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Article by DailyStocks_admin    (12-02-08 04:11 AM)

Inverness Medical Innovations Inc. CEO RON ZWANZIGER bought 64000 shares on 11-24-2008 at $15.5

BUSINESS OVERVIEW


GENERAL

By developing new capabilities in near-patient diagnosis, monitoring and health management, Inverness Medical Innovations enables individuals to take charge of improving their health and quality of life. A global leader in rapid point-of-care diagnostics, our products and services, as well as our new product development efforts, are focused in the areas of infectious disease, cardiology, oncology, drugs of abuse and women’s health. Inverness Medical Innovations, Inc., a Delaware corporation, was formed to acquire the women’s health, nutritional supplements and professional diagnostic businesses of its predecessor, Inverness Medical Technology, Inc., through a split-off and merger transaction, which occurred in November 2001. We became an independent, publicly traded company immediately after the split-off and our common stock is listed on the American Stock Exchange under the symbol “IMA.” Since the split-off, we have grown our businesses through strategic use of our superior intellectual property portfolio and through strategic acquisitions. We have an experienced research and development team and a continuing commitment to product development, and a demonstrated capability for introducing new and innovative products. During 2007, we entered the growing health management market and we are confident that our ability to offer rapid diagnostic tools combined with value-added healthcare services will improve care and lower healthcare costs for both providers and patients.

Our principal executive offices are located at 51 Sawyer Road, Suite 200, Waltham, Massachusetts 02453 and our telephone number is (781) 647-3900. Our website is www.invmed.com and we make available through this site, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the Securities and Exchange Commission, or the SEC. These reports may be accessed through our website’s investor information page. We also make our code of ethics and certain other governance documents and policies available through this site.

RECENT DEVELOPMENTS

November 2007 Public Offering

On November 20, 2007, we completed a public offering in which we sold a total of 13,634,302 shares at a public offering price of $61.49 per share. Certain of our officers also sold a total of 165,698 shares of common stock in the offering. The net proceeds to us from the offering were approximately $806.9 million.

Agreement to Acquire Matria Healthcare

On January 27, 2008, we entered into a merger agreement pursuant to which we will acquire Matria Healthcare, Inc., or Matria, through an initial merger of Matria with and into a wholly-owned subsidiary with Matria to be the surviving corporation, followed as soon as reasonably practicable by an upstream merger of Matria with and into a wholly-owned limited liability company. Matria is a national provider of health enhancement, disease management and high-risk pregnancy management programs and services. At the effective time of the initial merger to acquire Matria, each share of issued and outstanding common stock of Matria will be converted into the right to receive (i) $32.50 in newly created Inverness convertible perpetual preferred stock and (ii) $6.50 in cash; however at any time prior to the closing date of the merger, we may elect, in our sole discretion, to pay the aggregate merger consideration as $39.00 in cash. We have agreed to register and list the series of convertible perpetual preferred stock created and issued in the merger. Each option to purchase shares of Matria common stock will vest prior to the effective time of the initial merger by their terms and each option that is outstanding immediately prior to the initial merger will be assumed by us and converted into a right to acquire shares of Inverness common stock under an exchange ratio set forth in the merger agreement.

The completion of the initial merger is subject to various closing conditions, including obtaining the approval of Matria shareholders and filings under the Hart-Scott-Rodino Antitrust Improvements Act. The transaction is intended to qualify as reorganization for federal income tax purposes.

Segments

Our major reportable segments are professional diagnostic, consumer diagnostic and vitamins and nutritional supplements. Below are discussions of each of these reportable segments. Financial information about our reportable segments is provided in Note 19 of the “Notes to Consolidated Financial Statements,” which are included elsewhere in this report.

Products

Professional Diagnostic. Professional diagnostics are designed to assist medical professionals in both preventative and interventional medicine. These products provide for qualitative or quantitative analysis of a patient’s body fluids or tissue for evidence of a specific medical condition or disease state or to measure response to therapy. Within professional diagnostic, our primary focus is in point-of-care, rapid diagnostic testing, which we distinguish from clinical diagnostic markets consisting of large, centralized laboratories offering a wide range of highly-automated laboratory services in hospital or related settings. The market for rapid diagnostic products consists primarily of small and medium size laboratories and testing locations, such as physician office laboratories, specialist mobile clinics, emergency rooms and some rapid-response laboratories in larger medical centers.

In the market for rapid diagnostic products, the ability to deliver faster, accurate results at reasonable prices generally drives demand. This means that, while there is certainly demand for faster, more efficient automated equipment from large hospitals and major reference testing laboratories, there is also growing demand by point-of-care facilities and smaller laboratories for fast, high-quality, inexpensive, self-contained diagnostic kits. As the speed and accuracy of such products improve, we believe that these products will play an increasingly important role in achieving early diagnosis, timely intervention and therapy-monitoring outside of acute medicine environments, especially where supplemented by the support and management services that we also provide.

Our current professional diagnostic products test for over 100 disease states and conditions and include point-of-care and laboratory tests in the following areas:

Infectious Disease. We believe that the demand for infectious disease diagnostic products is growing faster than many other segments of the immunoassay market due to the increasing incidence of certain diseases or groups of diseases, including viral hepatitis, respiratory syncytial virus (RSV), influenza, tuberculosis, acquired immunodeficiency syndrome (AIDS), herpes and other sexually transmitted diseases. To meet this demand we have expanded our product offerings through strategic transactions, as well as through in-house product development. We develop and market a wide variety of point-of-care tests for Influenza A/B, strep throat, HIV, HSV-2, malaria, C.difficile, infectious mononucleosis, lyme disease, chlamydia, H.pylori, RSV, rubella and other infectious diseases. Our tests for infectious disease are sold under brand names which include Acceava, BinaxNOW, BioStar OIA, Clearview, Determine, Signify, SureStep, Inverness Medical TestPack and Wampole.

In addition to point-of-care products, we also offer a line of indirect fluorescent antibody, or IFA, assays for over 20 viral, bacterial and autoimmune diseases, a full line of serology diagnostic products covering a broad range of disease categories, and over 70 enzyme linked immunosorbent assays (ELISA) tests for a wide variety of infectious and autoimmune diseases, as well as a full line of automated instrumentation for processing ELISA assays. We are the exclusive U.S. distributor of the AtheNA Multi-Lyte ® Test System, a multiplexed, fluorescent bead-based system designed to simultaneously perform multiple assays from a single sample using just one well. It offers a simple and streamlined alternative to IFA and ELISA testing, providing improved clinical sensitivity and comparable clinical specificity in a labor-saving, automation-friendly format. Our IFA, serology and ELISA products, which generally serve the clinical diagnostics laboratory markets, are generally marketed under our Wampole brand.

Cardiology. The cardiology diagnostic market, including the markets for heart failure diagnostics, coronary artery disease risk assessment, coagulation testing and acute coronary syndrome, exceeds $1.5 billion and, in the near-patient categories where we focus, annual growth is estimated at 15% to 20%. Our 2007 acquisitions of Biosite Incorporated, or Biosite, Cholestech Corporation, or Cholestech, and HemoSense, Inc., or HemoSense, have established us as a leader in this market. Our Biosite Triage products are used in approximately 65% of U.S. hospitals and in over 50 countries worldwide. The Triage system consists of a portable fluorometer that interprets consumable test devices for cardiovascular conditions, as well as the detection of drugs of abuse. The Biosite Triage cardiovascular tests include the following:


• Triage BNP Test. An immunoassay that measures B-type Natriuretic Peptide (BNP) in whole blood or plasma, used as an aid in the diagnosis and assessment of severity of heart failure. The test is also used for the risk stratification of patients with acute coronary syndromes and heart failure.

• Triage Cardiac Panel. An immunoassay for the quantitative determination of CK-MB, myoglobin and troponin I in whole blood or plasma, as an aid in the diagnosis of acute myocardial infarction.

• Triage CardioProfilER. An immunoassay for use as an aid in the diagnosis of acute myocardial infarction, the diagnosis and assessment of severity of congestive heart failure and the risk stratification of patients with acute coronary syndromes. This panel combines troponin I, CK-MB, myoglobin and BNP to provide rapid, accurate results in whole blood and plasma.

• Triage Profiler S.O.B. An immunoassay for use as an aid in the diagnosis of myocardial infarction, the diagnosis and assessment of severity of congestive heart failure, the assessment and evaluation of patients suspected of having disseminated intravascular coagulation and thromboembolic events, including pulmonary embolism and deep vein thrombosis, and the risk stratification of patients with acute coronary syndromes.

• Triage D-Dimer Test. An immunoassay for use as an aid in the assessment and evaluation of patients suspected of having disseminated intravascular coagulation or thromboembolic events, including pulmonary embolism and deep vein thrombosis.

