Good afternoon. My name is Craig Bijou, one of the medical device analysts here at B of A. It's a pleasure to have Integra LifeSciences here and from the company, Lea Knight , Chief Financial Officer. Chris Ward is in the audience there, IR. Lea Knight, thank you for joining us.
Thank you for the opportunity. Appreciate it.
Maybe just want to start with Q1 results. They came in above expectations and above the high end of your guidance. Maybe just talk about some of the key drivers in Q1 and kind of what came in above expectations for you.
Certainly, certainly. Thank you. Yes, so we had a strong Q1. We delivered revenue $6 million above the midpoint of the guide that we provided. And it really was on the strength of our global CSS business, which delivered 4.4% growth for the quarter, which is exactly what we expected that business. And our Tissue Technologies business delivered as expected given the headwind that we talked about on our Integra Skin supply. As you look at the overperformance, that was largely driven by Integra Skin supply and timing of orders. Orders we had originally forecasted to be part of Q2, we saw executed in Q1. So that explains a big part of the overdelivery. The other part would be attributable to the strength that we're seeing in DuraSorb, which is our resorbable synthetic, which is doing very well. It had triple-digit growth for the quarter.
Great. And I do want to get into a little bit of Q2 and full-year guidance and talk about some of the puts and takes on that. But maybe just diving a little bit deeper into the CSS business that's obviously been doing well. It's pretty stable, especially on the international side. So you saw high- single-digit growth, I believe, in Q1. But you've really seen some strong growth for the last five quarters in that business. So I know CereLink is back. But maybe let's kind of dive into that business a little bit and what's driving that international growth. And how can that, given the stability of that business, how do you foresee that for the rest of the year? And maybe just even as maybe the tissue business is still kind of catching up.
Yeah, certainly. So we're really proud of the growth that we've seen internationally. And our strategy there, as you look at across our total business, international is less than 30% and under-penetrated in a lot of different markets. And so part of our strategy is to take the existing portfolio that we have and expand it into those markets. And it's been highly effective. We've seen double-digit growth in China, double-digit growth in some of the indirect markets that we serve outside the U.S., as well as Canada. And it really, like I said, is on the back of being able to bring established products like CUSA, like CUSA Tips, into these markets and expand growth in that way. In China in particular, we're building traction and extending our presence outside of the tier 1 hospitals. And we think there's a lot of runway there.
The business has been performing, to your point, at high single-digit growth for the past five quarters. We think that momentum is there and will continue through the end of 2024 and into 2025. Still a lot of runway to go.
Got it. And CereLink, I guess that relaunched recently. And just, I guess, how has that launch been going? And any reason not to think and correct me if I'm wrong, but I think it was roughly a $1 million a month run rate revenue. So, I mean, is that how we should think about the contribution for the rest of the year?
Yeah. So CereLink, we relaunched internationally at the end of Q3. So Q4 was our first full quarter internationally. And then the U.S. launched in Q1 of this year. On an annual basis, our monitors do about $12 million. And so far through Q1, we're pacing really well against that. And so I would expect that to continue through the balance of the year.
Great. Maybe shifting over to tissue tech. You did talk on the call about some of the underlying demand there. We'll get into some of the other issues with the business. We'd love to just hear about really the strong underlying trends or demand trends that you're seeing. What do you think's driving that? I guess, what's driving that?
Yeah. So a couple areas. And maybe I'll start with, from a market perspective, the demand we're seeing in Skin. We saw increased demand really start to pick up kind of the middle to late last year. Some of it, again, that's a space where we treat chronic wounds, burns, things like that. And so some of it's just the dynamics of what's happening in the broader marketplace. Some of it, a little bit of substitution, as we saw PriMatrix out of the market. We do see a little bit of substitution on that business as well. But that momentum has continued. And we expect it to continue for the balance of the year.
As we look across SIA, our SIA acquisition and DuraSorb, part of what we saw as the opportunity with that acquisition was to increase kind of the call points through deeper penetration, broader penetration. We've brought together our sales force in this year to begin executing against that strategy. We're seeing the traction. DuraSorb, we were able to double growth in 2023 on that business. As I mentioned, through Q1, that business is up triple- digits. So, again, that's, again, momentum that we see will continue throughout the year on a full-year basis growth, tracking to double- digits as well. Then from an ACell perspective, that's one area where, in 2023, we saw really strong growth across that business. We still believe there's strong momentum in that business that will carry it to high- single-digit growth in 2024 through Q1.
We did have a little bit of distraction because of the supply constraints that we've talked about on Integra Skin that directly impacted ACell because our reps couldn't be in the procedures where they need to be to drive that growth. But again, the underlying demand there is still there. And we think, through the balance of the year, we'll be able to execute against that.
