Alere (ALR) Lags Q3 Earnings, Revenues; Outlook Positive

Alere Inc. (ALR) reported disappointing third-quarter 2014 results as both the top and the bottom line missed the Zacks Consensus Estimate by a wide margin. The company reported adjusted earnings (including stock based compensation expense of 4 cents) of 44 cents per share, which lagged the Zacks Consensus Estimate by 8 cents and declined 18.5% on a year-over-year basis.

Alere Inc - Earnings Surprise | FindTheBest

Revenues (including adjustments related to software license contracts, which were acquired) of almost $736 million were well-short of the Zacks Consensus Estimate of $748 million. This marks the third consecutive quarter of revenues lagging the Zacks Consensus Estimate. The top line also declined 2.2% from the year-ago quarter.

However, Alere’s share price increased 4.13% ($1.55) to close at $39.12 on Oct 28, owing to a better-than-expected outlook provided by management.

Top-line Details

Professional Diagnostics revenues declined almost 1% from the year-ago quarter to $586.3 million. U.S revenues fell 5.4%, which was primarily attributable to lower revenues from sales of Beckman Coulter BNP tests, due to supply constraints. Lower pain management revenues from Toxicology business also negatively impacted results.

Infectious disease business revenues grew 3% driven by strong global growth rates of Malaria (16%), CD4 (75%) and HIV (13%). New products contributed favorably to overall growth rate, with sales of CD4 and Epoc products increasing $2.6 million and $1 million, respectively, on a year-over-year basis.

Health Information Solutions revenues fell 7.3% to $123.9 million, while Consumer Diagnostics declined 8.3% to $26.4 million in the reported quarter.

Health Information Solutions revenues were positively impacted by 12% growth in Patient self testing services. However, this growth was fully offset by weak results from Condition and case management, Wellness, and Women's & children's health, which fell 14%, 3% and 16% respectively, from the year-ago quarter.

In the reported quarter, revenues from China, India and Africa increased 21%, 23% and 18%, respectively.

Operational Details

Adjusted gross margin contracted 240 basis points (bps) on a year-over-year basis to 43.6% in the quarter.

Both research & development (R&D) and selling, general & administrative (SG&A) expenses declined in the quarter, reflecting stringent cost control. Headcount reductions lowered R&D by approximately $7 million and total operating expense base by $17 million annually.

However, improving costs failed to fully offset a significantly lower gross margin base as operating margin contracted 140 bps from the year-ago quarter to 16.7%.

Segment wise, Professional Diagnostics operating margin fell 130 bps, which was partially offset by 300 bps and 160 bps operating margin expansions in the Health Information Solutions and Consumer Diagnostics businesses, respectively.

Financial Position

Alere exited the third quarter with cash and cash equivalents of $483.8 million (including restricted cash and marketable securities).

Cash flow from operating activities improved significantly to $91.7 million from $19.3 million at the end of the previous quarter. Free cash flow came in at $63 million, a notable turnaround from a cash outflow of $7.6 million recorded in the previous quarter.

Divestitures

Alere is divesting its Health Management business unit to Optum, a division of United Healthcare for $600 million. The transaction is expected to close during the fourth quarter.

The company announced the sale of Alere ACS unit, its health information exchange system. Alere sold 40% of its stake at Vedalab for approximately $10 million. It is also selling Bionote, its vet business unit for approximately $45 million.

Alere expects to use this $655 million proceeds from divestitures to pay off its debt, which currently stands at $3.79 billion. The company continues to pursue strategic alternatives for Alere Analytics unit.

New CEO Appointment

Alere appointed Namal Nawana as the Chief Executive Officer (CEO), President, and a member of the Board of Directors. Nawana had joined Alere in Dec 2012 as Chief Operating Officer (COO) and was appointed Interim CEO and President of Alere in Jul 2014.

Outlook

Alere expects cost savings from headcount reductions, lower R&D expense and strict cost control to result in $100 million savings by the end of the fourth quarter and into 2015. The company expects to reduce R&D expense by approximately $20 million to a maximum of $120 million for 2015.

Divestiture of non-core profitable businesses is also expected to improve cost structure going forward. The company has already achieved $75 million in targeted savings and the remaining is expected to come from the divestitures. Management believes that this cost savings will add at least 50 cents to 2015 full year earnings per share.

Alere expects strong organic top-line growth will come from Afinion, Malaria, CD4, Epoc and Toxicology reagents, as well as from geographies like China, India and Africa.

Further, Alere believes that cold weather in the Northern hemisphere that results in respiratory problems will boost demand for its molecular platform Alere i, in the near term.

Our Take

Although Alere reported a dismal third quarter, its optimistic outlook is positive for the stock, in our view. The lower R&D and SG&A expense suggests that the company’s cost control plans are working. The continuing divestment of non-core assets will not only boost profitability but will also help Alere focus more on developing its core operations.

Alere recently won a U.S. government contract to develop diagnostic countermeasures for pandemic influenza. Investments on Triage, Epoc, Alere Q, toxicology and lateral flow infectious disease business are significant positives. We believe Alere’s strong product pipeline improves its position amid growing competition from the likes of Bio-Rad Laboratories (BIO), athenahealth (ATHN) and Cerner Corp (CERN).

Alere continues to focus on international markets with strong potential, particularly in Africa and India. Given its focus on global market development in addition to its diverse product portfolio, Alere is positioned to perform well going forward.

However, in our opinion, proper execution of its cost savings will be the key to Alere’s future growth.

Currently, Alere carries a Zacks Rank #2 (Buy).

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