Welcome everyone to another session here today at the Morgan Stanley Healthcare Conference. I'm Drew Ranieri, one of the Medical Technology Analysts here. It's my pleasure to host this session with Integra. Delighted to have CFO Leah Knight with us today. Before we jump into it just a quick disclaimer: if you wanna read them, go to the website or ask your sales rep. Now we'll move on to bigger and exciting, exciting things. Leah, thanks for joining us today. But maybe to take a few steps back. I mean, last year we were discussing kind of the ongoing tissue technology recall and the pathway forward.
And maybe the best place to start today is maybe helping us better understand the quality Compliance Master Plan that you're laying out and some of the newer headlines that have popped up. And maybe just talk to us about maybe how Integra got in this position, and help us with the roadmap to get this behind the company.
Yeah. Will do. Thank you, Drew. I appreciate the opportunity to be here with you today. So in terms of how we got here you know, as we reflected on our Boston and what we learned coming out of our Boston remediation it forced us to reevaluate our quality system across the entirety of our manufacturing and supply network. More specifically, it taught us we needed to be more effective in standardizing our quality systems. And so as we rolled out the Compliance Master Plan, that is our systemic holistic approach to being able to address our quality system and GMP compliance.
As a management team, we are focused at both the management team level as well as the board level, including the creation of a quality committee that is now an official part of the board of directors. We've increased investments from a talent perspective, quality, culture perspective. We're investing in our manufacturing facilities and we're investing to drive quality, to drive supply resilience and to increase capacity so that we're not only fixing supply for today, but we're better positioned to meet the longer term needs of the growth on this business, but we know this is not going to be a quick journey a quick fix. I n fact, be a journey, but we're committed to do the right thing for our customers, for our patients, for our employees as well as our shareholders.
And with the Compliance Master Plan specifically, and it's still fairly early on in that process and getting a resolution here, but is there anything that you can talk to us about today that you're seeing so far in the third quarter that's giving you confidence that timelines, progress is being made? I know you can't share quantitative details, but just maybe help us better understand, appreciate maybe what you're seeing that we may not be able to see on our side.
Yeah, certainly. So we spent time. Again, we announced the Compliance Master Plan as part of our Q2 call. We mentioned that it was likely an 18-month journey, as part of that, and that it would be informed by the work we're doing on an internal audit basis to understand what observations are out there that need to be addressed, but also informed by the observations that we get from our normal external regulatory reviews. We've taken that, as part of that is the temporary shipping holds that we announced on our Q2 call. And the remediation effort for that really is addressing on a product-by-product and by-country basis, meeting the compliance gaps that we talked about, and releasing the products as soon as possible as those compliance gaps are addressed, and we've been doing exactly that.
Mm.
And during the Q2 call, we mentioned that the effort underway to address that part of the Compliance Master Plan would primarily be addressed in Q3, but that it would extend into Q4 to a lesser degree, and as I mentioned, we see that playing out. As you can imagine, there is no greater focus of our teams in this moment than getting our products back into the hands of our customers, and so we'll continue along that path to address the temporary shipping holds, but also we've also brought on consultants to help us continue to build out the scope of the Compliance Master Plan that will extend through the end of this year and into next year.
And I have to imagine that, I mean, this is a broad company effort and is probably taking priority even in your own time. But I mean, you've now been here about fifteen months at..
Yeah
at Integra. I mean, maybe talk to us about maybe how your priorities have evolved with some of these operational challenges, and, like, once resolved, what do you wanna focus on from a CFO perspective looking ahead?
Yeah. So to your point, the first, second, and probably third priority of the organization at this point is focused in on alleviating the immediate supply challenges, but more importantly, instituting a stronger quality control environment so that we can stay ahead and more proactively address risks or issues as they arise, so they don't become a problem in terms of getting products to our customers at the end of the day, but as I imagine a world where, you know, now that's under control, and what can we do? It's about doing the work to get this business back to growth. We operate in very stable, attractive environments, characterized by, you know, areas where surgeon's choice matters. We have long-standing relationships.
We have strong products that are differentiated in their spaces, and we have an ability to grow at mid-single-digit levels, and we've been performing below that level because of the supply challenges. So as CFO, I'm excited about the opportunity to get back to that point where we can demonstrate an ability to drive revenue consistent with our potential.
