So I think you said you expect a $50 million impact from the shipping holds in Q3. You know, I know you just said you're not gonna give any sort of broad updates, but just talk about your confidence level in that Q3 impact and, you know, will that bleed into Q4 and into 2025 at all?
Yeah. Again, number one priority for our entire company is releasing the shipping hold. As part of the Q2 call, we did give a guidance range for Q3 and full year that communicated the fact that we expect the majority of the shipping holds to be released in Q3, but that there would be a smaller amount that continued into Q4, and to your point, order of magnitude for Q3 was about $50 million. The guidance range for Q3, specifically, that I provided, does allow for faster or slower timing in terms of release of shipments, so there is some give there, but again, more specific than that, I can't-
Okay.
I can't provide insight.
The impact for Q4, that's about $10 million, correct?
Yes. So that was part of our Q2 guide, right? $50 million in Q3 and about $10 million in Q4.
Okay, and then just to confirm, the shipping holds do not impact the Acclarent business or the ENT business, correct?
That is correct. The shipping holds that we communicate impact neurosurgery division, so not tissue, not instruments, not ENT.
Got it. So just stepping back, you know, just talk us through the trends within CSS and the tissue technology segments, and just elaborate on what you're seeing in the market generally from a high level perspective?
Yeah, happy to. We can continue to see strength in our end markets. The features or dynamics of our markets that make them both stable and attractive are true in both divisions. In the case of CSS, that means we enjoy markets that are growing at mid-single digit levels, markets characterized by surgeons' choice, that have an outweighed voice in purchasing decisions. Markets where product differentiation matters, and we do have differentiated products, which allows us an ability to take price. And a market where commercial relationships are still important, and they have the ability to limit the ease of competitive entry. On the tissue technology side of the equation, those markets are enjoying high single-digit growth, also characterized by a dynamic where surgeons' choice matters, where we have proven clinical evidence.
In the hospital setting, which is the majority of our business, we enjoy stable reimbursement landscape or structures. In the outpatient setting, which is a much smaller part of our portfolio currently, we are seeing changing reimbursement dynamics. But when you look at the direction of where they're changing, they're changing to better promote or support products with clinical evidence and products with increased efficacy, which is represented in the most recent LCD decisions that came out. It also lends itself to how our portfolio is positioned, and for us, creates longer-term growth potential. So we're excited about our markets, we're excited about our portfolio, as well as the strength of our commercial relationships.
So, you know, I, on the Q3 guidance, you talked about, kind of what gets you... Well, I guess maybe just sort of elaborate on what gets you to the high end versus the low end. And besides the shipping holds, are there any other variables we should consider when thinking about Q3?
Yeah, so during our call, the guide we provided for full year, was a guide of revenue $1,609 million-$1,629 million, midpoint being $1,619 million. As you look at the dynamics that get us the top to the bottom end, there's a couple key ones. One, it's the operational timing of the releasing of the shipping holds; it clearly is one, but it's also the yield recovery on Integra Skin that we've talked about, and it presumes that we continue to see the strong demand we've been seeing across our product portfolio in CSF, Tissue Tech, as well as the solid performance we've been seeing on Acclarent.
Okay, so just on Integra Skin, right? We may as well just jump into that now.
Yeah, please.
So you said you expect sales to normalize in Q4. What's the latest? And just remind us why the timeline was pushed out?
Yeah. So first and foremost, on Integra Skin, our equipment is up and running. We are producing Integra Skin. We had originally anticipated that our production levels would get to a point where we would be able to sustain our normal run rates by the end of Q2. Right now, the production pacing, based on our yield output, is such that we will not hit our normal run rates until Q4. But on that trajectory, we would expect Integra Skin to return to growth in 2025 .
Okay. And just so is that beginning of Q4, end of Q4, or just-
By the beginning of Q4.
Beginning of Q4?
Yeah.
Okay. You know, I guess just since it was pushed out, I guess, what's your confidence level in the updated timeline that you will resolve this by Q4?
Specific to Integra Skin?
Integra Skin, yeah.
