Good day, and welcome to the Integra LifeSciences Third Quarter 2021 Financial Results Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mike Beaulieu, Director of Investor Relations. Please go ahead, sir.
Thank you, Cecilia. Good morning, and thank you for joining Integra LifeSciences third quarter 2021 earnings conference call. Joining me on the call are Peter Arduini, President and Chief Executive Officer, Glenn Coleman, Chief Operating Officer, and Carrie Anderson, Chief Financial Officer. Earlier today, we issued a press release announcing our third quarter 2021 financial results. Along with the release, a corresponding earnings presentation, which we'll reference during the call, is available at integralife.com under Investors, Events and Presentations, with the file name Third Quarter 2021 Earnings Call Presentation. Before we begin, I'd like to remind you that the statements made during this call may be considered forward-looking. Factors that could cause actual results to differ materially are discussed in the company's Exchange Act reports filed with the SEC and in the release.
Also, in our prepared remarks, we will make reference to both reported and organic revenue growth. Organic revenue growth excludes the effects of foreign currency, acquisitions including ACell, divestitures including the sale of our extremity orthopedics business, as well as discontinued products. Unless otherwise stated, all disaggregated and franchise-level revenue growth rates are based on organic performance. Lastly, our comments today will include certain non-GAAP financial measures. Reconciliation of any non-GAAP financial measures can be found in today's press release, which is an exhibit to Integra's current report on Form 8-K filed today with the SEC. With that, I'll turn the call over to Pete.
Thank you, Mike, and good morning, everyone. If you'll please turn to slide five, I'd like to make a few brief remarks regarding the CEO transition. Last Thursday, we issued a press release announcing that after a comprehensive search of candidates, our board has appointed Jan De Witte as its next President and Chief Executive Officer. Jan brings significant leadership experience and capabilities, including digital innovation and new product development, commercial acceleration and international market expertise and operational excellence, as well as a global mindset. As I noted on the second quarter earnings call, Integra has an outstanding leadership team capable of executing our strategic plan with a robust pipeline of innovative new products to drive global growth and market expansion for years to come.
I have every confidence that Jan will build on Integra's strong foundation to drive the next phase of our profitable growth strategy, and I'll work closely with him over the coming months to ensure a seamless transition. Jan will be joining us prior to the end of the year as we work through the logistics of moving him and his family to the United States fro m Belgium . I'd also like to extend my sincere thanks to Stuart Essig and the board of directors, Integra's exceptional management team and the more than 3,700 employees around the world. It's been an amazing 11 years at Integra, and I remain a huge supporter and look forward to Jan's many contributions as Integra's next CEO. Now, I'd like to turn the call over to Glenn to discuss our accomplishments and performance in the third quarter. Glenn?
Thanks, Pete, and good morning. Please turn to slide seven. Our third quarter operating performance was strong despite a challenging environment. I'll highlight a few of the factors that drove our results and provide an update on several of the key catalysts that position the company to achieve its near and longer-term financial targets. Third quarter sales were $387 million, near the high end of the guidance we provided in July. Adjusted earnings per share were $0.86 compared to $0.80 in the prior year and was $0.13 above the midpoint of the guidance. We're pleased with our continued sales recovery across geographies and product lines during the quarter, despite the impact of the Delta variant and hospital staffing shortages that resulted in procedural deferrals in parts of the U.S., Europe, and Australia.
Sales performance in July was strong, continuing the recovery trend seen in the second quarter, with the most pronounced COVID impact in August, followed by a gradual improvement towards the end of September. We experienced a strong recovery during the quarter in our indirect markets and benefited from pent-up demand in our instruments business. Despite the variability in deferral and procedures, third quarter organic revenue growth was 6.7%, demonstrating the benefits of our diverse portfolio with products and market-leading positions. In the third quarter, we achieved positive organic growth in each of our businesses, including neurosurgery, instruments, wound reconstruction and private label when compared to both 2020 and 2019. Geographically, sales in the U.S. increased mid-single digits and sales outside the U.S. increased approximately 10% compared to 2020, with strong growth in Japan and China.