Got it. Maybe that's a good segue into just the Skin supply issue. Just really want to understand what caused that supply issue. I guess, when was it found?
Yeah. So what I shared at the end of February is that, in Q4, we had a machine issue impacting our production. That, since then, we were able to address the machine issue. But we were not operating production back to the levels that we were seeing from the demand and that we would need, during the course of Q2, to get production back up to capacity so that we're able to meet demand. So that's the work that's happening right now. We do anticipate that, in the H2, we'll be back at levels that will allow us to meet demand. And that's what's included in the guide that I provided for the balance of the year. The other thing we're doing, though, to mitigate the risk and ensure that we can actually meet demand is we are bringing up capacity at another site.
It's a site that used to produce Skin. We're bringing that back online, in part to help us get to a point where we can meet demand. But also, because of that strong underlying demand that we believe will continue, we want to make sure that we are well positioned to grow as this business grows.
Got it. Did you quantify the impact specifically from Skin in Q1?
Yeah. So the impact of what we believed was kind of the missed opportunity is about $5 million in Q1.
OK. And what's going, I guess, you're still producing some, but clearly not enough to meet the demand. So are customers kind of burning through inventory that they have? Or did you have a backup inventory that you've kind of burned through? And I guess, maybe just talk about what the dynamics actually are with the field.
Yes. Yeah. No, thank you for the question. Because it is important to note that we did continue to ship throughout Q4, throughout Q1. But what's unique about this product is you have to be on the shelf when the procedures are happening. And so we've been able to leverage our sales force to be able to manage some of the inventory dynamics and try to meet customer needs as much as possible. To that end, where we did have inventory constraints, such that our product was on the shelf, did customers have to turn to other products? Yes. But we were not out at any one particular customer for an extended period of time where we think that we're now at risk of not being able to come back.
It's not like the gaps were that deep or significant where we think that'll be an issue once we are in this kind of better supply situation.
Just, I guess, I want to understand. It was only one line. I guess, the risk that other lines could be impacted. Then, I guess, what's the remediation for that one line? I know you did talk about adding additional capacity, which obviously will help. But I'm just curious as to the remediation process.
Yeah. So we look broadly across the production capability for Skin. And we are managing it through that lens, to your point, making sure that, as we position ourselves to be able to resume meeting demand, that we're addressing any potential risks to that end. And then, as I mentioned, the additional capacity that we're bringing online is the risk mitigator in all of this.
Got it. OK. Maybe jumping back to just guidance. So maybe if you could just walk through kind of the puts and takes for Q2 guidance. Maybe start there and kind of how we should think about it. I think it's organic growth is a little bit of a step down. Ex-Boston in Q2, you did mention those orders that were pulled forward. So maybe that's the only thing. But maybe any other color that you can have on what formed your guidance for Q2.
Yeah. So as we exited Q1, we were down about 2.5%. And that's inclusive of kind of Boston being in Q1 2023, not in Q1 2024. As we move into Q2, we start hitting a period where we did not have Boston revenue a year ago. But we actually did have Boston returns a year ago. So we had negative revenue a year ago. We're now comping that. So that's going to look like growth. So it's about two points of growth if you look at just Boston. Outside of that, the business outside of Boston, we're calling to be about flat. And what's impacting that dynamic is, again, the order pull forward, where we had order timing that executed in Q1 versus Q2. And we're still in this mode where we're building Skin back. We're not back in full production, being able to meet demand.
That's also impacting the growth. With that, the distraction factor that I mentioned earlier that will also impact some of the growth that we would ordinarily expect to see on ACell.
Got it. From a rep perspective, I guess, just to follow up on that, from a rep perspective, that distraction factor, when does that get resolved? So, I mean, you said they're managing it well, working with the inventory. But is that something that's getting better throughout Q2, less distraction, and the H2, maybe it's gone?
Yeah. So that's exactly what we anticipate. As we get to kind of more secure inventory levels, again, because production's now meeting demand, that's exactly what you'll expect to see. Distraction gets lessened. And then we're able to drive our UBM platform, which is ACell, along with the Skin. I should also mention, as we think about the Q2 guide and sometimes this goes unsaid, so I want to be intentional about it, it still requires that some of that same growth that we talked about on international, that's still delivering as expected. From a CSS perspective, it's still delivering in that kind of 3%-5% window that we've asked for from that business. And so that's presumed in there and, again, should characterize what we see through the rest of the year on those businesses.
