiated early in the second quarter of 2014, which adversely impacted revenues by $3.7 million. Net product sales of Alere Triage® meter-based products in the U.S. decreased by $3.1 million to $16.2 million during the three months ended June 30, 2014 from $19.3 million during the three months ended June 30, 2013 as a result of our supply issues, which began in the second quarter of 2012. This decrease in U.S. revenues was partially offset by a $3.1 million increase in flu-related sales between the second quarter of 2013 and the second quarter of 2014. Revenues from international sales increased by $12.0 million to $289.5 million during the second quarter of 2014 from $277.5 million in the second quarter of 2013 due principally to continued strong performance in India and Africa, which together grew by approximately 21%, which was partially offset by a $21.6 million decrease in revenues from markets in Latin America as a result of a reduction in diabetes revenue in Brazil and a weak dengue season in the region. Excluding the impact of acquisitions, the decrease in net product sales from meter-based Triage products in the U.S., the impact of the increase in flu-related sales during the comparable periods, and the decrease in organic revenues from our U.S. mail order diabetes business impacted by the reduction in CMS' reimbursement rates, the currency-adjusted organic growth for our professional diagnostics net product sales and services revenue was approximately $2.5 million, or 0.5%, from the three months ended June 30, 2013 to the three months ended June 30, 2014. New products contributed favorably to our overall adjusted growth rate, with sales of our CD4 products increasing from $4.6 million in the second quarter of 2013 to $7.6 million in the second quarter of 2014 and Epoc sales increasing from $5.5 million to $6.9 million for the same periods.

Within our professional diagnostics business segment, net product sales and services revenue for our infectious disease business increased by approximately $7.9 million, or 5%, to $165.6 million for the three months ended June 30, 2014, from $157.7 million for the three months ended June 30, 2013. The quarter-over-quarter increase was primarily due to a $3.1 million increase in North American flu-related sales and an overall increase in international sales, as discussed above. Net product sales and services revenue for our toxicology business decreased by approximately $1.2 million, or 1%, to $164.7 million for the three months ended June 30, 2014, from $165.9 million for the three months ended June 30, 2013. Net product sales and services revenue for our cardiology business decreased by approximately $16.7 million, or 14%, to $101.8 million for the three months ended June 30, 2014, from $118.4 million for the three months ended June 30, 2013, primarily as a result of the impact of lower U.S. INRatio revenues as a result of the recall initiated early in the second quarter of 2014. Our diabetes business decreased by approximately $23.7 million, or 32%, to $51.2 million for the three months ended June 30, 2014, from $74.9 million for the three months ended June 30, 2013. This decrease was primarily the result of the decline in revenue attributable to the reduction in CMS's reimbursement rates described above, which was partially offset by our recent acquisitions of the Medicare fee-for-service assets of Liberty Medical, or the Liberty business, and Simplex Healthcare, Inc., or Simplex, which contributed a combined net $7.7 million of the non-currency adjusted incremental revenues from our diabetes business. Included in the $51.2 million of revenue from our diabetes business for the three months ended June 30, 2014 was $33.0 million of mail order diabetes sales, compared to $56.2 million for the three months ended June 30, 2013.

