Inverness Medical Innovations Tuesday, October 27, 2009 by hxe11278

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									                              IMA Q309 Conference Call Script.doc




Inverness Medical Innovations
Tuesday, October 27, 2009 @ 10:00 AM EST
3rd Quarter Earnings Call


Doug Guarino


Good morning and welcome to the Inverness Medical Innovations conference
call to discuss our results for the quarter ended September 30th, 2009.


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 US 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 integrate our acquisitions and to recognize the expected
benefits of restructuring and new business activities; the impact of the recent
crises in the global financial markets, including the credit markets, on our plans
and operations and those of our suppliers and customers; our exposure to
changes in interest rates and foreign currency exchange rates; our ability to
successfully develop and commercialize products; the market acceptance of our
products; continued acceptance of health management services by payors,
providers and patients; our ability to develop enhanced health management
programs through the integrated use of innovative diagnostic and monitoring
devices and to recognize the expected benefits of this strategy; the content and



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timing of decisions by regulatory authorities 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, 2008, as well as in our Quarterly Reports on Form
10-Q. Our Company undertakes no obligation to update forward-looking
statements.


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


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


Ron Zwanziger:


Good morning everyone.


I am pleased to report another quarter of solid financial results, highlighted by
currency adjusted organic revenue growth of over 9% in our professional
diagnostics business, excluding the positive impact of US flu related sales, and
adjusted cash-basis earnings per share of $0.74 cents, representing our 13th
consecutive quarter of year over year earnings growth. Year to date results of
$1.92 in adjusted cash EPS nearly matches our total reported result for 2008.




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During the third quarter, as previously disclosed, we began reinvestment in R&D
and global market development programs that were placed on hold during the
second half of 2008, as the recession began to strengthen. We also recognized
interest expense from cash on the balance sheet related to the unspent portion of
our second and third quarter debt offerings. Despite the continuation of these
expense increases throughout the 4th quarter, we remain confident in our
previously provided guidance of exceeding $2.50 in adjusted cash-basis earnings
per share for the full year 2009. More importantly however, we are well
positioned to deliver significant year over year earnings growth in 2010 and
beyond.


While the impact of the H1N1 pandemic was clearly significant, it’s important to
recognize that even without this benefit we have experienced a strong quarter,
primarily as a result of the momentum which we have built up in the professional
diagnostics division over the last several years. Due to continued confidence in
our professional business, as well as a belief that our health management
business is particularly well positioned to benefit from an economic recovery and
the effects of healthcare reform, we expect to continue to perform well for the
next several years, regardless of the long term outlook for H1N1 or any other
infectious disease outbreaks.


An important, but perhaps overlooked, recent milestone was the demonstration
at the Healthcare 2.0 conference of our newly developed integrated health
management platform, called Apollo. Apollo will provide the technology
backbone for all of our future service offerings and is designed to seamlessly
integrate data from biometric devices and rapid diagnostics, as well as other
sources, into a longitudinal record for individuals. This comprehensive data-store
will in turn be leveraged to improve the care we provide to individuals as well as
the service we provide to our payor clients.




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During the third quarter we closed our previously announced acquisition of
Concateno, a leading European supplier of drugs of abuse testing products and
services. We also closed 4 small acquisitions which have not been previously
announced. Genecare, a leader in prenatal genetic screening; Zycare, the
developer of a 510K cleared software system which enables physicians to
directly manage Warfarin patients in the home; Medim, a Swiss distributor; and
Biosyn, an Irish distributor which closed on October 1st. The combined price of
these four acquisitions was $23 million, and their combined annual revenues are
approximately $16.5 million.


We also, subsequent to quarter end, bought Mologic, which may give us
biomarkers that are useful in COPD, TB, and wound care. The company was
founded by Professor Paul Davis, who invented the Davis Patent while at
Unipath.


Additionally, as previously announced, we acquired Free & Clear, a provider of
highly-effective tobacco cessation services for more than 25 years. Free & Clear
has developed a new program for healthy weight, based on their extensive
experience with cognitive behavioral coaching and web-based learning, and is
particularly well positioned to benefit from any increased funding for tobacco
cessation and obesity prevention programs that may be a component of future
healthcare reform proposals. Additionally, The American Cancer Society and
Free & Clear have recently agreed to combine their strategic and operational
resources to more effectively and efficiently promote and deliver a single tobacco
cessation program that reflects the best thinking and practices of both
organizations. We expect this partnership to be highly successful and to drive
strong organic revenue growth within the business during 2010.