Got it. So this is a question I often get asked by investors and have for some time. But maybe it would be helpful to kind of hear your thoughts on this. Like, why does CSS and the tissue technology assets together make sense in ultimately achieving kind of long-range plan targets? The targets have really largely been unchanged, like, over the past several analyst days, but there's been some kind of change in the portfolio. But why CSS, why tissue technology together?
Yeah. So Integra has a strong position in five key markets, right? As you look across our business, it's neurosurgery, it's ENT, it's specialty surgical instruments, it's complex wound reconstruction, it's private label. When we talk to the street, when we present our business, we typically present it through the two divisions you mentioned, tissue technologies and CSS, and we do that for financial and reporting reasons. But from a management perspective, the businesses are managed, are highly integrated based from an operating perspective. Underpinning that is our portfolio is based on regenerative medicine. And so we sell regenerative products across those four key markets, and we have plans to introduce regenerative products through our newly acquired ENT portfolio. As an example, within neurosurgery, our sales force sells DuraGen and DuraSeal, right? Regenerative-based technologies.
We sell regenerative products in our surgical instrumentation market, and we have plans to introduce to our newly acquired Acclarent sales force team, access to regenerative products to sell into ENT surgeons for use in procedures like skull based procedures. And finally, even on an international front, as you look at it across our sales force there, they are highly integrated in servicing our four legacy markets. So there's this underpinning around regenerative medicine that makes sense, that drives the entirety of our portfolio across both of those divisions. And then combined, the businesses have generated substantial EBITDA that's given us access to a fair amount of liquidity that well exceeds many of our peer set.
Gotcha. Maybe just a follow-up question there on the regenerative side in ENT. I mean, I don't, maybe I'm misremembering this, but it doesn't feel like that was necessarily communicated as like the investment thesis for the acquisition. It was more just a bolt-on. So is that something new that's kind of been coming out, or how you're thinking about the portfolio or synergy opportunities looking ahead?
Yeah. So to your point, it wasn't characterized as part of why we did the deal today.
Mm-hmm.
But as we look ahead and we say, "Where does this business have the potential to grow? The adjacency that exists between neurosurgery and ENT, could it represent an opportunity?" Right? Especially in procedures where they aren't a big piece of what happens today in terms of skull based procedures, but they're an element that could represent an opportunity for us to leverage that technology. So it is about the potential of where it could go versus the value that we saw in the deal today.
So it sounds like a bit of market development to kind of reach-
Absolutely
... that opportunity, and not necessarily a 2024 type of-
Oh, correct.
Okay.
Correct. Definitely.
Got it. Maybe kind of like last, like a higher level question before we kind of dig into some of the segments. But just, just on China, remind us kind of where you are, or the size of the business today, and maybe what you're seeing, from the landscape in China for anti-corruption or consumer trends?
Yeah.
And what you baked in for 2024.
So across our China business, it's interesting. So when you look at kind of the neurosurgery products that we offer in China, you consider kind of the early stages we're in, in terms of market penetration, and you look at kind of our plans for expansion across that market. It does represent durable growth, despite some of the government restrictions that a lot of businesses have faced in that market. We haven't seen a lot of impact due to the anti-corruption campaign in terms of the impact on our business. China is about 6% of our portfolio from a total Integra revenue base. We've been growing at high single to low digit, double digit levels, you know, independent of some of the supply challenges.
And even when you think about things like VBP, we haven't seen a meaningful impact from volume-based pricing. And as a matter of fact, and part of that is VBP is not as hasn't penetrated neurosurgery as deeply, so we benefit from that, but we also benefit from limited local competition. And then finally, what I would say is we're making investments in that area in terms of our in China, for China manufacturing strategy, that actually helps-...
A, protect access to that market as we move forward, but B, also mitigates the potential for additional VBP actions, so we feel great about China in terms of the growth potential for this business, in terms of what it's done lately, but also where we have an ability to go.
And so the high single digit, low double digit kind of growth that you are seeing out of China, even despite some of the factors that China is seeing, are you still confident that that's, like, a sustainable?
Yeah
growth rate for
Yeah
for the company and the business?
Yeah. And again, it goes back to kind of how penetrated we are versus where-
Right
The market opportunity lives. Yeah.
Okay, great. Let's dig into Codman a little bit, and we'll start with neurosurgery and then go into the ENT business.