Net product sales and services revenue from our professional diagnostics business segment decreased by $38.8 million, or 3%, to $1.1 billion for the six months ended June 30, 2014, from $1.2 billion for the six months ended June 30, 2013. Excluding the impact of currency translation, net product sales and services revenue from our professional diagnostics business segment decreased by $41.2 million, or 4%, comparing the six months ended June 30, 2014 to the six months ended June 30, 2013. Revenue decreased primarily as a result of lower U.S. revenues from our mail order diabetes business, a $24.0 million decrease in our U.S. flu-related net product sales from $36.3 million during the six months ended June 30, 2013 to $12.3 million during the six months ended June 30, 2014, and a $13.2 million decrease in net revenue as a result of our 2013 disposition of Spinreact, partially offset by $29.9 million in non-currency-adjusted incremental revenues attributable to acquisitions. Revenue from mail order diabetes sales decreased by $24.2 million, or 27%, to $65.3 million for the six months ended June 30, 2014 from $89.4 million for the six months ended June 30, 2013, primarily as a result of a reduction in CMS' reimbursement rates for those products, which became effective on July 1, 2013, the effect of which was partially offset by an increase in patients served from 455,000 as of June 30, 2013 to 778,000 as of June 30, 2014. Revenues in the U.S. were further reduced by continued lower U.S healthcare utilization levels during the first half of 2014 compared to the comparable period in 2013 and by the impact of product returns in our INRatio business as a result of the recall initiated early in the second quarter of 2014, which adversely impacted revenues by $3.7 million. Net product sales of Alere Triage® meter-based products in the U.S. decreased by $1.8 million to $39.0 million during the six months ended June 30, 2014 from $40.9 million during the six months ended June 30, 2013. Revenues from international sales increased by $33.5 million to $571.0 million during the first half of 2014 from $537.5 million in the second half of 2013 due to continued strong performance in India and Africa, which together grew by approximately 26%, which was partially offset by a $4.8 million decrease in revenues from markets in Latin America as a result of a reduction in diabetes revenue in Brazil and a weak dengue season in the region. Excluding the impact of acquisitions, the decrease in net product sales from meter-based Triage products in the U.S., the impact of the decrease in flu-related sales during the comparable periods, and the decrease in organic revenues from our U.S. mail order diabetes business impacted by the reduction in CMS' reimbursement, the currency-adjusted organic growth for our professional diagnostics net product sales and services revenue was approximately $19.9 million, or 2.0%, from the six months ended June 30, 2013 to the six months ended June 30, 2014. New products contributed favorably to our overall adjusted growth rate, with sales of our CD4 products increasing from $7.7 million in the first half of 2013 to 14.3 million in the first half of 2014 and Epoc sales increasing from $10.1 million to $13.7 million for the same periods.


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Within our professional diagnostics business segment, net product sales and services revenue for our infectious disease business decreased by approximately $17.9 million, or 5%, to $329.7 million for the six months ended June 30, 2014, from $347.6 million for the six months ended June 30, 2013. The decrease was primarily due to a larger-than-expected reduction in U.S. healthcare utilization during the first half of 2014, as compared to the first half of 2013, and a $24.0 million decrease in our U.S. flu-related net product sales from $36.3 million during the six months ended June 30, 2013 to $12.3 million during the six months ended June 30, 2014, as discussed above. Net product sales and services revenue for our toxicology business increased by approximately $1.6 million, or 1%, to $316.6 million for the six months ended June 30, 2014, from $314.9 million for the six months ended June 30, 2013. Net product sales and services revenue for our cardiology business decreased by approximately $10.0 million, or 4%, to $223.4 million for the six months ended June 30, 2014, from $233.4 million for the six months ended June 30, 2013, primarily as a result of a decline in sales of our Alere INRatio2 PT/INR professional test strip in the U.S. due to a voluntary recall. Our diabetes business decreased by approximately $23.0 million, or 18%, to $101.9 million for the six months ended June 30, 2014, from $125.0 million for the six months ended June 30, 2013. This decrease was primarily the result of the decline in revenue attributable to the reduction in CMS's reimbursement rates described above, which was partially offset by our recent acquisitions of the Medicare fee-for-service assets of Liberty Medical, or the Liberty business, and Simplex Healthcare, Inc., or Simplex, which contributed a combined net $28.8 million of the non-currency adjusted incremental revenues from our diabetes business. Included in the $101.9 million of revenue from our diabetes business for the six months ended June 30, 2014 was $65.3 million of mail order diabetes sales, compared to $89.4 million for the six months ended June 30, 2013.

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 six months ended June 30, 2014 and 2013 (in
thousands):



                                              Three Months Ended June 30,            %             Six Months Ended June 30,           %
                                               2014                 2013           Change            2014               2013         Change
Condition and case management             $       48,527       $       52,578           (8 )%    $      97,846       $  106,704           (8 )%
Wellness                                          23,534               27,230          (14 )%           48,484           53,530           (9 )%
Women's and children's health                     24,324               29,256          (17 )%           46,539           58,336          (20 )%
Patient self-testing services                     29,430               25,711           14 %            56,614           50,412           12 %

Health information solutions net
product sales and services revenue        $      125,815       $      134,775           (7 )%    $     249,483       $  268,982           (7 )%