We believe there is significant opportunity in these markets as we continue to introduce new products and expand our commercial presence. Moving to new product updates. We launched CereLink in the U.S. and Europe in the third quarter. As a reminder, CereLink raises the bar in ICP monitoring through enhanced accuracy, usability and advanced data presentation. Our third quarter sales of CereLink benefited by $5 million in initial orders, part of the reason we landed near the high end of our July guidance range. The U.S. and Europe make up approximately half of the global market for neurocritical care monitors and will drive growth for CereLink over the next several years. During the third quarter, we began a phased market release of the Aurora SurgiScope to a select group of key opinion leaders for clinical evaluation.
As a reminder, Aurora is a novel and proprietary minimally invasive surgical solution with integrated visualization and capabilities designed specifically for use in neurosurgery. These key opinion leaders have begun to perform cases using the Aurora Surgiscope to remove different types of brain lesions. Initial feedback has been encouraging and reinforces our excitement about the value of this product offering. We plan to expand our clinical evaluations to a wider group of KOLs during the fourth quarter. Also during the third quarter, we continued to expand our MIRA registry, which is designed to collect data on the use of Aurora for early surgical intervention in the treatment of intracerebral hemorrhage or ICH. We look forward to updating you on that progress over the coming months.
Turning to ACell, we were encouraged to see sequential improvement in the sales of MicroMatrix, the powder formulation of our UBM technology, and growth in accounts where we have strong existing relationships with providers who already use Integra's portfolio of products. Despite these improvements, the ACell business was slightly below our expectations in the quarter, but we've put in place a plan to drive better performance moving forward. This includes adding sales resources to select territories and expanding our training and surgeon education programs. I'll wrap up my discussion of growth catalysts with our takeaways following the recent FDA Advisory Committee meeting for our SurgiMend PMA in post-mastectomy breast reconstruction. This panel meeting was held on October 20th, and was an important review of the clinical section of our PMA, one step in the broader FDA product review and approval process.
To provide some context, Integra worked with the FDA to design a statistical analysis plan for MROC, the Mastectomy Reconstruction Outcomes Consortium, which was a large multi-center study that examined outcomes for thousands of breast reconstruction patients. This analysis demonstrated that results with SurgiMend PRS and post-mastectomy implant-based breast reconstruction are superior to the results in such procedures when no acellular dermal matrix is used. Nevertheless, we've always recognized that there are limitations in the MROC study data, and this was reflected in divided voting results from the panel regarding safety, efficacy, and whether the benefits outweigh the risks. We appreciate the FDA panel members' insights and discussion regarding our PMA. We continue to believe there is an urgent clinical need for an FDA-approved acellular dermal matrix to help restore quality of life for women following breast reconstruction. As of today, there are no FDA-approved products on the market.
We look forward to working with the FDA in the coming months as the agency completes its review of our PMA submission, and we believe the real-world clinical evidence supports approval. In summary, our third quarter organic growth was strong, and we're on track with our growth initiatives, which will keep us on the path towards achieving our long-term targets. Finally, I'd like to thank Pete for his 11 years of leadership at Integra and the incredibly positive difference he has made for me, the thousands of employees here at the company, as well as our customers and patients around the world. Pete, you will certainly be missed, and we wish you well at GE HealthCare. Now, I'll turn the call over to Carrie to provide a detailed review of our third quarter financial performance. Carrie?
Thanks, Glenn, and good morning, everyone. I'd like to start with a summary of our third quarter highlights on slide nine. Third quarter total revenues were $387 million, representing an increase of 4.5% on a reported basis and 6.7% on an organic basis compared to the prior year. With our strong performance in the third quarter and our outlook for the remainder of the year, we expect our organic growth in the second half of 2021 to be approximately 5% over 2019. Adjusted gross margin in the third quarter was 68.3%, down slightly compared to the prior year, but in line with expectations and up slightly when compared to the first half of 2021.