The Cholestech LDX System is a point-of-care monitor of blood cholesterol and related lipids which is used to test patients at risk of, or suffering from, heart disease and related conditions. The Cholestech LDX System can also provide Coronary Heart Disease Risk Assessment from the patient’s results as measured on the lipid profile cassette. The Cholestech LDX System is CLIA-waived, meaning that the United States Food and Drug Administration, or FDA, has waived the more stringent requirements for laboratory testing applicable to moderate or high complexity laboratories based on the Cholestech LDX system’s ease of use and accuracy. CLIA-waived therefore allows the Cholestech LDX system to be marketed to physicians’ offices, rather than hospitals or larger laboratories, and it is present in approximately 12% of U.S. CLIA-waived physicians’ office laboratories with an installed base of approximately 10,000 units in regular use.

The HemoSense INRatio System is an easy-to-use, hand-held blood coagulation monitoring system for use by patients and healthcare professionals in the management of warfarin, a commonly prescribed medication used to prevent blood clots. The HemoSense INRatio System measures PT/INR, which is the patient’s blood clotting time reported pursuant to an internationally normalized ratio, to help ensure that patients with risk of blood clot formation are maintained within the therapeutic range with the proper dosage of oral anticoagulant therapy. The INRatio System is 510(k) cleared by the FDA for use by healthcare professionals, as well as for patient self-testing, and is also CE marked in Europe. The INRatio System is targeted to both the professional, or point-of-care, market, as well as the patient self-testing market, the latter being an opportunity that has emerged primarily following the establishment of Medicare reimbursement in 2002 for mechanical heart valve patients. Several European countries have also implemented national reimbursement coverage of home PT/INR testing for chronic warfarin patients, including Germany, the United Kingdom, Denmark and the Netherlands.

Oncology. Among chronic disease categories, we are focused on oncology diagnostics as an area of significant future opportunity. We currently offer the first and only NMP-22 ® ELISA and rapid point-of-care tests for the screening and monitoring of bladder cancer. The NMP-22 test kit detects elevated levels of NMP-22 protein in the urine of patients with bladder cancer, even in the early stages of disease. We acquired the NMP-22 test kits as part of our purchase of Matritech, Inc., or Matritech, in December 2007. We are also focused on the use of rapid immunoassay tests for fecal occult blood as an aid in the detection of colorectal cancer.

Drugs of Abuse. Drug abuse is a major global health problem, as well as a social and economic burden. In addition to being a primary cause of lost workforce productivity, family conflict and drug-related crime, drug abuse is linked to the spread of HIV/AIDS through contaminated needles. Drug abuse is one of the most costly health problems in the United States. As a result, employers, law enforcement officials and others expend considerable effort to be sure their employees and constituents are free of substance abuse, creating a significant market for simple, reliable tests to detect the most commonly abused substances. Urine-based screening tests for drugs of abuse range from simple immunoassay tests to complex analytical procedures. The speed and sensitivity of immunoassays have made them the most widely-accepted method for screening urine for drugs of abuse.

We offer one of the broadest and most comprehensive lines of drugs of abuse tests available today. We offer tests to detect alcohol, as well as the following illicit and prescription drugs of abuse: amphetamines/methamphetam ines, cocaine, opiates, phencyclidine, tetrahydrocannabinol, acetaminophen, barbiturates, benzodiazepines, methadone, propoxyphene and tricyclic antidepressants using both urine and saliva body fluids.

Our rapid drugs of abuse tests are sold under the brands InstaCheck II, MEDplus — ER, Reditest, One Step and Biosite Triage. The TOX Drug Screen panel sold for use with the Biosite Triage System detects the presence of any of illicit or prescription drugs listed above at the point-of-care in approximately 15 minutes. In addition, we market the First Check line of drugs of abuse tests which are sold over the counter for direct use at home by, for example, concerned parents.

Through our December 2007 acquisition of Redwood Toxicology Laboratories, Inc., or Redwood, we also offer comprehensive, low-cost laboratory testing services. Through its laboratory services, as well as its Reditest point-of-care testing products, Redwood offers its clients, including law enforcement agencies, penal systems, insurers and employers, the certainty of science, the dependability of proven processes and the assurance of legally defensible results.

Women’s Health. Since women’s health and general sexual health issues are a global health concern, this remains a priority area for us. In the professional marketplace, we are a global leader in pregnancy fertility/ovulation testing and bone therapy (osteoporosis) monitoring. Our professional pregnancy tests are generally urine-based, CLIA-waived rapid tests in dipstick or cassette format. We also continue to manufacture the consumer pregnancy tests sold by SPD Swiss Precision Diagnostics, or SPD, our consumer diagnostic joint venture with The Procter & Gamble Company, or P&G.

Our professional women’s health products also target diseases, such as rubella and Group B strep, which pose unique threats to unborn or newborn babies and, in addition, we market a portfolio of tests for sexually-transmitted diseases, such as chlamydia, gonorrhea and trichomonas. Our women’s health products are sold under our Acceava, BioStar OIA, Clearview, One-Step and Osteomark brands.

Health Management. We believe that by utilizing both existing professional diagnostic devices and new devices under development to enhance the delivery of health management and other services to healthcare providers, we can further facilitate cost containment and outcome-driven decision making. Accordingly, during 2007, we entered the growing health management market with our acquisitions of Quality Assured Services, Inc., or QAS, in May and Alere Medical, Inc., or Alere, and ParadigmHealth, Inc., or ParadigmHealth, during the fourth quarter. QAS facilitates the distribution of and Medicare reimbursement needs associated with our HemoSense INRatio coagulation monitors for patients in the home. Alere provides biometric monitoring services in the home via remote analysis of data transmissions and telephonic registered nurse care managers and covers approximately 30 million commercial and 2 million Medicare lives through more than 20 healthcare contracts nationwide. Alere has a specialized focus on high-cost, chronic conditions. ParadigmHealth provides intensive clinical support services for clinically complex patients, and neonatal intensive care unit, or NICU, care management services, focused on the top 1% high-cost patients. Alere and ParadigmHealth enjoy recurring, stable revenue streams from numerous long-term contracts.

Consumer Diagnostic. On May 17, 2007, we and affiliates of P&G, commenced a 50/50 joint venture for the development, manufacturing, marketing and sale of existing and to-be-developed consumer diagnostic products, outside the cardiology, diabetes and oral care fields. As part of this arrangement we transferred essentially all of the assets of our consumer diagnostic business, other than our manufacturing and core intellectual property assets, to the joint venture, and P&G acquired its interest in the joint venture for a cash payment to us of approximately $325.0 million. Accordingly, substantially all of the consumer diagnostic business conducted by us prior to the joint venture, including all of our products targeting the worldwide over-the-counter pregnancy and fertility/ovulation test market, are now sold by the joint venture, which is an unconsolidated entity operating primarily under the name SPD.

As part of the SPD joint venture with P&G, we entered into a finished product purchase agreement, pursuant to which we currently manufacture and sell to SPD all of the consumer diagnostic products which it sells. We also entered into certain transition and long-term services agreements with SPD, pursuant to which we provide certain operational support services to the joint venture. Our consumer diagnostic segment recognizes the revenue and costs arising from these arrangements. Our other current consumer diagnostic products consist of our market-leading First Check brand of over-the-counter drugs of abuse tests for at-home testing for marijuana, cocaine, methamphetamines and opiates, which we acquired in February 2007, as well as First Check brand over-the-counter tests for alcohol abuse, cholesterol monitoring and colon cancer screening.

Vitamins and Nutritional Supplements. We also market a wide variety of vitamins and nutritional supplements primarily within the United States. Most growth in this market is attributed to new products that generate attention in the marketplace. Well-established market segments, where competition is greater and media commentary less frequent, are generally stable. Slow overall growth in the industry has resulted in retailers reducing shelf space for nutritional supplements and has forced many under-performing items out of distribution, including several broad product lines. Sales growth of private label products has generally outpaced the overall industry growth, as retailers continue to add to the number of private label nutritional products on their shelves.

Our subsidiary, Inverness Medical Nutritionals Group, or IMN, is a national supplier of private label vitamin and nutritional products for major drug and food chains and also manufactures bulk vitamins, minerals, nutritional supplements and over-the-counter drug products under contract for unaffiliated brand name distributors. IMN also manufactures an assortment of vitamin, mineral and nutritional supplement products for sale under Inverness Medical brand names.

Our Inverness Medical branded nutritional products are high quality products sold at moderate prices through national and regional drug stores, groceries and mass merchandisers. These branded products include Stresstabs, a B-complex vitamin with added antioxidants; Ferro-Sequels, a time-release iron supplement; Protegra, an antioxidant vitamin and mineral supplement; Posture-D, a calcium supplement; SoyCare, a soy supplement for menopause; ALLBEE, a line of B-complex vitamins; and Z-BEC, a zinc supplement with B-complex vitamins and added antioxidants.