Certainly.
But maybe with the supply holds, back orders that we were seeing in neurosurgery, it was hit a little bit, but anything more that you can kind of share there in the progress that you're seeing in third quarter that can kind of give us confidence that the situation is de-risked and I'll shut up and let you answer the question.
Yeah, absolutely. So from Codman, in terms of the back orders, there's probably two dynamics that I wanna speak to. When we left twenty twenty-three, or exited twenty twenty-three, we exited with higher back order levels on the CSS business. And as we entered twenty twenty-four and looked at the nature of what was giving rise to those back order levels, we expected them to abate, certainly as we got into Q3 and through the rest of the year. And it has done just that, right? The challenge became, as part of the Q2 call, when we announced the temporary shipping holds, that was a new issue-
Mm-hmm
... right? That introduced a new level of back order that was even larger. And so that's what's contemplated in the July guide that I provided on the Q2 call. And it's against that, as I mentioned earlier, that we're now seeing progress. So what we talked about was, we expected to release those temporary ship holds over time, throughout Q3, by product, by country. We've been doing just that. And, you know, again, the focus is, it's literally the number one priority for us in the moment. We do understand, though, you know. And we're excited about the fact that our products have proven clinical outcomes. They're trusted.
Mm-hmm.
But we know that we've probably shaken the trust of some of our customers as a result of these supply challenges. But we're doing kind of the work, and the Compliance Master Plan is our promise to restore that trust.
Got you. What's kind of been the competitive response that you're seeing, kind of with the situation and kind of given the data, the relationships that you do have with some of these products? I mean, would you expect to kind of recapture that, that surgeon mind share, that trust, pretty, pretty rapidly when you're back to full production?
Yeah. Yeah, I think-
Or full supply, sorry.
Right, right. I think it's important to remember that as we look across this portfolio, so CSS is about $1 billion, over two-thirds of our business. And, you know, as we characterize the expected supply disruption in Q3 and Q4 from just the temporary ship holds, what we said was it's about a $50 million impact in Q3 and about a $10 million impact in Q4. And as I mentioned, because we're gonna be releasing throughout the quarter, it means that there's a host of products within that subset that are out for a matter of weeks or maybe a month, and then there are some that do extend longer-
Right
Across that, across that period. And so at a customer level, while they clearly are feeling the impact, it's not quite as stark as it may seem when you consider, "Oh my gosh, there's a, you know, a $50 million impact in Q3." So that's, that's part of it. Beyond that, though, clearly, we are, we are leveraging our sales force and the strength of their relationships to stay in front of our customers. They do have a big bag of products that comes. You know, that they can also use to help satisfy any of the existing needs that our customers have, but also provide kind of transparent communications as to when we're gonna be back.
And so we've been leveraging all of those things to make sure we maintain the strength of our relationships, and that our customers are ready and willing to take our products back when we're ready to return them to the market.
Gotcha. This is probably a very silly follow-up question, but kind of on that point of, like, sales force focus, and they do have a large bag, and I'm sure that they're kind of maybe looking at other products that they haven't spent a lot of time on previously, just kind of given the bag. Has there been anything, like, surprising that you are seeing in terms of products that they are selling more forcefully now in the third quarter or fourth quarter, that could actually be more sustainable as you're thinking about twenty twenty-five and beyond?
So I think where we've seen a lot of great traction across... And I'll talk about CSS, and if you'll allow me, I'll also talk about tissue technologies, too-
Sure
because I think there's a good story there. From a CSS perspective, we actually have seen a lot of strong traction in terms of our DuraGen, DuraSeal, parts of the business, in areas around MicroFrance and ENT. We've also seen a lot of strong growth. So to your point, where we have much stronger supply in other parts of the business, we are seeing a lot of traction and pull-through, and that extends even in tissue technologies. While we've had challenges, as you know, I'm sure we'll talk about PriMatrix and SurgiMend, we're seeing great lifts in terms of ACell and DuraSorb. So we absolutely are leveraging the benefit of the very broad, diverse portfolio that we have.
Got it. We'll definitely hit on some of those-
Yeah.
in a few minutes. But maybe just to close out the neurosurgery questions here, maybe on CereLink. Just kind of give us the update there. I mean, the global relaunch occurred in third quarter, at least you're fully up and running now, or second quarter, excuse me. But just how is the launch kind of matching your expectations, or is it exceeding? And any kind of commentary that you can kind of give us on CereLink?