As we discussed on our July earnings call, we continue to monitor material inflationary pressures closely, and impacts in the third quarter were largely related to increased freight and packaging costs and some supply chain disruption. We have supply contracts that help to mitigate near-term exposure to these issues, and we have an opportunity to recoup a portion of increased costs through pricing adjustments as we move into 2022. Our Q3 adjusted EBITDA margin was 27% compared to 27.9% in the prior year, as the benefit from higher revenue was offset by higher operating costs as our expenses continued to normalize. As we discussed last quarter, operating expenses are gradually increasing following the reduced levels of spending we put into place last year in response to the global pandemic.
We continued to prioritize our spend in the second half, investing in new product growth strategies, further geographic expansion, and clinical studies. Given our year-to-date spending and outlook for Q4, we now expect full-year adjusted EBITDA margins to be above 25%, which was the high end of the range we provided in July. Adjusted earnings per share for the third quarter was $0.86 compared to $0.80 a year ago. The growth in adjusted EPS was largely driven by increased operating leverage on higher revenues and includes a small benefit from a lower tax rate in the quarter. I'll provide an update on our full year adjusted EPS in a moment. Finally, third quarter operating cash flow was $83 million, representing an increase of 19% from the prior year. If you turn to slide 10, I'll review the third quarter performance of our CSS segment.
Q3 revenues in CSS were $257 million, an increase of 7% on a reported basis and 8% on an organic basis from the prior year. Global neurosurgery sales increased 6%, while instrument sales increased over 15% on an organic basis compared to 2020. Geographically, sales in both the U.S. and outside the U.S. increased approximately 8% compared to the prior year. The recovery in global neurosurgery sales was generally broad-based, and sales and instruments benefited from pent-up demand. As Glenn discussed, the launch of CereLink in the third quarter resulted in $5 million benefit from early adopters. With this order backlog largely met, we expect a more modest benefit from CereLink in the fourth quarter and remain excited about the multiyear growth trajectory.
Excluding CereLink, sales of capital grew low double digits compared to 2020, but sales are not yet back at 2019 levels. Sales trends of capital are encouraging, and we expect further improvement in the fourth quarter and a return to normalization in 2022, given our very strong order funnel. International sales in CSS increased across all major regions compared to the prior year. The comparison to 2019 is more mixed, with variability across Europe and growth in Asia Pac. As Glenn discussed earlier, growth in Japan and China were standouts in the quarter, with both countries delivering low double-digit growth compared to 2019. Moving to our Tissue Technologies segment on slide 11. Q3 sales in Tissue Technologies were $130 million, approximately flat on a reported basis and increased 3.7% on an organic basis from the prior year.
Sales in wound reconstruction increased 1.7% on an organic basis compared to 2020, led by Integra Skin and SurgiMend in our burn, trauma, and surgical reconstruction markets. Compared to 2019, sales in wound reconstruction increased 1.5%, driven by strong growth in Integra Skin, partially offset by declines in our plastic and reconstructive surgery franchise, which, as a reminder, grew double digits in Q3 of 2019. Sales in private label increased 9% compared to 2020, driven by continued recovery in customer orders, and increased 26% compared to 2019, driven by a favorable comparison related to order timing. If you turn to slide 12, I'll provide a brief update on our balance sheet, capital structure, and cash flow. Operating cash flow in the quarter was $83 million, and free cash flow was $75 million.
Adjusted free cash flow conversion was 103% in the third quarter, reflecting higher earnings and a more gradual recovery in capital spending, driven by extended timelines on key manufacturing and construction projects. On a trailing twelve-month basis, both our operating cash flow of $323 million and our free cash flow of $294 million were record highs. Net debt at the end of the quarter was $1.1 billion, and our consolidated total leverage ratio was 2.3 x. As of September 30th, the company had total liquidity of approximately $1.75 billion, including $470 million in cash and the remainder available under the revolving credit facility.
Turning to slide 13, I'll provide an update to our consolidated revenue and adjusted earnings per share guidance for the full year 2021 and fourth quarter. We are reaffirming our previous full year 2021 revenue guidance of $1.54 billion-$1.55 billion with an expectation to be at the low end of the range, representing reported growth of approximately 12% and organic growth of approximately 13% compared to the full year 2020. Embedded in this guidance is an expectation for a sequential quarterly improvement in sales from ACell, resulting in slightly more than $65 million in revenue for the partial year of ownership.