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Another significant event during the quarter was the announcement of our
strategic alliance with CVS Caremark. This agreement enables our health
management division to offer program participants face-to-face, personalized
services in a familiar, near-patient setting, which will improve participants’ health
care outcomes while helping payers and employers more efficiently manage
costs. This partnership should accelerate the convergence of diagnostics and
health management services, while simultaneously allowing us to develop a
close working relationship with the largest pharmacy health care company in the
U.S.


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


Dave Teitel:


Thanks, Ron and good morning.


Revenues of $535.8 million for the third quarter of 2009 compare to revenues of
$438.8 million from Q3 2008 and $460.4 million in Q2 2009. The effects of
foreign currency translation reduced reported Q3 2009 revenues by $6.0 million
compared to Q3 2008 and increased revenues by $5.7 million compared to Q2
2009. Adjusted cash earnings per diluted share for Q3 2009 were $0.74
compared to $0.46 in Q3 2008.


By business segment, product and services revenues from our professional
diagnostic segment were $334.3 million in Q3 2009 as compared to $252.6
million in Q3 2008. Acquisitions accounted for $30.3 million of this increase, with
the acquisitions of Acon T-2 and Concateno combined contributing $24.8 million
of the change. Offsetting this increase was $4.8 million of adverse foreign
currency translation effects. Revenues from North American flu sales increased


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to $40.4 million in Q3 2009 from $6.8 million in Q3 2008 as a result of the H1N1
flu outbreak. Q3 2009 currency adjusted organic growth in our professional
diagnostics segment was 22.3%. Excluding the impact of the increase in Q3
2009 North American flu sales compared to Q3 2008, our currency adjusted
organic growth for professional segment revenues was approximately 9.2%. Net
product revenues for Biosite, Cholestech and HemoSense grew by a combined
8.9% during the third quarter of 2009 compared to the same quarter a year ago
which includes a 13.0% year over year growth rate for the business outside of
North America. Adjusted gross margins from our professional diagnostic segment
were 62.5% in Q3 2009 compared to 61.9% in Q2 2009. The increase in gross
margin percentage principally related to the higher than average margins earned
on incremental flu sales offset in part by lower than average gross margins
contributed from our recent acquisitions of Acon T-2 and Concateno.
Additionally, unfavorable manufacturing variances declined in Q3 as compared to
amounts incurred during Q2.


Revenues from our Health Management segment were $131.3 million in Q3 2009
compared to $122.5 million in Q2 2009 with the acquisitions of Genecare and
Free & Clear, along with the impact of the CVS relationship, contributing $7.0
million of incremental revenues compared to Q2. Revenues from our QAS
subsidiary were $11.0 million in Q3 2009, a 51% increase from Q3 2008.
Adjusted gross margins from our health management segment were 55.1% in Q3
2009 compared to 55.5% in Q2 2009.


Product and services revenues from our consumer diagnostic business segment
were $39.1 million in Q3 2009 compared to $34.7 million in Q3 2008. Q3 2009
revenues include $31.6 million of manufacturing and service revenues for
products and services provided to the joint venture. Looking at results at the
joint venture level, product revenues sold by the joint venture were $50.3 million
in Q3 2009 compared to $51.0 million for the year ago period. Approximately



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half of the joint venture revenues are derived from sales outside the US and
therefore have been adversely impacted by foreign currency translation.
Adjusted gross margins from our consumer diagnostic segment were 18.3% in
Q3 2009 compared to 23.0% in Q3 2008.


Revenues from our nutritional business were $23.1 million for Q3 2009 compared
to revenues of $21.6 million in Q3 2008. Adjusted gross margins from our
Nutritional segment were 11.5% in Q3 2009 compared to 8.5% in Q3 2008.


Selling, general and administrative expenses increased to $137.3 million in Q3
2009 from $129.4 million in Q2 2009. Compared to Q2, Q3 spending increased
by approximately $1.8 million as a result of exchange rate changes and
acquisitions accounted for $4.8 million. Additional spending increases relate to
higher variable selling related expenses as a result of revenue increases in our
professional diagnostic business, particularly those related to the significant
increase in North American flu sales.


Adjusted research and development expense was $25.3 million or approximately
5% of revenues compared to $23.3 million in Q3 2008. We expect total R&D
expenses to continue at approximately 5-6% of net revenues for 2009 and 2010.


At $134.5 million, our adjusted operating income reflects a $49.0 million increase
over the third quarter of 2008. Adjusted EBITDA for the quarter was $139.5
million which is net of deductions for $6.0 million of restructuring charges and
$5.1 million of acquisition related expenses. Free cash flow for the quarter was
$40.5 million reflecting cash flow from operations of $65.0 million offset by capital
expenditures of $24.5 million. Cash flow from operations was adversely
impacted by a $44.8 million increase in accounts receivable and a $5.4 million
increase in inventory levels which both reflect the higher level of revenues that
we generated during the quarter.