Yeah. Yeah. So again, it was pushed out because of our pacing of yield recovery. The confidence comes based on as we've monitored production recovery timelines over the course of the year. That is what, based on the, you know, what we shared at the Q2, gives us confidence that we can get there by Q4.
Okay, and just remind us what your sales are for Integra Skin.
Certainly. That business, Integra Skin, annually is about just under $200 million. Margins are strong and are well above our company average.
Okay, so definitely a benefit in Q4 once you get this back up and running.
Yeah.
I wanna switch gears to the Boston facility?
Yeah.
You know, it's a fairly long time between now and the first half of 2026 , when the Braintree facility is expected to come online. What near-term milestones should we be on the lookout for as you shift your manufacturing from Boston to Braintree?
Yeah. Yeah, so, as you're aware, in July, we communicated that, in fact, we were shifting our focus. We were no longer bringing up manufacturing for SurgiMend and PriMatrix in our South Boston facility, but instead, we would bring them up in our Braintree facility. That is a facility that's been under construction since 2023, and at this point, the exterior of the building is up, so our walls are up, and we're continuing to make progress building out the inside of the facility and getting that site operational. To your point, that timeline to get it operational is projected to be the first half of 2026. At this point, our communication plan is to communicate key milestones as we achieve them, so, as we progress, getting to that point of operationalization.
Can you share what some of these key milestones might be, or?
Yeah. So that's... Other than getting it operational, which is a significant key milestone-
Right
In and of itself, we're not going to share more specific.
Okay, so you'll update us as-
Yeah
You know, as it progresses.
Yeah.
But the plan is still first half of 2026 is when that facility is operational, up and running.
Absolutely.
Okay. Just talk about how much share, you know, you think you've lost as a result of this Boston, the recall, and what's your plan for share recapture?
Yeah. So, yeah, we remain confident in the strong market growth and demand for markets like implant-based breast reconstruction, complex wound reconstruction, as well as complex hernia. We know that we do have significant work to do to be able to regain, though, our position in those markets, and that's the work to be done. But we also know that there's proven clinical evidence supporting both SurgiMend and PriMatrix and a favorable competitive positioning, which means we have features and functionalities that our products offer that aren't easily replaced by existing competitive products. And as we look across the landscape, we can't see it being replaced in the near term by anything that's expected to enter the market.
At the same time, we have a very broad portfolio, which means we have other products in our, in the bags of our sales force, products that can be replacement products, like a DuraSeal, for certain areas. But it also means we get to stay in front of our customers to maintain those relationships. That will become very important as we start to plan our relaunch strategy for when we're back. So at this point, being able to project, you know, what that means in terms of share or how long it'll take is a little too soon to say, but we have lots of reasons to believe that, we'll be able to make traction on regaining our share once we are back at the market.
Okay, and just remind us what the revenue is. I think it's about 5% of revenue-
Yeah
from this facility.
In 2022, order of magnitude, it was about 5% of our total portfolio, is what the Boston products generated. Across SurgiMend and PriMatrix, it was about $64 million.
And those are also, high-margin products, I believe.
They are. They are high-margin products, above our company average.
Okay, so does the relocation of SurgiMend and PriMatrix to Braintree increase your capacity for manufacturing these products?
So what's interesting is when we started this journey to build out this long-term facility in. We commissioned it in 2022. Construction began in 2023. We did it because we knew the existing South Boston facility was not going to be, have enough capacity to support what we saw as the long-term growth potential on the business. As you remember, we, we've kind of made a commitment to pursue a PMA strategy and implant-based breast reconstruction. We saw that as a catalyst to drive significant growth on the business, and we knew South Boston couldn't support that. So that was the reason why we started down this path. When it's finally constructed, Braintree will be a 100,000 sq ft, state-of-the-art facility that will be capable of doing the manufacturing for all the products that were previously done in South Boston.
A 100,000 sq ft, how does that compare to the existing facility?
It's about three times from a capacity perspective.
Oh, wow! Okay. Are you going to produce other products at Braintree, as well, or strictly SurgiMend and PriMatrix?
So, we will produce all the products that were made in the South Boston facility, so primarily SurgiMend and PriMatrix, but there were a few other smaller products that were being-
Okay
Made out of there, too.