We are pleased to report that even at the low end of our full year 2021 revenue guidance range, organic growth for the second half of the year is expected to be approximately 7% compared to 2020 and 5% compared to 2019. Based on our expectation for the full year, we are targeting fourth quarter revenue of $403 million, which takes into account the risk of ongoing effects of the pandemic and changes in foreign currency. This target corresponds to reported growth of approximately 3.5% and organic growth of approximately 6.5% compared to 2020. Turning to adjusted earnings guidance for 2021, we expect fourth quarter adjusted EPS to be in the range of $0.82-$0.86.
For the full year, we are increasing adjusted EPS to a new range of $3.16-$3.20, representing 30% growth at the midpoint compared to 2020 and 16% compared to 2019. Our full year tax rate is now expected at 18.25%. Now I'd like to turn the call back over to Pete for some closing remarks. Pete?
Thanks, Carrie. If you all turn to slide 14, I'd like to wrap up our prepared remarks with a few key messages. We're pleased with our performance in the third quarter, despite the lingering effects of COVID, and as growth in many of our businesses exceeded 2019 pre-pandemic levels. We expect these positive revenue trends to continue through the fourth quarter and into 2022, and remain confident in achieving our long-term growth targets. We're focused on executing our strategies, which is about leveraging our optimized portfolio, exiting orthopedics, penetrating deeper into our existing markets and expanding into higher growth geographies and market adjacencies. The global launch of CereLink, our investments in the development of the Aurora Surgiscope, NeuraGen 3D, and the pursuit of a PMA for SurgiMend and breast reconstruction are just a few of the examples of our progress in 2021.
In closing, on my last earnings call here at Integra, I'm incredibly humbled by what we've accomplished over the last decade and the positive impact we've had on patients' lives, and that's really what matters, doing well by doing good. The company is in a position of strength with an outstanding leadership team and a deep pipeline of new products. With the appointment of Jan, who is a proven global business executive with deep experience in healthcare and technology, I have no doubt that the company will continue to excel for many years to come. That concludes our prepared remarks. Thank you for listening. Operator, if you would now open up our lines for questions.
Thank you. If you wish to ask a question today, please press star one on your telephone keypad. Please ensure the mute function on your telephone is switched off to allow your signal to reach our equipment. Again, please press star one to ask a question. We will now take our first question from Matt Miksic from Credit Suisse. Please go ahead.
Hey, Matt.
Great. Thanks so much. Good morning. Congrats on the quarter. Congrats, Pete, on the new position. It's been a pleasure working with you, and looking forward to keeping in touch.
Thanks, Matt.
You bet. A couple of things, I guess. I wanted to highlight, you know, heading into the quarter, I think for everyone, the expectation was for, you know, tough trends, particularly in the U.S. I think what is surprising folks to the upside here a little bit in your results is sort of the, you know, the performance in the U.S., despite, I think what everybody understands is the reliance of the business to a large degree on availability of ICUs, and then the outperformance OUS. Love to get your additional color on those areas that sort of, you know, you held in there and outperformed, as I just mentioned. Then I have one follow-up on Q4, if I could.
Yeah, Matt, I'll take a stab at that, and then if Glenn wants to add color. I would say, you know, as we went through the quarter, as Glenn made in his prepared remarks, the COVID impact that we saw certainly peaked in August, and we saw some nice recovery. I think as we think about the path that gave us the final result of $387 million, we certainly benefited from a late-quarter launch of CereLink, about $5 million worth of benefit coming from CereLink in the quarter that was towards the end of the quarter. I would say the pent-up demand that we talked about with instruments certainly helped us achieve near the high end of our guidance range.