Yeah, for CereLink, we initiated the relaunch in our international markets in Q3 of 2023. Our last market to relaunch was the US, which is in February of 2024. That business, we sized the monitor sales at about $12 million annually. And we had incorporated a pro rata portion in our guide for 2024. And through Q2, we've been performing well against that expectation. In addition to that, we've seen double-digit sales in our sensors-
Mm.
Through Q2 as well. So we're seeing nice, as expected, performance from the monitor sales and really nice growth from the disposable sales across that business.
Got it. On the ENT franchise, it's been roughly a couple quarters since the deal closed.
One and a half.
Roughly.
Yeah.
But, one of the things out of second quarter, I mean, you kept the ENT guidance unchanged despite a 2Q beat. So I mean, is there any cautiousness that you're seeing in the back half or is it more just being conservative with a new asset in your hands?
It's the latter. So, to your point, we acquired Acclarent April one. As of the time that we acquired the guidance that we provided versus how we delivered Q2, we did exceed that expectation by about $5 million. And part of our guidance at the time, and it continues to be, is to provide for the potential for disruption because it's still early days in terms of Integration. And so we'll roll that upside in from a full year basis and taking our full year number up from $80 million to $86 million, just based on what happened in Q2. We still can't have a conservative assumption baked into the second half again until we get through these early days of integration.
In longer term, I think you've emphasized before that you're expecting kind of high single-digit growth out of that business. I mean, just maybe help us with the algorithm of understanding that. You know, obviously, it was in a larger company that you didn't really have any visibility on, at least we didn't have any visibility on kind of the growth. But, I mean, are you holding that high single-digit growth stable? Are you accelerating that? And kind of what commercial R&D investments do you have to kind of put behind that to get there?
Yeah. So we right before we acquired Acclarent, so a few years before we acquired Acclarent, Acclarent was performing at high single-digit growth levels.
Mm-hmm.
And so that is the trajectory we expect to continue. And it was on the heels of some of the newer innovation that had been released in the market. So we see an ability to be able to maintain that performance as we move forward. We've brought on board intact, the commercial organization from Acclarent the R&D organization from Acclarent. And that's what will fuel kind of our ability to maintain at those levels as we move forward. The other thing is from an integration perspective, we are partnering with J&J. We've instituted some transition services agreements and transitional manufacturing agreements to help manage through the integration so that it does happen smoothly. Those agreements vary in length, but they go up to four years, right? So giving kind of further confidence that we'll be able to manage the cutover smoothly.
And so far, the teams are working well together and as I mentioned, we are pleased by what we're seeing from a commercial performance through Q2.
Got it. And you've talked about previously that the ENT business is scaled big product portfolio today. I mean, where else can you go kind of with this greenfield opportunity? I mean, what do you have to add to the bag to make your sales force's life easier?
Yeah. So we typically don't talk about a lot of our M&A kind of strategies but as you look at the game boards that we've had for some time we've looked at ENT opportunities in the past and we've passed them over because they didn't have the scaled commercial sales force. And we knew we would need that commercial arm, which is a sizable investment to be able to execute on those opportunities and drive profitable return. And so those now become options for us. And I can't say more specifically not for competitive reasons but clearly, they become options for us now that we can go back and create some very attractive return.
Got it. And maybe just on revenue synergy side, I know that there wasn't necessarily anything like, contemplated there maybe lightly on the MicroFrance instrumentation side and you were talking earlier about the potential for regenerative products. Also, but is there anything else as you've had the asset now for, I'll say, a few months-
Yeah.
- or a couple quarters that kind of gives you more confidence that there is revenue synergy opportunity whether or not you're ready to quantify that yet or not?
Yeah. So right now, the revenue synergies that we see continue to be central to the MicroFrance opportunity. To your point, when we first did the deal, again, revenue synergies were not a big part of the value proposition. That said, we've been excited to see the momentum on our MicroFrance ENT business. That business through Q2, is growing at double digits. So we think there is more runway there than maybe even we understood at the time we did the deal. But that continues to be for right now, the focus of where our revenue synergy opportunities lie.