That's, that's still the bulk of the manufacturing there.
Yeah. Yeah.
On SurgiMend, you've received your PMA approval notification from the FDA on the clinical submission for the PMA application for SurgiMend. I think you've said that the PMA is approvable subject to an FDA inspection. What are the next steps here?
Yeah. So let me take a moment to clarify, because I do get this question a lot. The FDA inspection requirement is specific to the PMA product. It does not relate to our 510(k) products. So as we operationalize the site, bring our 510(k) products back, we don't need an inspection-
Right
-to resume commercial distribution. As it relates to the PMA, to your point, we got a PMA approvable on SurgiMend. It is dependent on an FDA inspection that will determine whether or not our manufacturing facilities, methods, controls are in keeping with the quality regulatory system. In short, it means that we've completed or satisfied all of the clinical requirements for the submission. We have open items as it relates to the manufacturing requirements for the submission, and once we are in a position to demonstrate that we've met all of those outstanding items, that's when the FDA would come in, do its inspection. We'd then be able to complete our submission for the manufacturing component, and then wait for approval.
But as you—I'm sure you can tell, that would be linked to, timing, timelines around when we're gonna operationalize our Braintree site. So I can't speculate-
Right.
on exactly when that's gonna happen, but obviously there are-
Sometime in 2026 .
Yeah.
Okay. So given the delay that we've seen with Boston and the shift to Braintree now, it's not until 2026 do you still expect to be first to market with a breast reconstruction indication?
Yeah, so all of our current intelligence suggests that as we look across our portfolio of PMA products, so we're pursuing a PMA strategy in SurgiMend as well as DuraSorb, we should have the first and second PMAs for IBBR.
Just frame the market opportunity for us at a high level.
Yeah. So right now, that space is about a $600 million market opportunity. We believe across both products, that we have an opportunity to drive about $200 million in revenue in the kind of 2030 timeline.
Main competitors will be, or who are.
So, right now, from a PMA perspective, we don't have-
Right.
There's nobody on the line of sight. But in terms of main competitors, not currently able to promote in IBBR-
Right.
Allergan has
Allergan.
Yes.
Okay.
The main competitor.
Okay. I want to switch gears to Acclarent. You know, revenues beat our expectations in Q2. Just provide an update on the integration of Acclarent, and how that's progressing.
Yeah. So the integration is progressing really well. We're excited about having the Acclarent team join our Integra family. As you heard in our Q2 call, performance in Q2 exceeded our guide for that quarter. We have since rolled that upside into our full-year guide. And so we had originally called about $80 million for that business for the three quarters. It was as part of Integra. We are now projected to be at $86 million across that business, and we've continued to take a conservative view for the back half on Acclarent, because we are still early on in our integration.
Underlying market demand, like, what are you seeing in the market, like, demand for this product?
Yeah, so demand has been consistent with our expectation. We, you know, when we acquired that business, we projected an ability to grow at high single-digit levels, and so we're seeing evidence of that.
Okay. Can you talk about any, your strategy for any cross-selling opportunities with Acclarent?
Happy to. So when we acquired the business, as you may remember, we didn't associate a significant amount of the deal value to what I'll call revenue synergies, where there was a ton of crossover overlap in our business. But there was one area, our MicroFrance ENT Instruments business, that we thought represented a great cross-selling opportunity. And we are very excited to see the momentum on that business. In Q2, that business grew double- digits as a result of kind of the integration between Acclarent and Integra, and we're excited to see the momentum continue. So we think there's more runway there for MicroFrance.
And then, as it comes... As it relates to the integration, what are some of the key milestones to be on the lookout for?
Yeah. So we have, from an integration standpoint, we have several TSAs, TMAs that are outstanding with, Johnson & Johnson, who we acquired Acclarent from. They range in duration, but go up to about four years. So transition serVikes agreements, transition manufacturing agreements, focus being on, supply chain and operations, right? And so what we'll see is, you know, in the first year, we get off of, our integration with, systems, and then over time, eventually manufacturing supply chain are the last to get off of the TMAs. So these teams are working really well together. We're making good progress. We're what? Not quite six months in-
Right.
at this point, but yeah, those are the-
Okay.