Our health information solutions net product sales and services revenue decreased by $9.0 million, or 7%, to $125.8 million for the three months ended June 30, 2014, from $134.8 million for the three months ended June 30, 2013, as a result of the challenging contracting season in the second half of 2013. Within our health information solutions business segment, net product sales and services revenues from our condition and case management, wellness and women's and children's health businesses each decreased during the three months ended June 30, 2014, compared to the three months ended June 30, 2013, as we experienced customer terminations, lower state enrollments in wellness programs and lower revenue from homecare services in these businesses. Our patient self-testing services net product sales and services revenue increased approximately $3.7 million, or 14%, to $29.4 million for the three months ended June 30, 2014, from $25.7 million for the three months ended June 30, 2013, 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 decreased by $19.5 million, or 7%, to $249.5 million for the six months ended June 30, 2014, from $269.0 million for the six months ended June 30, 2013, as a result of the challenging contracting season in the second half of 2013. Within our health information solutions business segment, net product sales and services revenues from our condition and case management, wellness and women's and children's health businesses each decreased during the six months ended June 30, 2014, compared to the six months ended June 30, 2013, as we experienced customer terminations, lower state enrollments in wellness programs and lower revenue from homecare services in these businesses. Our patient self-testing services net product sales and services revenue increased approximately $6.2 million, or 12%, to $56.6 million for the six months ended June 30, 2014, from $50.4 million for the six months ended June 30, 2013, 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.

Consumer Diagnostics

Net product sales and services revenue from our consumer diagnostics business segment revenue increased by $2.7 million, or 11%, to $27.4 million for the three months ended June 30, 2014, from $24.7 million for the three months ended June 30, 2013. The increase in revenue primarily resulted from an increase in our manufacturing revenue associated with SPD, as SPD successfully launched the Clearblue Advanced Pregnancy Test with Weeks Estimator product in the U.S. during 2013.


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Net product sales and services revenue from our consumer diagnostics business segment revenue increased by $6.8 million, or 14%, to $53.9 million for the six months ended June 30, 2014, from $47.1 million for the six months ended June 30, 2013. The increase in revenue primarily resulted from an increase in our manufacturing revenue associated with SPD, as SPD successfully launched the Clearblue Advanced Pregnancy Test with Weeks Estimator product in the U.S. during 2013.

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 increased by approximately $1.7 million, or 36%, to $6.6 million for the three months ended June 30, 2014, from $4.9 million for the three months ended June 30, 2013. The increase in royalty revenue for the three months ended June 30, 2014, compared to the three months ended June 30, 2013, is primarily a result of higher royalties earned under existing licensing agreements.

License and royalty revenue increased by approximately $2.9 million, or 32%, to $11.8 million for the six months ended June 30, 2014, from $8.9 million for the six months ended June 30, 2013. The increase in royalty revenue for the six months ended June 30, 2014, compared to the six months ended June 30, 2013, is primarily a result of higher royalties earned under existing licensing agreements.

Gross Profit and Margin Percentage. Gross profit decreased by $44.6 million, or 12%, to $339.9 million for the three months ended June 30, 2014, from $384.5 million for the three months ended June 30, 2013. The decrease in gross profit during the three months ended June 30, 2014, compared to the three months ended June 30, 2013, was largely attributed to the decrease in net product sales and services revenue resulting from continued weakness in utilization in our professional diagnostics business segment, coupled with the impact of our recall of INRatio2 test strips and a recall of certain Alere Triage BNP Calibrators for Beckman Coulter Immunoassay Systems, or Triage BNP Calibrators, during the quarter, which included revenue and cost of sales charges totaling $7.5 million during the quarter ended June 30, 2014.

Gross profit decreased by $57.6 million, or 8%, to $691.2 million for the six months ended June 30, 2014, from $748.7 million for the six months ended June 30, 2013. The decrease in gross profit during the three months ended June 30, 2014, compared to the three months ended June 30, 2013, was largely attributed to the decrease in net product sales and services revenue principally resulting from weak U.S. influenza sales and a larger-than-expected reduction in U.S. healthcare utilization which primarily impacted our U.S. infectious disease revenue, as well as a continued weakness in utilization in our professional business, coupled with the impacts of a recall of INRatio2 test strips and a recall of certain Triage BNP Calibrators during the first half of 2014, which included revenue and cost of sales charges totaling $7.5 million during the six months ended June 30, 2014.

Cost of net revenue included amortization expense of $16.4 million and $17.1 million for the three months ended June 30, 2014 and 2013, respectively. . . .

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