Got it. Maybe let's shift over to the tissue technology business. Three topics to hit on like to hit on is SurgiMend, the proposed LCD, but coming at that a little bit differently than maybe some questions that you get asked-
Okay.
- and then Integra Skin. But with SurgiMend, you received the PMA approvable notification, pending the GMP certification. Just maybe kind of remind us on the timing, and the lift of getting SurgiMend approved. And I know you can't market for it for it yet, but any early thoughts on how you'd be thinking about commercializing, or if you need to build, like, a incremental sales force headcount? Anything that you could share would be great there.
Yeah. So let me start by also, because I do, I wanna clarify. I get, I get this question a lot. So what does that PMA approval mean, right?
Mm-hmm.
So the PMA approvable means, subject to an FDA inspection, and that FDA inspection will look to make sure that our manufacturing facilities, methods, controls, comply with our quality regulatory system. In short, it means that we've finished all of our clinical requirements as part of the submission, but we still have outstanding items as it relates to the manufacturing part of our submission. And so part of that, when we're operational in Braintree, the FDA will be able to come in and inspect, make sure we satisfy those outstanding items. We'll complete our submission, and then wait for approval. I can't speculate as to when that inspection will actually happen. So but clearly, it's linked to when we operationalize the site out of Braintree. There's a second part of your question.
There was.
I think I dropped-
It was adding... How are you thinking-
Yes.
about adding, yes, a sales force headcount?
Yeah, and so, the beauty of this is, the same sales force that carried the 510(k) products is the same sales force that will now be able to carry the PMA product. And so from that perspective, we don't need to invest in an incremental kind of commercial capability to drive that execution.
Gotcha. And sorry, if you mentioned this earlier, but Braintree will be up and running first half of 2026?
First half, we said operational first half of 2026, correct.
Okay, so then we should think about inspection at some point after that date, and-
Not providing specific dates, but yes, it's, it's tied to-
Okay
- the operationalization of the site.
Got it. Maybe just on the proposed LCD. I know that there has been some confusion, given your presence in tissue technology and wound care in general. But how are you thinking about the skin substitutes market now with the proposed LCD, and DFU, and VLU? I know it's not necessarily going to impact your business so much, but, I mean, it. This has been an area, outpatient physician office, where Integra really hasn't played. So how are you thinking about this from maybe a strategic standpoint, when kind of the market, the industry there is actually cleaned up and stabilized?
Yeah. So the LCD determination, so to your point, governs skin substitutes specific to diabetic foot ulcers, venous leg ulcers. And we have two products indicated for those wound types, PriMatrix, and Omnigraft. And what's interesting is, prior to the proposed legislation, there was, like, over two hundred and thirty products covered.
Mm-hmm.
Given the proposed LCD, it now takes that 230 down to 15, and we still have 2 on that residual list of 15. So for us, we're excited about the direction that it's taking. To your point, right now, DFUs, VLUs are a very small part of our portfolio, but we believe the proposed reimbursement policies now point to products that have demonstrated rich clinical evidence, along with products that have increased efficacy, and that plays really well to our portfolio, and so while it's not, it's kind of neutral to our business right now, from a long-term growth potential, we think it represents significant opportunity for us.
Gotcha. So you could go about it both inorganically and organically-
Absolutely
as a potential opportunity downstream?
Absolutely.
Okay. With maybe hitting Integra Skin briefly, it sounds like it's still on track to hit normalized run rates in the fourth quarter. I think it was about $200 million in sales for the company.
Less than $200 million.
Less-
Yeah.
Um-
Yeah.
But just kind of what are you seeing in terms of recommercialization efforts here? I mean, is it going to be a bit of a kind of missionary sale to start, or would you expect these clinicians to really just get up to a 100% utilization or ramp very, very kind of quickly, given the past experience?
Yeah. Let me step back a bit because there are a couple, I think, facts or details, nuances that matter. First of all, our equipment for production of Integra Skin is up and running. We have been producing, and we have continued to ship during this whole period, right? So it's not like we've been in any sort of stop ship mode. What's happened as of late is, we'd originally anticipated getting our production levels up to a point where we were meeting our normalized run rates by the end of Q2. That's now... Our current production pacing suggests that we're now pacing towards being able to do that in Q4. And so in short, what it means is, we haven't stopped shipping to our customers, we just haven't met all of their demand.