Next in items.
Okay, and how many TSAs and TMAs do you have in place?
We have several. I don't know the precise number.
Right. And the plan is try to transition as quickly as possible, which would obviously-
Absolutely
... impact margins and gross margins specifically?
Absolutely. So as we have an opportunity to accelerate getting off of TSAs, TMAs, we will do that. I think our priority at this point, though, is to make sure that it's a smooth transition. So where we need to, we'll leverage the duration of those agreements.
Okay. You know, just on the P&L, I think the last update we got from you was that you expect gross margins to decline about 150 basis points in 2024. Walk us through the rationale, any puts and takes, of the margin deceleration.
Yeah
... in 2024.
Yeah. So through the first half of 2024 , we had projected that on an annual basis our gross margins, 24 versus 23, would be down about 70 basis points, and that at the time was due to what we were seeing in terms of product mix, some geographic mix. We had some supply challenges that were evident then that contributed to lower utilization and higher scrap. During the course of the Q2 call, as we shared our compliance master plan and talked about how we would need to increase resources, both internal and external, in order to progress that master plan, and the fact that as we rolled out corrective actions, we had expected that to lower utilization at some of our sites, that that would drive an incremental 80 basis points impact , 24 versus 23.
Mm-hmm.
So those two things combined is how you got to the 150 basis points.
Okay. What are the drivers of gross margin going forward?
Mm-hmm.
And I have a follow-up question, so I'll save that for-
Certainly.
-after you answer this one.
Yeah. So for 2025, so we haven't provided guidance yet, but as you think about kind of some of the headwinds we know we're going to face, the Compliance Master Plan we framed out as a journey, right? This is not gonna be a quick fix.
Mm-hmm.
It's a systemic, holistic approach to addressing what we saw as an opportunity to strengthen our quality and control systems and environment, and that journey would be 18 months. So in 2025, we'll be operating under this plan for a full year versus the half year in 2024. Based on that, we're projecting another 60-80 basis point headwind on margins, as we continue to move forward with that plan.
In 2025?
In 2025 . 2025 versus 2024.
So that was actually my next question.
Oh, sorry.
I didn't want to ask you about 2025 because I knew you weren't gonna give guidance, but that, that's helpful.
Yeah.
And then what about going forward, like after that? I mean, you know, once you anniversary this plan, you sort of put that behind you, what are the drivers for gross margin improvement after that?
Yeah. So, as you can imagine, as you think about the nature of where we're incurring the incremental spend for the Compliance Master Plan, again, it's internal, external resources. Some of it's lower utilization, as we implement corrective actions. Some of the higher resources will stay, but some will go away, right, as we move forward and have strengthened our overall control environment. So, that'll be, you know, that should result in margins improving versus where they'll be in 2025. I can't get more specific than that.
Right.
We'll do that as part of our next long-range plan update.
Right. So 2024 steps down from 2023, another step down in 2025-
And then-
Potential for improvement in 2026.
Yeah. And then, oh, and I think the other important point to that end is you come through 2025, we've implemented the Compliance Master Plan, and we're in a better overall supply positions, right?
Mm-hmm.
So now I'm supplying more consistently, which should contribute to higher revenue growth. And because the nature of some of the products that I've had disruptions on were higher than normal company averages, you should also expect a margin benefit or tailwind as a result of that too.
Got it. So I know you said you're not giving 2025 guidance, but I think you've sort of given high-level color of mid-single-digit revenue growth in 2025 and flat to modest EPS growth over 2024. How do you think about the color that you laid out so far for 2025?
Yeah. So as we look at 2025, the reason why we framed it as mid-single-digit growth is it allows us to reflect not only the strong demand we continue to see across our portfolio, but it allows us also to provide for the potential for supply disruption as we progress the compliance master plan. You would expect that as a result of getting through some of these supply disruptions, that we would, you know, realize upside in that in 2025.
Mm.
What we're saying is, yes, that's there, but because we're still advancing our Compliance Master Plan, assume that there's some disruption, there's an offset, such that you're landing at mid-single-digit growth.
Right.