Methods of Distribution

In the United States, Canada, the United Kingdom, Germany, Italy, Spain, the Netherlands, France, India, Japan, China, Australia, Columbia and Israel, we distribute our professional diagnostic products to hospitals, reference laboratories, physicians’ offices and other point-of-care settings through our own sales forces and distribution networks. In these countries, as well as in all other major world markets, we also utilize third-party distributors to sell our products. In the United States, we have distribution relationships with all of the major distributors to hospitals and reference laboratories, as well as with the major distributors serving physicians’ offices and other non-hospital, point-of-care settings. One of our distributors, Thermo Fisher Scientific, accounted for 17% of our consolidated net revenue in 2007. Our QAS subsidiary facilitates the distribution of our HemoSense INRatio coagulation monitors by contacting targeted customers and facilitating the Medicare reimbursement process for physicians and for patients monitoring at home. Under the terms of our acquisition of our Determine products from Abbott Laboratories in June 2005, Abbott distributes our Determine products, which are sold outside of the United States, in certain countries where we do not currently have suitable distribution capabilities. We also sell these products to Abbott as the exclusive supplier of its global “Access to HIV Care” program, through which Abbott provides free or low-cost testing products for HIV testing in underdeveloped countries around the world.

We market and sell our First Check consumer drug testing products in the United States and Canada through retail drug stores, drug wholesalers, groceries and mass merchandisers. These products compete intensively with other brand name drug testing products based on price, performance and brand awareness, which is achieved through target print advertising. We primarily market and sell our vitamins and nutritional supplements in the United States through private label arrangements with retail drug stores, groceries, mass merchandisers and warehouse clubs who sell our products under their store brands. We also sell a variety of branded products to the retail drug stores, groceries and mass merchandisers.

Manufacturing

Approximately 28% of our professional diagnostic products, based on net product sales for the fiscal year ended December 31, 2007, were manufactured by third parties. We manufacture substantially all the diagnostics for our other products, meaning our consumable diagnostic products and the consumable diagnostic devices containing the diagnostic chemistry or other proprietary diagnostic technology which are used in conjunction with our diagnostic or monitoring systems. Our primary manufacturing facilities are located in Hangzhou and Shanghai, China; Matsudo, Japan; San Diego, California; and Bedford, England, although we have announced a proposal to close the Bedford operation subject to compliance with U.K. employment law and, if implemented, we plan to transfer those manufacturing operations to our low cost production facilities mainly in China facilities. We also manufacture products at a number of other facilities around the world, including important facilities in Scarborough, Maine and Hayward, California. All of our important manufacturing facilities are ISO certified and registered with the FDA. We contract with third parties to supply the electronic reader portion of many of our diagnostic or monitoring systems, including our Biosite Triage system, our Cholestech monitoring devices and the digital pregnancy and ovulation prediction tests and fertility monitors that we supply to the SPD joint venture. Because most components of our diagnostic products are produced to our specifications, some of our suppliers are single source suppliers with few, if any, alternative sources immediately available.

We manufacture substantially all of our vitamin and nutritional products at IMN’s facilities in Freehold and Irvington, New Jersey. IMN internally manufactures substantially all of its softgel requirements at the Irvington facility. Our Freehold facility manufactures to the Good Manufacturing Practices, or GMP, standards recently proposed by the FDA for the dietary supplement industry. Our Irvington facility manufactures to GMP standards applicable to drug makers and is registered with both the United States Drug Enforcement Agency, or the DEA, and the FDA.

Research and Development

Our primary research and development centers are in Stirling, Scotland; Jena, Germany; and San Diego, California. We also conduct research and development in Bedford and Cambridge, England; Hangzhou, China; Scarborough, Maine; Hayward, California; Yavne, Israel; and, to a lesser extent, at certain of our other facilities. Our research and development programs currently focus on the development of cardiology, infectious disease, oncology, HIV and women’s health diagnostic products.

On February 25, 2005, we entered into a co-development agreement with ITI Scotland Limited, or ITI, whereby ITI agreed to provide us with approximately ÂŁ30.0 million over three years to partially fund research and development programs focused on identifying novel biomarkers and near-patient and home use tests for cardiovascular and other diseases. We agreed to invest ÂŁ37.5 million in these programs over three years and we established a new research center in Stirling, Scotland where we conduct most of the funded research and development activities and where we will ultimately commercialize products arising from these efforts. ITI and Stirling will have exclusive rights to developed technology in their respective fields of use. The funding arrangement with ITI, as well as our investment commitments described above, expires during the first quarter of 2008.

Foreign Operations

Our business relies heavily on our foreign operations. Four of our five largest facilities (Hangzhou and Shanghai, China; Matsudo, Japan; and Bedford, England) are located outside of the United States and we also have significant research and development operations in Stirling, Scotland and Jena, Germany. Since late 2005, we have also focused significant effort on expanding our worldwide distribution network supporting our professional diagnostic business by acquiring distribution operations in England, Spain, Australia, Germany, Japan, Italy, India, Columbia and Canada. Approximately 37% of our net revenue was generated from outside of the United States during 2007. Our Inverness Medical TestPack and Determine product lines are sold exclusively outside the United States.

Competition

Professional Diagnostic. The main competitors for our rapid diagnostic products for infectious disease, as well as other conditions, are Becton Dickinson and Quidel. Some competitors in this market, such as Becton Dickinson are large companies with substantial resources, while other numerous competitors, particularly in the drugs of abuse market, are smaller yet aggressive companies. These competitors include WHPM, Princeton BioMeditech and Genzyme Diagnostics. Some automated immunoassay systems can be considered competitors when labor shortages force laboratories to automate or when the costs of such systems are lower. Such systems are provided by Abbott, Siemens AG, Beckman Coulter, Johnson & Johnson, Roche Diagnostics and other large diagnostic companies. In the infectious disease area, new technologies utilizing amplification techniques for analyzing molecular DNA gene sequences, from companies such as Abbott, Roche Diagnostics and Gen-Probe, are making in-roads into this market. Competition for rapid diagnostics is intense and is primarily based on price, breadth of product line and distribution capabilities.

Our competitors in the ELISA diagnostics market include the large diagnostics companies named above, which manufacture state-of-the-art automated immunoassay systems and a wide array of diagnostic products designed for processing on those systems. Other competitors in this market, DiaSorin and Diamedics, in particular, are smaller companies who compete based on quality and service. In the United States and Canada, we focus on matching the instrumentation and product testing requirements of our customers by offering a wide selection of diagnostic products and test equipment.

The markets for our serology and our IFA and microbiology products are mature and competition is based primarily on price and customer service. Our main competitors in serology and microbiology testing include Remel and Biokit. Our main competitors in IFA testing are Bio-Rad Laboratories, INOVA Diagnostics, Immuno Concepts, The Binding Site and DiaSorin. However, products in these categories also compete to a large extent against rapid membrane and ELISA products, which are often easier to perform and read and can be more precise.

In cardiology, the majority of diagnostic immunoassays utilized by physicians and other healthcare providers are performed by independent clinical reference laboratories and hospital-based laboratories using automated analyzers for batch testing. As a result, the primary competitors of our Biosite Triage and Cholestech LDX point-of-care testing systems, which consist of rapid diagnostic devices interpreted by portable electronic readers, are the large diagnostic companies identified above who produce automated immunoassay systems. We expect these large companies to continue to compete vigorously to maintain their dominance of the cardiology testing market. Although we offer our Triage BNP test for use on Beckman Coulter Immunoassay Systems, our other primary cardiology products are not currently designed for automated batch testing. Our Cholestech LDX system also faces direct competition from Abaxis Medical Diagnostics, which markets its point-of-care blood laboratory systems to physicians’ office laboratories. The primary competitors for our HemoSense INRatio coagulation monitoring system are Roche Diagnostics and International Technidyne Corporation, a division of Thoratec, who together currently account for over 71% of the worldwide sales of PT/INR point-of-care and patient self-testing devices.

In oncology, our NMP-22 diagnostic products, which are sold in both rapid and ELISA formats, are currently the only FDA approved diagnostic or therapeutic products based on nuclear matrix protein technology. However, competition in the development and marketing of cancer diagnostics and therapeutics, using a variety of other technologies, is intense. Competing diagnostic products based on other technologies may be introduced by other companies and could adversely affect our competitive position. In a larger sense, our tests also compete with more invasive or expensive procedures, such as surgery, bone scans, magnetic resonance imaging and other in vivo imaging techniques. In the market for urine-based diagnostic tests, our NMP-22 tests also compete with existing cellular-based tests, such as the microscopic examination of suspicious cells and a test known as UroVysion, which is a fluorescent in-situ hybridization test.

Generally, our professional diagnostic products’ competitive positions may be based on, among other things, product performance, accuracy, convenience, cost-effectiveness, the strength of our intellectual property and price, as well as on the effectiveness of our sales force and our marketing and distribution partners. Where we face competition from large diagnostic companies, these competitors have greater resources than we do. In addition, certain competitors may have more favorable competitive positions than we do in markets outside of the United States.

We believe that our dedication to research and development and our strong intellectual property portfolio, coupled with our advanced manufacturing expertise, diversified product positioning, global market presence and established distribution networks, provide us with a competitive advantage in the point-of-care markets in which we compete.

Competition for the health management services which we offer is also intense. Our competitors and potential competitors include disease management companies, pharmaceutical companies, pharmacy benefit management companies, case management companies, health plans, healthcare providers and other organizations that provide services to health plans and self-insured employers. Many of these competitors are considerably larger than us, with access to greater resources. We believe that our ability to improve clinical and financial outcomes and our highly-regarded technology platforms will enable us to compete effectively. In addition, if we are able complete our pending acquisition of Matria, we will have the ability to offer customers an integrated health enhancement solution across a full continuum of care.