If I think about the H1 or the H2, obviously, we've talked about the Skin supply. There's a number of different things that are likely to get better in the H2. But even if you look at kind of the revenue, that dollar revenue, if you take out Acclarent, which I'll ask you about, Acclarent, the acquisition you did in a minute. But if you take that out and you look at the full year, the underlying growth, it's still a pretty big step up from the H1 to the H2, and more than you see traditionally. Skin, obviously, coming back online is a factor. But, I mean, anything else? Or how should investors kind of look at that jump that looks a little bit bigger than what you've seen previously?
Yeah. Fair question. So as we look and, again, stripping out Acclarent, as we look front half to back half, there's about an $80 million step up between the two halves. About a third of it is addressed through alleviating the supply constraint on Skin, along with the distraction factor. So those two taken together, about a quarter of it is what I would call more seasonal lift that I would expect front half to H2. And then there's another third that is related to us being able to alleviate some of the normal CSS back order. So we've had some back order across some products within our CSS portfolio that we expect to be addressed in the H2. So you'll see that. And then kind of the all other I would call out is we have a full half of CereLink.
We have a full half of Aurora Surgiscope, which is also a product we launched in the kind of late March- April time frame. So those are the things that will carry the momentum and drive the lift that we would expect to see.
Got it. That's helpful. Let's talk about Acclarent. So you just closed it. It's a good-sized acquisition. It was a J&J for a long time. So I guess, maybe just talk about the strategic rationale for the deal, what you guys can do with the business now that it's outside of J&J, and maybe some of the financial metrics behind the deal. What do you expect from a growth perspective? What's the impact on margins?
Yeah. Very excited about the Acclarent acquisition. Deal closed April 1st. We've had an opportunity to not only get to know the Acclarent team and welcome them into our family, but also to get to know the customers. We're excited because this acquisition gives us immediate commercial scale and leverage in the ENT specialty device category, which is a natural adjacency to what we already do in CSS. It's a billion-dollar category. The category itself is growing 5%-6%. We believe, with the portfolio of products that we're bringing on board, we have an ability to drive high- single-digit growth, which, for us, means an accretive growth. As we look at their offerings and have had an opportunity to understand more specifically kind of customer needs and the fit, we're excited about the TruDi Nav system.
We're excited about the expanded indication that they've recently gotten for the AERA Eustachian Tube Dilation System. So we think those things, in particular, are poised to help drive the parts of the category that are growing the fastest. That will be our pathway to realize the high- single-digit growth. From a metrics perspective, what we've said is, so in our guide for 2024, we've assumed about $80 million in revenue, reflecting an April 1st acquisition date. Beyond that, in 2025, is when we'd be able to drive the high- single-digit growth. From an EPS perspective, we continue to believe that it will be EPS neutral. Overall, the deal is set up to have a greater than 10% ROIC by year five, which is kind of an important threshold for us as we look at value creation opportunities.
From a gross margin perspective, it's operating consistent with kind of where our base business is. Operating margins become accretive in the 26%-27% time frame. Really poised to be a powerful contributor of growth for us at Integra.
Got it. Did it come with a Salesforce? Or how were you?
Yeah. Yeah. Yep. So we brought on an ENT sales force. And that's what gave us access to the immediate scale, commercial scale of about 130 reps. And so we also have a smaller business, but MicroFrance ENT instrumentation, which we think, again, works well. And so we've been integrating that sales force, getting to know them, and just excited about where this opportunity will take us.
Great. Moving on to Boston.
Yes.
Obviously, I know you're not providing updates on timing. Maybe how should investors think about when we will learn something new? When will we know when we will know?
Yeah. Yeah. Yeah. Fair question. Again, just to frame it, so we obviously have been on a path. We're retracking to commercially relaunch those products this year. Earlier, and I guess last week, shared that, in fact, based on the results of the final audit, that we were no longer on that pathway and, at that time, had not shared any more specific timing. I absolutely understand the range of emotions that all of our stakeholders have experienced based on that news, not just investors, but certainly our customers, even our employees and myself. Chief among those emotions are certainly frustration and disappointment because we weren't able to provide an additional insight with respect to what the new timeline is. That's not lost on us. But I think it's important to understand why.
It's not that we aren't working urgently to bring those products back to the market. It's not that we're not committed to make sure SurgiMend and PriMatrix come back. It really was in the interest of making sure we get it right. Getting it right means evaluating all the options available to us to bring these products back in a sustainable, reliable way to meet the needs of our customers and our patients. So we've been looking at options like, do we relaunch these products or remediate the process and relaunch out of our existing South Boston location? Do we remediate the process and launch directly out of a facility in Braintree, Massachusetts, which is the facility that we already had under construction because that was our long-term plan for the Boston portfolio?