And so obviously, we have our sales force deployed and working with our customers to help them understand the timelines, when our inventory will be back in a position to help better meet their needs, and you know, be there when they have their procedures. So that work is underway. We do expect as we, like I said, as we get into Q4 and then get into 2025, is when we'd expect to see a return to growth for Integra Skin, because we're able to you know, regain our position in terms of meeting the needs of our customers.
Got it. Let's maybe shift to another topic here. As we do look at next year, well, I mean, after the second quarter kind of commentary, you gave some framework for thinking about next year, and I think consensus landed around $1.7 billion in sales, $2.50 in EPS. So that would be about 6% top line growth, and 2% on EPS. I mean, is that still a fair way to think about next year? And maybe to take a step back, just, like, help us understand kind of the main puts and takes that we should be thinking about for 2025, and your kind of confidence that given some of the headwinds, like, you do see the opportunity for mid-single digit growth for next year.
Yeah. So on our Q2 call, I did not provide guidance for 2025. I did provide color, to your point, and I-
That's the framework.
You did use the framework. You say framework. And I'm not gonna comment to consensus specifically, but I do. I'll provide additional explanation on the color I provided. So we think it's appropriate to expect 2025 to grow at mid-single digit growth off of where we now expect to exit 2024.
Mm-hmm.
And we believe that's appropriate given the strong demand that we continue to see on our portfolio, but it also allows for the potential for supply disruption as we continue to make progress against our Compliance Master Plan. And that supply disruption is actually benchmarked off of what we've actually experienced in 2023 and 2024. So we don't have any known, explicit examples of where we're gonna incur the supply disruption. It really is just an allowance, recognizing the fact that as we move forward with the compliance plan, we won't necessarily know what we're gonna find until we get there.
And so, you know, as you think about it, what's different about the approach we're taking around this quarter for twenty twenty-five is, you know, the nature of the supply issues in twenty twenty-four were more temporary in nature, so you would expect them to come back in twenty twenty-five. It should be a tailwind to twenty twenty-five, but because we're allowing for the potential of disruption, we're taking that back down and saying, "It's just gonna be how we exit twenty twenty-four at mid-single-digit growth," cause that's what we've been able to demonstrate.
So it is embedding some potential theoretical disruptions?
Absolutely. And then-
But if they don't come through, then we could expect.
So where we're gonna land, that balance of where we're gonna land will be a function of, you know, the demand that we see on the portfolio, along with the level of disruption we experience. 2025 also takes into consideration a full year of Acclarent.
Mm-hmm.
And obviously from a margins perspective, we will have downward pressure on our adjusted margins because of the investments we're gonna make in the Compliance Master Plan. And when you step back and look at all of that, we're, you know, I think it's reasonable to... You know, what we're thinking at this point is that EPS would be flat to modest-
Okay.
to reflect those investments.
Got it, and we have about a minute or two left.
Yeah.
But just in closing, I mean, there's a lot going on at Integra. I mean, there's puts and takes, there's positives and negatives here. But, I mean, what's something that you feel like is not being fully appreciated or being underappreciated by investors or something surprising that you're not getting asked about?
Yeah. The operational challenges that we've seen to date shouldn't define the potential for this business. Our markets offer stable and attractive growth rates. We operate in niche spaces driven by population growth, driven by disease state prevalence, as well as innovation. As you look across both of our divisions, they're characterized by strong brand recognition, spaces where surgeon choice matters, and we have those really strong relationships with our customers. We have product differentiation in these spaces. You know, we support procedures in the hospital setting that are profitable, and it allows us an ability to take price. We also...
I mean, as you look across and compare to other med tech companies, there's not as many med tech companies out there that have an ability to grow at mid-single digits, while also offering inorganic and international expansion growth opportunities. We have a strong balance sheet. As I look at this year, in particular, in terms of what we've had to withstand operationally, it's evidence of the strength of our balance sheet, and we have access to liquidity that is above our peer set. So our challenges to date are a supply challenge. They are not a demand challenge. And you know, there is commitment throughout the organization, from the management team through the board, to do what's necessary make the necessary investments to ensure we're securing our supply position and delivering more consistent results for our future.
Got it. Well, sadly, have to end there, but Leah, thanks so much for the time today.
Thank you, Drew.
Really appreciate you making it. Thanks so much.
Thanks.