Consumer Diagnostic Products. Our First Check tests compete against over-the-counter diagnostics tests sold primarily by Phamatech, Inc., but also by other smaller competitors. The remainder of our consumer diagnostic products is sold to SPD, our joint venture. These products are sold by SPD in retail markets where competition is intense and based primarily on brand recognition and price. Our revenues and our share of the profits from the sale of these products are dependent upon SPD’s ability to effectively compete in these markets.

Vitamins and Nutritional Supplements. The market for private label vitamins and nutritional supplements is extremely price sensitive, with quality, customer service and marketing support also being important. Many of the companies that mass market branded vitamins and nutritionals, including U.S. Nutrition, Pharmavite and Leiner Health Products, also sell to private label customers and constitute our major competitors for private label business. In addition, there are several companies, such as Perrigo Company, that compete only in the private label business.

In the branded nutritional supplements industry, competition is based upon brand name recognition, price, quality, customer service and marketing support. There are many companies, both small and large, selling vitamin products to retailers. A number of these companies, particularly manufacturers of nationally advertised brand name products, are substantially larger than we are and have greater financial resources. Among the major competitors of our branded products that are sold through groceries and other mass retailers are U.S. Nutrition, Wyeth, Pharmavite and GlaxoSmithKline.


MANAGEMENT DISCUSSION FROM LATEST 10K


Forward-Looking Statements

This Annual Report on Form 10-K, including this Item 7, 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 7 include, without limitation, statements regarding anticipated expansion in certain of our product categories, research and development expenditures, the impact of our research and development activities, potential new product and technology achievements, the impact of our worldwide distribution network, our ability to improve our margins through consolidation of certain of our higher cost manufacturing operations into lower cost facilities, our ability to achieve further synergies within expected timelines, our expectations with respect to our SPD joint venture with P&G, the growth prospects of the health management market, the impact of our pending acquisition of Matria on our ability to compete effectively in the health management market, our ability to improve care and lower healthcare costs for both providers and patients, 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 Item 1A entitled “Risk Factors,” which begins on page 12 of this report, as well as those factors identified 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

As a leading global manufacturer and supplier of rapid diagnostics, our products and services, as well as our new product development efforts, are focused in the areas of infectious disease, cardiology, oncology, drugs of abuse and women’s health. With our 2007 acquisitions of Biosite, Cholestech and HemoSense, we established our company as a leading supplier of cardiology diagnostic products. Our acquisitions of Biosite, Instant and Redwood during the year enhanced our position in drugs of abuse testing. Additionally, with our December 2007 acquisition of Matritech, we also established a stronger presence in oncology, by acquiring the unique NMP-22 ® ELISA and rapid point-of-care tests for the screening and monitoring of bladder cancer. We expect to continue to expand in all of these product categories through focused research and development projects and further development of our distribution capabilities. During 2007, we also entered the growing health management market and we are confident that our ability to offer near-patient monitoring tools combined with value-added healthcare services will improve care and lower healthcare costs for both providers and patients. With our pending acquisition of Matria, we will be able to compete most effectively in the health management market, as Matria’s services span a full range of disease conditions.

Our research and development programs have two general focuses. We are developing new technology platforms that will facilitate our primary objective of enabling individuals to take charge of improving their health and quality of life by moving testing out of the hospital and central laboratory, and into the physician’s office and ultimately the home. Additionally, through our strong pipeline of novel proteins or combinations of proteins that function as disease biomarkers, we are developing new tests targeted towards all of our areas of focus.

During 2007, we also advanced another stated goal of establishing a worldwide distribution network that will allow us to bring both our current and future diagnostic products to the global professional market. We did this primarily through smaller acquisitions of local distributors which, from late 2005 though 2007, expanded our direct sales capabilities in Germany, Spain, Italy, England, the Netherlands, India, Canada, Australia and Columbia.

In addition, we continue to focus on improving our margins through consolidation of certain of our higher cost manufacturing operations into lower cost facilities, including our 300,000 square foot manufacturing facility located in Hangzhou, China, as well as our jointly-owned facility in Shanghai, and we are already seeing improved margins on some of our existing products that we have moved to these facilities. In addition, our business integration activities during 2007 met or exceeded our expectations, in particular at Biosite where we have reduced costs, integrated sales force efforts and improved manufacturing efficiencies. In 2008, we will continue to aggressively integrate acquired operations in order to achieve further synergies within expected timelines. During the second half of 2007, we also began implementation of a plan to consolidate sales processing and certain other back-office services from seven of our current U.S. operations into a shared service center, located in Orlando, Florida. This shared service center is expected to commence operations during the second quarter of 2008.

During May 2007, we also consummated our 50/50 joint venture with P&G for the development, manufacturing, marketing and sale of existing and to-be-developed consumer diagnostic products outside of the fields of cardiology and diabetes. By leveraging P&G’s marketing and distribution capabilities, we expect that the SPD joint venture will expand the reach of our current and future over-the-counter diagnostic products, while allowing us to focus on our rapidly growing professional diagnostic and health management business units.

2007 Financial Highlights

Net revenue in 2007 of $839.5 million increased by $270.0 million, or 47%, from $569.5 million in 2006, primarily as a result of our acquisitions of: (i) Instant in March 2007, which contributed revenue of $22.8 million, (ii) Biosite in June 2007, which contributed revenue of $171.7 million, (iii) Cholestech in September 2007, which contributed revenue of $24.1 million and (iv) various other less significant acquisitions, which contributed an aggregate of $67.1 million of such increase. Partially offsetting the increased revenue as a result of acquisitions was the decrease in revenue associated with the completion of our 50/50 joint venture (SPD) with P&G on May 17, 2007 in which we transferred substantially all of the assets of our consumer diagnostic business, other than our manufacturing and core intellectual property assets. Upon completion of the arrangement to form the joint venture, we ceased to consolidate the operating results of our consumer diagnostic products business related to the joint venture and instead account for our 50% interest in the results of the joint venture under the equity method of accounting in accordance with Accounting Principles Board (“APB”) Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock. Organic growth, particularly from our professional infectious disease and drugs of abuse products, also contributed to the revenue growth, as well as higher license and royalty revenue.

Gross profit increased by $164.5 million, or 72%, to $393.7 million in 2007 from $229.2 million in 2006 principally as a result of gross profit earned on incremental revenue from acquired businesses, primarily in our professional diagnostic business, as well as increased license and royalty revenue. Gross profit from our nutritional supplements business also increased in 2007, principally as a result of improved customer mix, improved factory utilization and cost reduction initiatives in our private label manufacturing business. Offsetting these increases was a decrease in our consumer diagnostic business gross margin, principally as a result of the formation of our 50/50 joint venture with P&G in May 2007. During 2007, our gross profit was adversely impacted by a $2.0 million charge associated with our various restructuring plans and a charge of $8.2 million associated with the write-up of inventory acquired to fair value in connection with three of our 2007 acquisitions. Gross profit in 2006 was adversely impacted by $9.5 million of charges associated with the closures of our ABI operation in San Diego, California and our manufacturing facility in Galway, Ireland.

We continue to invest aggressively in research and development of new products and technologies as evidenced by our increased research and development expense of $69.5 million in 2007 from $48.7 million in 2006. Expenditures in 2007 and 2006 are reported net of $18.5 million and $16.6 million, respectively, arising from the co-development funding arrangement that we entered into with ITI in February 2005. Research and development expense before considering the co-development funding was $88.0 million in 2007 and $65.3 million in 2006, an increase of $22.7 million. The increase in spending resulted principally from expenditures of $19.8 million associated with our acquisitions of Biosite and the Cholestech. Offsetting these increases was the favorable impact of the 50/50 joint venture with P&G. Our co-development funding arrangement with ITI expires in March 2008. The final payment under this agreement was received in the fourth quarter of 2007.

Results of Operations

Year Ended December 31, 2007 Compared to Year Ended December 31, 2006

Net Product Sales. Net product sales increased by $242.1 million, or 44%, to $794.2 million in 2007 from $552.1 million in 2006. Excluding the favorable impact of currency translation, net product sales in 2007 grew by approximately $231.1 million, or 42%, over 2006. Of the currency adjusted increase, revenue increased primarily as a result of our acquisitions of: (i) First Check Diagnostics LLC, or First Check, in January 2007, which contributed revenue of $12.9 million, (ii) Instant in March 2007, which contributed revenue of $22.8 million, (iii) Biosite in June 2007, which contributed revenue of $167.8 million, (iv) Cholestech in September 2007, which contributed revenue of $24.1 million, (v) Bio-Stat Healthcare Group, or Bio-Stat, in October 2007, which contributed revenue of $8.1 million, (vi) HemoSense in November 2007, which contributed revenue of $3.5 million and (vii) various less significant acquisitions, which contributed an aggregate of $42.7 million of such increase. Partially offsetting the increased revenue as a result of acquisitions was the decrease in revenue associated with the completion of our 50/50 joint venture with P&G on May 17, 2007 in which we transferred substantially all of the assets of our consumer diagnostics business, other than our manufacturing and core intellectual property assets. Upon completion of the transaction to form the joint venture, we ceased to consolidate the operating results of our consumer diagnostic products business related to the joint venture and instead account for our 50% interest in the results of the joint venture under the equity method of accounting. We recorded $76.1 million of net product sales in 2007 (through the date the joint venture was formed), as compared to $171.6 million of net product sales in 2006. During 2007, we recorded $65.0 million of manufacturing revenue associated with our manufacturing agreement with the joint venture, whereby we manufacture and sell consumer diagnostic products to the joint venture. Organic growth, particularly from our professional infectious disease and drugs of abuse products, also contributed to the growth, as well as higher license and royalty revenue.