The benchmark that we're using for that supply disruption is not based on any known or specific events. It really is just benchmarking the experience that we incurred in 2024 and 2023. So that's how you can think about it through a revenue lens. In addition to that, we're gonna have a full year of CereLink, so that's kind of reflected or contemplated in the color that we provided in 2025. We'll have the incremental investments that I just talked about for the Compliance Master Plan, which will be the headwind we discussed-
Mm-hmm.
-on margins. And all those things combined is what yields flat to modest EPS growth in 2025.
Yeah, 'cause one of the questions I get a lot is:
Yeah.
Hey, why, you know, can you not grow above mid-single digits in 2025, given the easier comp in 2024?
Right. And so that, that goes exactly to the point I just made, which is, yes, you would expect that.
Right.
But we are allowing for the potential for additional supply disruptions, which will neutralize that and leave us at mid-single-digit growth based on the color I provided. Now, where we land in that range really will be a function of what we experience as we advance the Compliance Master Plan-
Mm-hmm.
-and any potential disruption that, we may or may not realize. It's just too early to say.
Right. Same guidance. I guess you'll give guidance in Q4.
Correct.
And any other potential headwinds and tailwinds that you would call out besides what you've already pointed out?
Yeah, so the color we've provided, if you think about it, has been focused specifically on what's happening-
Yeah
Inside of Integra. We have not contemplated yet any macroeconomic dynamics that could impact our performance. So interest rates, FX, currency, geopolitical dynamics that are currently playing out, the outcome of the U.S. elections. None of that is really factored into the color that we provided, and that is something we will do in the normal course when we're ready to provide guidance to our discussion. We haven't provided guidance yet, and that we would do that in our normal course, and that typically is when we do our Q4 call.
Got it. And just on that topic, you know, I think just given the potential recession, weakening demand, have you guys seen any impact to your business segments or your end markets at all?
So far, no. We continue, like I mentioned earlier, we continue to see fairly strong demand across our portfolio. So within, you know, outside of the supply, so it's pure demand, within tissue tech, CSF, both in the U.S. and in the international areas outside the U.S., we continue to see strong demand across our portfolio.
Got it. Just talk about M&A. Your leverage at the end of Q2 was about 3.8 times. That's above the top end of your 2.5- 3.5 times range that you tend to operate in. Just talk about, you know, your thoughts on M&A or potential future M&A in terms of deal size, parts of the portfolio that are of particular interest, and financial criteria.
Yeah. So at this point, our first priority is bringing our leverage back down into our ideal range of 2.5-3.5. To your point, it did tick up beyond that as a result of the Acclarent acquisition, which was expected, but we had also anticipated being able to bring it back down within range by the end of the year. With the announcement of the shipping holds, what we've communicated is that we no longer believe that'll happen by the end of 2024, and that we wouldn't be back down into our ideal range until sometime 2025, 2026, depending on the progress we make against-
Mm-hmm.
- The Compliance Master Plan. So that really is the first priority at this point.
Okay. And is there a specific range that investors are sort of looking at? I mean, two and a half to three and a half is a pretty broad range. Do people want to see it sort of three-ish or below three?
I guess it depends on which investor we're talking to.
Right.
But for the most part, I think, you know, most of the investors we talk to are comfortable within that range. Some would like to see it below three. You know, their view is kind of three is the new three, five-
Yeah, yeah.
In the current interest rate environment. I think some of the things we've been able to do with our interest rate swaps, fixing our debt, gives us a little bit more latitude, but yeah. Yeah.
Okay, so obviously the focus is on bringing down the leverage ratio.
Yeah.
But just talk about broadly what you're seeing in terms of M&A-
Yeah
sort of interest in market valuations.
Yeah, absolutely. So when we're ready to do M&A, I think our strategy will be as it was previously, right? We're looking for opportunities that allow us to advance kind of our strategic priorities in terms of getting us into broadening our care pathways, things that allow us to expand in you know internationally things that will drive accretive growth. You know, but obviously, financially, we're looking at deals from a value perspective that generate double-digit ROIC within five years. Things that allow us to advance other pathways that we said are a priority, like our digital technology pathway.