We knew our current facility was not going to meet the growth needs on that business and that we needed to get it to a place that would allow us to grow and meet the volume projections, also allow us to operate more efficiently. And so that plan had been put into place about 18 months ago. And so now that we are where we are, there's a very natural question that says, do you start in South Boston and move to Braintree, or do you go directly to Braintree? Or is there some hybrid in between? And so that's the calculus that we now have to do, in addition to fully vetting and understanding all of the observations that came through from the audit to understand the time required to remediate.
So that's why, as we think about from a guide perspective, what we said is, take SurgiMend and PriMatrix out of 2024. It's out of our guide. And while we have not provided guidance in 2025, I will provide kind of a way to think about how to approach it is, once again, take Boston out and put it on the side as an upside. As we come back with more timing, you can layer that in. And if you do that, what you have left is still a very strong business. You have a business with a portfolio that's growing in single-digit growth in 2024, that portfolio outside of Boston, 3.3%-4.3% with a lot of back half momentum that will carry into 2025. From a margins perspective, we will still have some of the remediation costs that we'll have to absorb.
But we're looking at gross margins that are in the kind of low- to mid-60s%, EBITDA margins that are in the low- to mid-20s%, and so still a very profitable business even beyond Boston. And then once we come back with that timing, that just becomes the layer on top.
Got it. And those decisions or those discussions on what to do next, I mean, is that all internal? I know part of the process to reopen Boston, you had the dress rehearsal. So it was a different auditor than the actual auditor that did the final review. And I think I've asked you this on the call. But, I mean, is the FDA involved in any of these talks as well? Maybe if you could just kind of frame who are the parties in that discussion and who ultimately, how are you going to come to that decision? What input is going to come is going to be given?
So the planning for Boston is being led absolutely internally. So across our management team, we are making the decision as to what the right pathway is, informed by the input we're getting in terms of the different cost structures, the impact on employees, things like that. But that decision is a management decision. It obviously does get reviewed with the board. We are using or leveraging consultants to give input as we think about the approach to the remediation and, therefore, the cost implications. But that is absolutely an internal management decision. From an FDA perspective, we have made the report that we received available to the FDA, along with an attestation that we've received this report. It has findings. And we are initiating the appropriate actions to remediate those findings. So that's done.
If there's any additional requirement coming out of the FDA, we'll have to wait and see. We just don't have that at this point.
Then on Braintree, I guess, so, I mean, how close would that be to actual production? Obviously, I mean, they're 510(k) cleared products. So you'd have to go through that process again, I'm assuming? Or?
So the remediation process is remediating the process to manufacture our 510K approved products. So unless there are significant variations, which we don't anticipate at this point, we would not have to go through an additional clearance process, if that's the question. From a timing perspective, again, that's part of the calculus that we're doing now that we don't have a definitive answer to. What I can share, though, is, from a timeline perspective, our lease in South Boston site is up in 2026.
OK. The lease in the Boston site?
South Boston.
South Boston.
So Braintree is in Massachusetts, the empty.
Yep. Yep. OK. So it's still OK. All right. Maybe, I mean, only a couple of minutes left. But margins, and you touched on how to think about margins. There's a lot of puts and takes with Boston, with Skin. So maybe just kind of frame how we think about or how you're thinking about margins for 2024 and then kind of what those are, how do they ramp in 2025 and beyond? I know you're not going to give necessarily guidance. But just frame how investors should think about margins.
Yeah. So I'll start with gross margins. From a gross margin perspective, year-on-year for 2024, we're looking at margins that will be moderately down. So I think 70 basis points-90 basis points down from where we were on a full-year basis in 2023. And that reflects some of the challenges that we've had from a supply chain perspective that we're building our way out of embedded in there. That impact does slow down from an EBITDA margin perspective. And so we will also be down year-on-year versus full year 2023 from an EBITDA perspective in the same order of magnitude as we build back. So, again, I kind of gave you a way to already think about 2025 without Boston.
But eventually, as we get beyond some of these remediation challenges, you do see a pathway where we start getting back to a place that's consistent with where we were in the kind of 2022, 2018, 2023, early 2023 timeline or time frame. And I think that happens. Again, our products get back onto the market, high margin products. We have a clearance. Acquisitions growing, accretive to margins in kind of the 2026 time frame. And the rest of the business continues to deliver as it has been delivering. And that becomes the math necessary to start seeing the margins that we used to operate at.
Well, great. I think we're just about out of time. So maybe I'll stop it short here before starting another question. But, Lea Knight, thank you for participating.
Thank you, Craig Bijou. I appreciate it.
All right. Great.