The currency adjusted increase in net product sales from our professional diagnostic products was $266.8 million, or 88%, comparing 2007 to 2006. Of the currency adjusted increase, revenue increased primarily as a result of our acquisitions of: (i) Instant in March 2007, which contributed revenue of $22.8 million, (ii) Biosite in June 2007, which contributed revenue of $167.8 million, (iii) Cholestech in September 2007, which contributed revenue of $24.1 million, (iv) Bio-Stat in October 2007, which contributed revenue of $8.1 million, (v) HemoSense in November 2007, which contributed revenue of $3.5 million and (vi) various less significant acquisitions, which contributed an aggregate of $17.2 million of such increase. Organic growth, particularly from our professional infectious disease and drugs of abuse products, also contributed to the growth.

The currency adjusted decrease in net product sales from our consumer diagnostic products was $21.4 million, or 12%, comparing 2007 to 2006. Of the currency adjusted decrease, the decrease was primarily driven by the completion of our 50/50 joint venture with P&G on May 17, 2007 in which we transferred substantially all of the assets of our consumer diagnostic business, other than our manufacturing and core intellectual property assets. Upon completion of the arrangement to form the joint venture, we ceased to consolidate the operating results of our consumer diagnostic products business related to the joint venture and instead account for our 50% interest in the results of the joint venture under the equity method of accounting. Net product sales of our consumer diagnostic products for 2007 included $65.0 million of manufacturing revenue associated with our manufacturing agreement with SPD, whereby we manufacture and sell consumer diagnostic products to the joint venture. Partially offsetting the impact of the joint venture was $12.9 million of net product sales from our First Check consumer drugs of abuse product line which was acquired in January 2007.

Vitamins and Nutritional Supplements

Our vitamins and nutritional supplements net product sales decreased by $9.2 million, or 11%, comparing 2007 to 2006. The decrease was driven primarily by our private label business.

Services Revenue. Services revenue of $23.4 million in 2007 represents revenue related to our health management businesses, Alere, ParadigmHealth and QAS, all of which were acquired during 2007. Our health management businesses are included in our professional diagnostic segment.

Net product and services revenue of $511.9 million and $323.0 million generated in the United States were approximately 63% and 59% of total net product and services revenue for the year ended December 31, 2007 and 2006, respectively. The growth in net product and services revenue in all geographic regions resulted from the various acquisitions discussed above and organic growth, partially offset by the decrease in revenue associated with the completion of our 50/50 joint venture with P&G in May 2007.

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 $4.7 million, or 27%, to $22.0 million in 2007 from $17.3 million in 2006. The increase primarily relates to $3.9 million of royalty revenue contributed by Biosite, which was acquired in June 2007. Additionally, incremental royalty revenue was derived from new royalty agreements entered into during 2007, along with increases associated with certain existing royalty agreements, partially offset by decreases in other royalty agreements.

Gross Profit and Margin. Gross profit increased by $164.5 million, or 72%, to $393.7 million in 2007 from $229.2 million in 2006. Gross profit during 2007 benefited from higher than average margins earned on revenue from our recently acquired businesses and from the favorable impact of our low cost manufacturing facilities in China. Included in gross profit in 2007 were restructuring charges totaling $2.0 million associated with our 2006, 2007 and joint venture related restructuring plans, a charge of $8.2 million associated with the write-up of inventory acquired to fair value in connection with our acquisitions of Biosite, Cholestech and HemoSense, and $0.6 million of stock-based compensation expense. Additionally, gross profit in 2007 was unfavorably impacted by the formation of our 50/50 joint venture with P&G. Included in cost of revenues during 2006 was a restructuring charge of $9.5 million related to the closure of our ABI operation in San Diego, California, along with the write-off of fixed assets at other facilities impacted by our 2006 restructuring plans and the closure of CDIL, our manufacturing facility in Galway, Ireland. Cost of revenues during 2006 also included a $0.4 million charge for stock-based compensation expense. Cost of revenues included amortization expense of $24.0 million and $11.2 million in 2007 and 2006, respectively.

Overall gross margin was 47% in 2007, compared to 40% in 2006.

Gross Profit from Net Product Sales by Business Segment. Gross profit from net product sales represents total gross profit less gross profit associated with services revenue and license and royalty revenue. Gross profit from net product sales increased by $151.6 million to $368.9 million in 2007 from $217.3 million in 2006.


MANAGEMENT DISCUSSION FOR LATEST QUARTER


Financial Overview

We enable individuals to take charge of improving their health and quality of life by developing new capabilities in near patient diagnosis, monitoring and health management. As a leading global manufacturer and supplier of rapid diagnostics, our diagnostic products and development efforts are focused in the areas of infectious disease, cardiology, oncology, drugs of abuse and women’s health. With our 2007 acquisitions of Biosite Incorporated, or Biosite, Cholestech Corporation, or Cholestech, and HemoSense, Inc., or HemoSense, we established our company as a leading supplier of cardiology diagnostic products. Our acquisitions of Biosite, Instant Technologies, Inc., or Instant, and Redwood Toxicology Laboratories, Inc., or Redwood, during 2007 enhanced our position in drugs of abuse testing. Additionally, with our December 2007 acquisition of Matritech, Inc., or Matritech, we also established a presence in oncology, by acquiring the unique NMP-22 ® ELISA and rapid point-of-care tests for the screening and monitoring of bladder cancer in conjunction with standard diagnostic procedures. We expect to continue to expand in all of these product categories through focused research and development projects and further development of our distribution capabilities.
During 2007 and 2008, we entered the growing health management market with our acquisitions of ParadigmHealth, Inc., or ParadigmHealth, Alere Medical Inc., or Alere, and more recently, Matria Healthcare, Inc., or Matria. With the acquisition of Matria, we are now a leader in this field offering a broad range of services aimed at lowering costs for health plans, hospitals, employers and patients. Our health management services are focused in the areas of women’s and children’s health, cardiology and oncology. We are confident that our ability to offer near patient monitoring tools combined with value-added healthcare services will improve care and lower healthcare costs for both providers and patients. During the third quarter of 2008, we began efforts to consolidate the health management businesses under a single brand. Today, Matria, ParadigmHealth and Alere, each a leader in their respective areas, are united as one business under the name Alere. Also during the third quarter of 2008, we acquired an overseas health management business enabling us to establish a presence in the newly-developing international health management market.
Our research and development programs have two general focuses. We are developing new technology platforms that will facilitate our primary objective of enabling individuals to take charge of improving their health and quality of life by moving testing out of the hospital and central laboratory, and into the physician’s office and ultimately the home. Additionally, through our strong pipeline of novel proteins or combinations of proteins that function as disease biomarkers, we are developing new tests targeted towards all of our areas of focus.
We continue to advance toward our goal of establishing a worldwide distribution network that will allow us to bring both our current and future diagnostic products to the global professional market. In addition, we continue to focus on improving our margins through consolidation of certain of our higher cost manufacturing operations into lower cost facilities, including our 300,000 square foot manufacturing facility located in Hangzhou, China, as well as our jointly-owned facility in Shanghai, and we are already seeing improved margins on some of our existing products that we have moved to these facilities. Our business integration activities remain on track and we are beginning to see positive results as we continue to aggressively integrate acquired operations in order to achieve further synergies within expected timelines. During the second half of 2007, we began implementation of a plan to consolidate sales processing and certain other back-office services from seven of our U.S. operations into a shared service center, located in Orlando, Florida. This shared service center commenced operations at the beginning of the second quarter of 2008.
Net revenue increased by $201.2 million, or 85%, to $438.8 million for the three months ended September 30, 2008 from $237.6 million for the three months ended September 30, 2007. Revenue increased primarily as a result of our newly-formed health management segment which provided $118.7 million of incremental revenue and primarily included the activities of our recent acquisitions of Quality Assured Services, Inc., or QAS, Alere, ParadigmHealth and Matria. Also contributing to the increase in net revenue during the third quarter of 2008 were our other recently acquired businesses, primarily within our professional diagnostic products segment which provided $63.5 million of incremental revenue. Net revenue increased by $660.6 million, or 120%, to $1.2 billion for the nine months ended September 30, 2008, from $551.6 million for the nine months ended September 30, 2007.