So those will continue to be the focus areas, I think, and I guess one other thing I'd add to that is as we look across our, you know, with the acquisition of Acclarent and, you know, from a tuck-in perspective, things that will allow us to expand-
Mm-hmm
In that space is also a priority for us. So those will continue to be kind of how we view M&A in our game board.
Just to follow up on your digital strategy, you know, at your last Investor Day, you had talked a fair bit about that, but we haven't heard a whole lot. I mean, I know you've been busy.
Yes, we've been busy.
Kind of just help us understand your digital sort of focus, your digital strategy, and how you monetize that.
Yeah. So to your point right now, the priorities have absolutely been against kind of what we're doing operationally, strengthening quality systems, and addressing the supply challenges that are in front of us. From a digital perspective, in terms of what we're planning for, it's very consistent with what we've talked about in our last Investor Day. So as we look across, both neurosurgery and wounds, you know, how do we find digital technologies that allow us to broaden the care pathway in terms of getting more engaged up front in diagnosis via digital, to monitor wound treatment, healing, compliance on the back end? Those continue to be the areas that we are pursuing, but right now, just not as much of a priority.
Got it. Just given the, you know, multitude of issues you faced so far in twenty twenty-four, the Boston facility shutdown, the shipping holds, Integra Skin not being at full capacity, do we get an update to your LRP at some point?
So we are not going to be providing an update to our LRP in 2024. Our current plan is actually to wait for the CEO's successor to come on board, have sufficient time to get up to speed, and at some point after that, we'd come forward with an updated thinking on our LRP plan.
Okay. And is that a 2025 event or too early to say?
... Too early to say. Too early. Yeah, I would anticipate at some point in 2025 , but yeah.
Okay.
I can't be more specific.
Got it. Then just, you know, good follow-up question. What's the latest on the CEO search? What have you said? You know, it's - we're in September now, so it's getting pretty close to the end of the year.
It is. So the board is actively managing the CEO search. As you may have heard on our Q2 call, Stuart did share an update that mentioned that the board believes that they'll have a CEO by year-end. So that continues to be our status.
So stay tuned.
Stay tuned.
Can you share anything about the criteria for the candidate, or, you know, is it internal, external, both?
So it's an external search. Absolutely. And I don't have a ton of insight in terms of the criteria being used. But clearly somebody who's been an operator, who's going to take the priorities that we've already talked about in terms of operational quality, system control, environment, and be able to drive that forward is chief among them.
Okay, got it. You have a convert maturing in August of 2025 . I know it's still about a year out, but any thoughts on how you plan to satisfy that commitment?
Yeah, certainly. So yes, we do have a convert maturing next year. At this point, given our stock price, given the current interest rate environment, our plan is to be able to manage that maturity through our revolver, and our revolver is big enough to be able to accommodate that. At the same time, we have an interest rate swap portfolio that will allow us to fix about $900 million of our debt, which means our all-in interest rate will continue to be kind of in the low 3% range through 2027. And that's important because that buys us time-
Right
where we can continue to monitor stock price, before, you know, defining kind of a interim solution for the convert.
Got it. And just maybe lastly from me, just provide an update on how the CereLink relaunch is progressing.
Yeah. So we began the relaunch of CereLink in Q3 of 2023 in our international markets. We completed it with our final relaunch in the U.S. market in February of this year. That business annually, in terms of monitor sales, is about $12 million. We factor into our guide for 2024 with the pro rata portion, and we're executing well against that.
Got it. We've got about a minute left. I just want to turn it over to you if any sort of closing comments and remarks you may have.
Yeah, no, thank you for the opportunity again, Vik. I appreciate it. I think for us, as I mentioned, our first, second, and third priority this year is focusing in on addressing our quality system control gaps, and being able to stabilize supply, and making the necessary investments, both from a technology, and a capacity perspective, to ensure that we can not only supply today, but we can supply the long-term growth to support this business going forward. And I think, I'm hoping what you've heard is there's a, you know, a renewed commitment at a management level, also at a board level. We have invested in talent, leadership, as well as, technology to help drive those improvements. And so, so we look forward to being in a much better place as we move forward.
Got it. Thank you very much, Lea...
Thank you, Vik.