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Adjusted interest and other expense was $30.1 million in Q3 2009, compared to
$24.5 million in Q3 2008. Adjusted interest expense, net of interest income was
$29.8 million in Q3 2009 compared to $22.8 million in Q3 2008. Our Q3 2009
interest expense reflects incremental expense related to the $400 million 9%
senior subordinated notes which we issued in May 2009 and the $250 million
7.875% senior unsecured notes which we issued in August and September 2009.


In Q3, our tax rate was approximately 32.6% of pretax income compared to
33.1% in Q3 2008. Included in tax expense for Q3 2009 were net discrete
benefits of $2.7 million recorded during the quarter.


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

Ron Zwanziger:


Thanks Dave.


Clearly our third quarter results would have been good even without the benefit
of higher than usual flu sales. Professional Diagnostics, in particular, continues
to perform very well, which we have predicted it would do for the past several
quarters. As expected, professional diagnostics’ organic growth rate has come
back to roughly 9%, as foot traffic in physician’s offices has returned to previous
levels, consistent with what we were seeing during the second half of Q2.
Through our continued investment in the drivers of organic growth outside the
US, as well as our ever-strengthening relationships with our distributor partners
within the US, we expect this trend to persist. As a result, strong growth in the
professional diagnostics base business should underpin our performance
throughout 2010, as new products and services begin to work their way into our
results, and our health management division continues to show improvement.



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Before we go to questions, I’ll give a brief update on some recently launched
products as well as new product development. NGAL, which was launched in
the first quarter on the Triage platform, continues to generate a high level of
interest from clinicians seeking new tools for earlier diagnosis and improved
management of renal injury. A study published in the Journal of Critical Care in
October suggested that a rapid test for NGAL could allow clinicians to rapidly
assess if a critically ill patient is suffering from Acute Kidney Injury, perhaps in
time to make meaningful interventions.


Our home clinical trial for the Stirling CHF platform is continuing, as is our work
with the FDA to obtain regulatory clearance for professional use of the platform,
and we anticipate initiating a study to support our application in the 4th quarter.
Concurrently, we are working to initiate appropriate studies later this year in the
EU to obtain a CE mark, which should enable us to begin to commercialize the
system in Europe next year. Designed specifically for patient self testing, we
believe that the Stirling CHF platform will become a key element in our strategy
of combining home diagnostics and health management over the next few years.


Our portable CD4 analyzer will begin commercial sales in targeted key markets
in Sub-Saharan Africa during this quarter and will be rolled-out to additional
markets in 2010, with pre-market development activities having commenced on a
global scale. This Point-of-Care CD4 test will address a significant unmet need
for the staging of HIV and determination of therapy eligibility.


We also remain on track in the development of our CLONDIAG molecular
platform, with a preclinical trial for the measurement of HIV viral load expected to
commence before the end of the year followed by clinical studies in select
markets during 2010. As we have previously described, this platform offers true
multiplexing capabilities using a single drop of whole blood, with numerous



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applications other than HIV viral load to be added over the next several years.
Designed specifically for future introduction to the physicians office, clinics, and
ultimately to the home, this platform will help support our long term strategy for
the convergence of diagnostics and health management services.


In the area of Women’s Health, during the third quarter, we received a CE mark
for our blood-based test for the measurement of placental growth factor. This
test, which runs on the Triage platform, will aid in the diagnosis of preeclampsia.
Following training of our European sales force during the next few months, the
test will be launched in the first quarter of 2010.


And now let me open the call up to questions.


Q&A


Ron’s closing:

Despite the difficult economic challenges that all companies have faced during
the last three quarters, Inverness remains on track to achieve its 2009 strategic
and financial goals. This has been accomplished without sacrificing any of the
programs or initiatives required to attain our broader objective of becoming the
leading company in the world focused on enabling individuals to take charge of
their own health at home through the merging of diagnostics and health
management. As a result of our continued commitment to our long term goals,
Inverness remains well positioned to deliver strong financial results for many
years to come. At this time we are in the advanced stages of our 2010 budgeting
process, and we are confident that we will maintain our track record of delivering
significant annual growth in adjusted cash-basis EPS not only next year relative
to our 2009 estimate of $2.50/share, but for many years to come.




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As always, I would like to thank all of you for your continued support and interest.


Thank you very much and have a good day.




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