Revenue increased primarily as a result of our professional diagnostic related acquisitions which contributed $364.3 million of the increase. Also contributing to the increase in net revenue during the nine months ended September 30, 2008 was our newly-formed health management segment which contributed $251.6 million of incremental revenue and included the activities of our recent acquisitions of QAS, Alere, ParadigmHealth, Matria and our most recently acquired healthcare business.
For the three and nine months ended September 30, 2008, we generated a net loss of $3.7 million and $38.2 million, respectively, compared to a net loss of $180.6 million and $229.0 million, for the three and nine months ended September 30, 2007, respectively.
Results of Operations
Net Product Sales, Total and by Business Segment. Total net product sales increased by $79.1 million, or 35%, to $305.3 million for the three months ended September 30, 2008, from $226.1 million for the three months ended September 30, 2007. Excluding the favorable impact of currency translation, net product sales for the three months ended September 30, 2008 increased by $78.0 million, or 35%, compared to the three months ended September 30, 2007. Total net product sales increased by $387.4 million, or 73%, to $918.5 million for the nine months ended September 30, 2008, from $531.1 million for the nine months ended September 30, 2007. Excluding the favorable impact of currency translation, net product sales for the nine months ended September 30, 2008 increased by $378.3 million, or 71%, compared to the nine months ended September 30, 2007.

Net product sales of our professional diagnostic products increased by $72.9 million, or 42%, comparing the three months ended September 30, 2008 to the three months ended September 30, 2007. Excluding the favorable impact from currency translation, net product sales of our professional diagnostic products increased by $71.2 million, or 41%, comparing the three months ended September 30, 2008 to the three months ended September 30, 2007. Of the currency adjusted increase, revenue increased primarily as a result of our acquisitions of: (i) Cholestech, in September 2007, which contributed additional product revenue of $12.0 million in excess of those earned in the prior year’s comparative quarter, (ii) HemoSense, in November 2007, which contributed product revenue of $8.5 million, (iii) BBI Holdings Plc, or BBI, in February 2008, which contributed product revenue of $8.5 million and (v) various less significant acquisitions, which contributed an aggregate of $23.1 million of such increase. Organic growth, particularly from our professional infectious disease products, also contributed to the growth. The currency adjusted organic growth for our professional diagnostic net product sales, excluding the impact of acquisitions, was 11%.
Net product sales of our professional diagnostic products increased by $392.8 million, or 113%, comparing the nine months ended September 30, 2008 to the nine months ended September 30, 2007. Excluding the impact from currency translation, net product sales of our professional diagnostic products increased by $383.6 million, or 110%, comparing the nine months ended September 30, 2008 to the nine months ended September 30, 2007. Of the currency adjusted increase, revenue increased primarily as a result of our acquisitions of: (i) Biosite, in June 2007, which contributed additional product revenue of $161.7 million in excess of those earned in the prior year’s comparative period, (ii) Cholestech, in September 2007, which contributed additional product revenue of $49.4 million in excess of those earned in the prior year’s comparative period, (iii) Bio-Stat Healthcare Group, or Bio-Stat, in October 2007, which contributed product revenue of $21.6 million, (iv) HemoSense, in November 2007, which contributed product revenue of $23.7 million, (v) Redwood, in December 2007, which contributed product revenue of $18.4 million, (vi) BBI, in February 2008, which contributed product revenue of $23.0 million and (vii) various less significant acquisitions, which contributed an aggregate of $39.1 million of such increase. Organic growth, particularly from our professional infectious disease products, also contributed to the growth. The currency adjusted organic growth for our professional diagnostic net product sales excluding the impact of acquisitions was 13%.
Health Management
Net product sales from our health management business segment increased by $0.3 million, or 8%, comparing the three months ended September 30, 2008 to the three months ended September 30, 2007. Net product sales from our health management business segment increased by $8.6 million, or 172%, comparing the nine months ended September 30, 2008 to the nine months ended September 30, 2007. The increase in net product sales in each of the respective periods represents organic growth of sales related to our acquisition of QAS in June 2007.
Consumer Diagnostic Products
Net product sales of our consumer diagnostic products increased by $5.0 million, or 17%, comparing the three months ended September 30, 2008 to the three months ended September 30, 2007. The increase in net product sales is primarily attributed to our acquisitions of: (i) Bio-Stat, in October 2007, which contributed product revenue of $2.3 million and (ii) BBI, in February 2008, which contributed product revenue of $1.7 million.
Net product sales of our consumer diagnostic products decreased by $22.4 million, or 18%, comparing the nine months ended September 30, 2008 to the nine months ended September 30, 2007. The decrease in net product sales is primarily driven by the completion of our 50/50 joint venture with The Procter & Gamble Company, or P&G, in May 2007 in which we transferred substantially all of the assets of our consumer diagnostic products business, other than our manufacturing and core intellectual property assets. Upon completion of the arrangement to form the joint venture, we ceased to consolidate the operating results of our consumer diagnostic products business related to the joint venture and instead account for our 50% interest in the results of the joint venture under the equity method of accounting. Net product sales of our consumer diagnostic products for the nine months ended September 30, 2008 does, however, include $79.0 million of manufacturing revenue associated with our manufacturing agreement with the joint venture, whereby we manufacture and sell consumer diagnostic products to the joint venture. Partially offsetting the impact of the joint venture was an increase in revenue associated with the acquisitions of: (i) First Check Diagnostics LLC, or First Check, in January 2007, which contributed additional product revenue of $1.1 million, (ii) Bio-Stat, in October 2007, which contributed product revenue of $6.9 million and (iii) BBI, in February 2008, which contributed product revenue of $4.4 million.
Vitamins and Nutritional Supplements
Our vitamins and nutritional supplements net product sales increased by $0.9 million, or 4%, comparing the three months ended September 30, 2008 to the three months ended September 30, 2007, and increased by $8.4 million, or 16%, comparing the nine months ended September 30, 2008 to the nine months ended September 30, 2007. The increase in each of the respective periods is primarily a result of organic growth from our existing customers.
Services Revenue, Total and by Business Segment. Services revenue is primarily related to our newly-formed health management business segment which primarily includes our recent acquisitions of QAS, Alere, ParadigmHealth and Matria. In addition to the services revenue generated by our health management businesses, services revenue also includes revenue generated by our professional drugs of abuse testing and screening business, along with revenue associated with our long-term services agreement related to our consumer diagnostic joint venture formed with P&G in May 2007, pursuant to which we provide certain operational support services to the joint venture.

Services revenue provided by our professional diagnostic business segment of $7.4 million and $22.0 million for the three and nine months ended September 30, 2008, respectively, represent revenue related to the laboratory-based professional drugs of abuse testing and screening business at Redwood, which was acquired in December 2007.
Health Management
Services revenue provided by our newly-formed health management business segment was $119.8 million and $248.2 million for the three and nine months ended September 30, 2008, respectively, with Matria contributing services revenue of $75.2 million and $119.7 million in each of the respective periods, Alere contributing services revenue during the respective periods of $22.9 million and $68.2 million, ParadigmHealth contributing services revenue during the respective periods of $18.2 million and $52.7 million, and QAS contributing services revenue during the respective periods of $3.0 million and $7.1 million.
Consumer Diagnostic Products
Services revenue provided by our consumer diagnostic business segment decreased by $0.5 million, or 50%, comparing the three months ended September 30, 2008 to the three months ended September 30, 2007. Services revenue provided by our consumer diagnostic business segment increased by $0.3 million, or 16%, comparing the nine months ended September 30, 2008 to the nine months ended September 30, 2007. Services revenue provided by our consumer diagnostic business segment represents revenue related to our long-term services agreements with our 50/50 joint venture with P&G formed in May 2007, pursuant to which we provide certain operational support services to the joint venture.
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 $3.3 million, or 36%, to $5.8 million for the three months ended September 30, 2008, from $9.1 million for the three months ended September 30, 2007, and increased by approximately $4.4 million, or 26%, to $21.5 million for the nine months ended September 30, 2008, from $17.1 million for the nine months ended September 30, 2007. The decrease in license and royalty revenue for the three months ended September 30, 2008 primarily relates to a $2.6 million royalty/license fee received by Biosite during the third quarter of 2007. License and royalty revenue for the nine months ended September 30, 2008 increased primarily as a result of our acquisition of Biosite in June 2007, which contributed $5.5 million of such increase. This increase was partially offset by decreases in existing royalty agreements.
Gross Profit and Margin. Gross profit increased by $117.9 million, or 107%, to $228.1 million for the three months ended September 30, 2008, from $110.3 million for the three months ended September 30, 2007. Gross profit during the three months ended September 30, 2008 benefited primarily from higher than average margins earned on revenue from our recently acquired businesses, as discussed above. Gross profit for the three months ended September 30, 2008 included a $1.9 million restructuring charge related to the closure of various manufacturing and operating facilities. Gross profit for the three months ended September 30, 2007 included a $6.3 million charge related to the write up to fair market value of inventory acquired in connection with our acquisitions of Biosite and Cholestech.
Gross profit increased by $359.7 million, or 141%, to $614.6 million for the nine months ended September 30, 2008, from $255.0 million for the nine months ended September 30, 2007. Gross profit during the nine months ended September 30, 2008 benefited primarily from higher than average margins earned on revenue from our recently acquired businesses, as discussed above. Gross profit for the nine months ended September 30, 2008 included a $16.4 million restructuring charge related to the closure of various manufacturing and operating facilities and a $2.0 million charge related to the write up to fair market value of inventory acquired in connection with our first quarter of 2008 acquisitions of BBI and Panbio Limited, or Panbio. Gross profit for the nine months ended September 30, 2007 included a $7.5 million charge related to the write up to fair market value of inventory acquired in connection with our acquisitions of Biosite and Cholestech.
Cost of sales included amortization expense of $10.5 million and $7.5 million for the three months ended September 30, 2008 and September 30, 2007, respectively, and $34.2 million and $13.8 million for the nine months ended September 30, 2008 and September 30, 2007, respectively.


CONF CALL

Doug Guarino

Thank you Barbara and good morning and welcome to the Inverness Medical Innovations conference call to discuss our results for the quarter ended September 30, 2008. We are joined today by Ron Zwanziger, Chairman and CEO, and David 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 law. These statements reflect our current views in 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 recognizing expected benefits of restructuring and new business activities; the performance of businesses acquired, our ability to consummate the health management joint venture alternative arrangements that we are exploring, the impact of the recent crises in the global financial markets including the credit markets, our plans and operations and those of our suppliers and customers; our exposure to changes in interest rates in foreign currency exchange rates; our ability to successfully develop and commercialize products, the market acceptance of our products, continued acceptance of healthy management services by payers, providers, and patients; the content and timing of decisions by regulatory authorities, both in the United States and abroad; the effect of pending and future legal proceedings in our financial performance; and the risks and uncertainties described in our periodic reports filed with the securities and exchange commission, including our form 10K for the year ended December 31, 2007. Our company undertakes no obligation to update forward looking statements. 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 web site at Invernessmedical.com.

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

Ron Zwanziger

Thanks, Doug and good morning everyone. During Q3, we experienced another quarter of sustained financial improvement with adjusted cash EPS up 59% over Q3 of 2007, representing our ninth consecutive quarter of year-on-year improvement. The financial result that we achieved in the third quarter are based on sustainable long-term factors and we therefore expect to continue our significant year over year profitability growth for the foreseeable future.

Q3 however was not without its challenges. Toward the end of the quarter a variety of issues in Europe reduced our overall reported results by approximately $0.05 per share on an adjusted cash basis. Approximately half the impact was related to shipment delayed out of the quarter most of which was shipped at the time. The balance is due to a number of issues including foreign exchange and production introductions in some companies that need to be addressed.

On the other hand, the U.S. professional market experienced a particularly good quarter and we believe that the momentum should continue even through a recession. For example, the outpatient cardiovascular business continues to see positive momentum from both the (inaudible 00:04:47) product lines with BioStar experiencing a record number of new accounts closing into the physician office market. Additionally, Cholestech business remains solid with expanding new business opportunities into the growing retail health market.

Also important in terms of our ability to sustain these successes is the fact we're experiencing both revenue and cost benefits from increasingly strong relationship with our key distribution partners in the U.S. as we find new ways to drive our combined business and optimize the supply chain.

Despite the problem in Europe at the end of Q3, our overall organic growth rate in the quarter for professional diagnostics was 11.1% continuing the path and approach we've been experiencing over the past several quarters.

The integration of our health management business now operating as Alere continues ahead of schedule. Even in the current economic climate, our health management customers remain committed to improving the clinical outcomes of their employees and members, especially when these programs allow them to cut their overall cost of care. As a result of our unique capability to offering high touch, low cost technology-driven solutions, we've just renewed and extended the contracts with our largest health claim client and our largest employer client. We're also in discussion with several of our clients about expanding their business to include our unique product offerings. We're now pleased to report that the attrition of legacy Matria has slowed considerably and we're beginning to gain more new clients than we're losing, both in the employer and health plans.

We believe that this momentum will continue based on the fact that our pipeline for requests for proposal and sales leads are strong and we are unrivaled in the quality of our staff that we have been pursuing these opportunities.

Additionally, as previously discussed, we're in negotiation with several of our health plan clients to add home based PTI in our monitoring programs using Inverness Diagnostics. In fact, the number of clients with whom we are engaged in discussions expanded during the quarter and we're optimistic that we'll sign multiple contracts in this area over the next several months, making an important milestone in the convergence of diagnostics and health management.

Furthermore, several insurance companies have recently agreed to automatically cover INR monitoring based on physician prescriptions, eliminating the need to obtain reimbursement approval on a case by case basis.

Overall, we believe that home INR monitoring is a major opportunity which we're uniquely positioned to capitalize on. I'll come back to this in more detail later in the call.

Q3 was financially strong with record EBITDA during the third quarter of $100 million excluding restructuring charges and this has enabled us to continue making several smaller strategic investments around the world. For example, as part of our strategy, to increase our direct sales presence in countries outside the U.S., we acquired two foreign distributors in Austria and Brazil in September and October. Respectively, both of these companies were privately held distributors for a number of manufacturers including Inverness, to the professional diagnostic market. In each case, we selected a company and a management team that we know well and which we're confident will support Inverness expansion over the next several years.

Also in September, we completed the acquisition of two companies located in South Africa. The first specializes in the development and manufacture of malaria lateral flow tests, an attractive addition to our wide range of rapid diagnostics. The second is a diagnostic product distributor which will provide marketing and sales resources to Inverness' new subsidiary in Johannesburg. These two acquisitions collectively represent the creation of Inverness' first direct manufacturing and distribution breaks in Africa to help in the launch of both a determine combo antigen/antibody rapid diagnostic HIV test and the CD4 test being launched next year.

Additionally, in August, we acquired a smaller overseas health management business with revenues of less than $2 million per year on a trailing basis.

Before I hand the call over to Dave, let me just mention that while the financing transaction around the health management business is obviously much less likely at the moment, we're exploring options which may enable us to enhance its value.

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

David Teitel


Thanks Ron and good morning everyone. Adjusted net revenue for the third quarter of 2008 was $438.8 million, up 85% as compared to $237.6 million for third quarter 2007. Adjusted gross margins for the quarter were $240.9 or 54.9% of revenue in Q3 2008, compared to $124.2 million, or 52.3% of revenue in Q3 2007.

Adjust operating income was $85.5 million in Q3 of 2008, compared to $42.4 million in Q3 2007. Adjusted cash earnings per diluted share for Q3 of 2008 was $0.43, compared to $0.29 for Q3 2007. Comparing our third quarter results to Q2 2008, revenues of $438.8 million earned in Q3 exceeded Q2 revenues of $401.1 million.

Changes in exchange rates during the third quarter reduced reported revenues by $2.3 million compared to Q2 2008 rates. Q3 2008 benefited from a full quarter of ownership of Matria which contributed $75.2 million of revenue in Q3 2008 compared to $44.5 million of revenue for the partial quarter results included in Q2 2008. Adjusted gross margin for the percentage of revenue decreased from 56% in Q2 2008 to 55% in Q3 2008.

General and administrative expense increased to $132 million in Q3 of 2008, from $121.9 million in Q2. Matria, by virtue of a full quarter of ownership, attributed 13.2 million of the increase. Excluding this increase, as G&A expenses were $118.8 million in the quarter, or $3.1 million lower than the Q2 results.

Adjusted R&D spending of $23.3 million reflects a $1.2 million decrease in R&D expense from Q2 levels. As a precaution in response to the financial crisis, we're placing increased emphasis on expense control at the moment.

By business segment, product and service revenues from our professional diagnostic segment were $252.6 million in Q3 of 2008, compared to $172.2 million in Q3 of 2007. Acquisitions accounted for $59.5 million of this increase. The currency adjusted organic growth rate of the professional segment, excluding acquisitions was approximately 11.1%.

Considering the full quarter results for each entity, net product revenues for Biosite, Cholestech, and Hemosense grew by a combined 9.1% during the third quarter of 2008, compared to the same quarter a year ago.

Professional diagnostic revenues grew sequentially from $250.4 million in Q2. Adjusted gross margins from our professional diagnostic segment were 62.5% in Q3 of 2008, compared to 62% in Q3 of 2007 and 63% in Q2 of 2008.

Revenues from our health management segment were $124.1 million in Q3 of 2008 including $75.2 million of revenues from Matria that I noted earlier. Revenue from Alere and Paradigm grew by approximately 14% compared to their pre-acquisition revenues earned in 2007. Matria's results declined slightly from $77.4 million in Q2 and were down 16% from Q3 2007. This year over year decrease was offset by a 36% increase in revenues from our (inaudible 00:12:56) subsidiary, which contributed revenues of $7.3 million in Q3 of 2008.

Adjusted gross margins from our health management segment were 55.7% in Q3 of 2008 compared to 53.6% in Q2 of 2008. The decrease was principally related to lower margins from our QAS subsidiary associated with the placement of coagulation meters under Medicare reimbursement programs. While QAS recent progress in the placement of meters bodes well for future revenue and profitability growth, there is a two to three month lag from the additional identification of patients for the first billable revenue associated with this placement. As a result, the time requirements for training and the completion of the requisite number of tests by home users, during which costs are incurred in the training of these patients.

Product and services revenues from our consumer diagnostic business segment were $34.7 million in Q3 of 2008 compared to $30.3 million in Q3 of 2007 For the 2008 period, these revenues include $26.9 million of manufacturing and service revenues for product and services supplied from a joint venture.

Looking at the results at the joint venture level, products sold by the joint venture were $51 million in Q3 2008 compared to $48.7 for the year ago period. Adjusted gross margins from our consumer diagnostic segment were 23.0% in Q3 of 2008 compared to 18.5% in Q3 of 2007 and 23.6% in Q2 of 2008.

Revenues from our nutritional business were $21.6 million Q3 of 2008, up 4.4% from revenues of $20.7 million in Q3 of 2007. Adjusted gross margins from our nutritional segment were 80.5% in Q3 of 2008, compared to 12.6% in Q3 of 2007, and 10.3% in Q2 of 2008.

Adjusted research and development expense was $23.3 million, or approximately 5.3% of revenues, up from $19 million in the comparable quarter last year, reflecting our recent acquisition for continuing investment in our cardiology related research, and down slightly from $24.5 million in Q2 of 2008. We expect R&D expense to continue at approximately 6% of net revenues.

At $85.5 million, our adjusted operating income reflects a $43.1 million increase over third quarter of 2007. Overall, we expect improvements in adjusted operating profits against comparable prior year quarter to continue in Q4 and throughout 2009.

Adjusted interest and other expense was $24.5 million in Q3 of 2008, compared to $26.9 in Q3 of 2007. Included in this line is adjusted interest expense, net interest income of $22.8 million in 2008, compared to $27.6 million in 2007.

Also included in other expense during Q3 of 2008 was a $3.1 million charge for realized and unrealized exchange losses associated with changes in exchange rates during the quarter.

Equity variance of unconsolidated subsidiaries in Q3 of 2008 include $2.8 million related to our share of earnings from the joint venture with DNG. In Q3, our tax rate was approximately 33% of taxed income. After tax rates ranged from 30% to 35% for Q4 in 2009. With respect to our acquisition of Matria, based on the integration work that we have completed to date, we expect to realize synergies of $20 million to $25 million from the combination of Alere and Matria. Of this amount, our acquisitions to date have resulted in annualized savings of $17.4 million, with realized synergies of approximately $4.3 million compared to approximately $1.1 realized during Q2.

In terms of other integration programs, both significant integration initiatives remain on track. During the first quarter, (inaudible 00:17:14) transfer of manufacturing and subsequently closed some of our highest cost plants. These plants will affect Biostart, Cholestech and Hemosense in the U.S. and (inaudible 00:17:22) and will run through the end of 2009. BioStart production at the end of Q2 and Hemosense is on track to wind up production during Q4 with respect to our debt and related exposure to changes in the interest rate.

As of the end of the third quarter, we had floating rate that associated with our senior credit facility of $1.355 billion. Of this amount, 963 relates to our first lien debt which bears interest at LIBOR plus 200, prime plus 100. $142 million relates to our revolver which bears interest at LIBOR plus 1.5 or prime plus 70, and $250 million relates to our second lien debt, which bears interest at LIBOR plus 425 or prime plus 325.

Against these balances we purchased an interest rate hedge in August 2007, covering a notional $350 million at a three month LIBOR rate of 4.85% through September 2010. For the first month of the fourth quarter, we purchased one month LIBOR contracts for the non-hedge portion of our debt at LIBOR rates of approximately 3.4%. These contracts lapse toward the third week in October at which point we rolled over the balances into prime loans at a rate of 4.5%. With recent declines in LIBOR rates, we anticipate switching back to LIBOR in the next few days.

With a significant strengthening of the dollar against the euro and pound since the end of the quarter, we expect our reported revenues and gross margins to be adversely impacted by these recent changes, although the amount of such impact will vary with rates over the remainder of the quarter.

This trend will be offset by corresponding benefits from our locations with incur costs principally incurring these other new U.S. dollars, reducing the overall impact in net income. With that, let me turn the call back over to Ron.

Ron Zwanziger

Thanks, Dave. During the third quarter, we announced or launched five new products, the consumer JV Conception Guide Indicator, the Determinant Combo Antigen/Antibody HIV Point of Care Test, the TB (inaudible 00:19:28) Test for HIV-positive individuals, the Binax Now Avian Flu Test and the second generation (inaudible 00:19:34) Ratio Coagulation Monitor. Several of these products are novel diagnostics, the first to be introduced by any company and have been in development for a number of years.

Additionally, earlier this month, we announced that the first product of (inaudible 00:19:49) platform will be a portable CD4 cell enumeration analyzer which will be introduced in the international HIV conference in Senegal in early December.

For individuals who've been confirmed as being HIV positive, testing for CD4 or key healthy cells is a critical baseline measurement that gauges the state of their immune system and is also measured at regular intervals during the course of HIV therapy. We believe that this device has the potential to revolutionize the management of HIV positive individuals in the near term by delivering CD4 quantification at the point of care where it is needed most and where few tools are available.

However, the greater long term value of the CLONDIAG platform lines in its multi assay capability and not opportunity to further develop it into the first molecular platform capable of deployment to a broad customer base directly in the physician office and eventually in the home.

Progress on our NGAL program continues with several multi center clinical trials underway, spanning various potential applications. The NGAL test will become available on the triage platform for use in Europe within the next few weeks and will begin sales on a limited basis shortly thereafter.

While it is too soon to know how effectively NGAL will ultimately be an early mark of the kidney injury, there have been a number of positive indications for its potential.

The Sterling CHF device is nearing completion. It has already begun preclinical trials for the professional market and should begin clinical trials in a home setting early in 2009, which will focus on determining the appropriate BNB testing frequency for heart failure patients in the home.

As a home monitoring device, this proprietary blood market based testing system will provide patient data to our health management monitoring systems in real time dramatically improving quality of life while lowering cost to the healthcare system. We expect to have it commercially available for the professional setting in 2009.

Clearly, our R&D programs are proceeding well and we're confident that we'll continue to meet our previously stated goals of multiple product launches in various disease categories every year for the next several years, resulting in a steady increase in our rate of organic growth.

As a brief update on some of the Q3 introductions just mentioned, the conception guide indicator rollout is on schedule in Europe with launches so far having occurred in the UK, Ireland, and Spain with a number of additional countries planned before the end of this year. The U.S. introduction is expected to occur in 2009 pending FDA clearance.

All of these launches are being supported by Proctor & Gamble sales and marketing infrastructure. However, even before advertising commenced in the UK, same store sales figures were up 30% with similar positive indicators coming out of Spain. Supported by these promising early results, we believe that the conception guide indicator can drive significantly higher sales for the joint venture for many years to come.

The determine HIV one and two antigen/antibody combos test has undergone multi center clinical trials throughout the second and third quarters and we're very pleased with the performance data which shows sensitivity and specificity comparable to the fourth generation lab based enzyme immune acetates which are traditional use for blood backing screening. This novel diagnostic is the first rapid format test which enabled the identification of acute HIV infections prior to the development of antibodies. It is important to note that those who are acutely infected with HIV are responsible for a high percentage of new infections and without early indication of this population it would be difficult to control the HIV epidemic.

Considering the performance that we've seen in trials, we feel that this test should set a new standard of care for rapid HIV testing and we're scaling up manufacturing for the product in two production facilities at this time.

In terms of near term drivers of revenue and earnings, home coagulation monitoring represents one of our most immediate and meaningful opportunities. In fact, home INR testing is one of the most exciting markets that we've seen in years in terms of professional consumer interest for a new offering. Currently, QAS revenue is trending at a 50% increase versus prior year although we've yet to benefit from the full revenue impact of recent positive changes in coverage for home anti-coagulation testing.

Referral of patients by prescription from physicians have increased from an average of 700 per month in the second half of 2007, to over 1,800 per month on average for Q3 of 2008. Between Alere management offering to pay us for home coagulation monitoring and QAS' offers directly to physicians and patients, we expect to lead the way in this dynamic growth area of home diagnostics, as well as position ourselves for additional success as technologies being developed by us or others create new opportunities in home monitoring.

Despite the probability of a serious recession for most of 2009, we feel that '09 earnings will be strong and significantly higher than 2008. This is because the vast majority of our revenues are unlikely to be affected by a recession. Currency adjusted organic growth from both existing and new products should continue to increase from the overall 2008 growth rate, which would drive improvement in gross margins. Manufacturing consolidations in California and China should also continue to improve gross margins as well as two contractual changes with a long term business partner. Tremendous potentials in INR should result in QAS turning profitable toward the end of 2009 and continued success with the Alere integration should also contribute to our earnings growth.

Considering these and other profitable drivers that we expect to come into play in the near term and consistent with what we have said previously about significant year over year earnings growth, at this point, we expect to achieve approximately $2.00 per share in adjusted cash earnings in 2008, excluding the litigation settlement that we recorded in Q2 and year over year increase at 57%. Furthermore, we expect to achieve a minimum of 25% earnings growth in 2009, compared to our 2008 estimate.

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