There was still a COVID impact in the quarter. As I think about procedural deferrals, plastics and reconstruction, and surgical reconstruction did see some procedural deferrals. Even in some of our neural procedures had some deferrals. Overall, I think there was enough diversity in our portfolio that pushed us there. Then capital, as I mentioned earlier, certainly benefited from CereLink. Even when you exclude capital, we even saw double-digit growth compared to 2020. When compared to 2019, still not at those same levels. We still have some full normalization of capital to go that will help us as we move into Q4 and into 2022. With that, Glenn, anything else that you would want to add?
Just in terms of the international business, you know, obviously, we saw some of the COVID impacts in Europe and in Australia, New Zealand. But even with that, you know, we put up a really strong quarter outside the U.S., double-digit organic growth for the international team. That was outstanding. A lot of that coming from Japan and China. I mentioned both of those markets doing exceptionally well. Even Europe put up mid-single digit growth organically versus 2020, despite some of the challenges. We did see a bit of a bounce back with our indirect markets as well. On the whole, the international performance was quite good and could have been better had we not seen some of the COVID headwinds. Pete, anything you wanna add to that?
Just to reinforce what you guys said, I think this is the beauty of the Integra model, a diversified midcap. I think you saw some of the benefits of it this quarter, as Carrie mentioned, and the fact that life-sustaining, life-supporting products such as neurosurgery get prioritized to the top of the heap even when ICUs are under pressure. I think we benefited from that as well.
That's great. If I could just on Q4, you know, it you know, you've raised on the bottom line for the beat mostly and, you know, I think the street was looking for maybe a little shallower Q3 and a little, you know, steeper increase into Q4, and you've sort of leveled that. I'm just wondering, you know, what kinds of things are you contemplating in your Q4 guide, given that, you know, there's still some concerns over hospital staffing and some other issues, I guess, what goes into that assumption, for organic growth in Q4?
Well, Matt, I think you said it exactly in terms of what we're thinking about. As we digest our Q3 results, certainly there was some impact of COVID in there, and that uncertainty still exists in the fourth quarter. A bit of caution as we move into the fourth quarter. Like what we're seeing in terms of October, it came in as expected. First month of a quarter typically is the lowest of the three months. October came in as expected. I would say just wanting to reflect the fact and more of a cautious view of continued COVID uncertainty with flu season. Staffing challenges are still there, still persisting and likely will persist even into 2022.
Just supply chain disruption, certainly, you know, managing through expedited freight and getting product where it needs to be. All those things factor in, and a little bit of FX headwinds as we think about where the dollar has strengthened against some of those European currencies, reflecting some FX headwinds there as well. All those things kind of mix into the lower end of our guidance range.
Matt, I would just add to that. You know, we feel quite good about how the second half of the year has played out. I mean, if you think about the organic growth versus 2020 in the third quarter, 6.7%, that's a good number. We expect Q4, based upon our guidance, to be above 6%. We're exiting the back half of the year above 6% organic growth. I just wanted to highlight that as well.
Terrific. Thank you.
Yeah, thanks.
We will now take our next question from Steven Lichtman from Oppenheimer. Please go ahead.
Thank you. Hi, guys. Best of luck, Pete. Just a couple questions for me. First, on CereLink outlook. You know, certainly understand your comments about the Q3, Q4 dynamics here, but you know, just bigger picture, what are you seeing in the early days of the reintroduction, as you talk to the field, and how are you thinking about CereLink as a driver in 2022, you know, now with it out on the market again?
Yeah, thanks, Steve. I'll take this one. This is Glenn. Again, just why we're excited about CereLink, a few things. One, the new monitor is more accurate than other monitors on the market. It has less drift, it's MR compatible. It's got this waveform on it that enables continuous monitoring and better clinical decisions and better patient outcomes. We're real excited about that along with the flexible microsensor that goes with it. You know, we did see some pent-up demand when we launched here in the third quarter in the U.S. and Europe, so we mentioned $5 million. You know, we'll see obviously, you know, more revenues coming in in the fourth quarter, but not to the extent of the third quarter revenues because of some of those initial orders.
As we go into next year and the next couple of years, this should be a nice growth driver for us in many markets outside the U.S. as well. Longer term, China is a big opportunity for us, but that's still a few years down the road, I'll say. Certainly for 2022, this is gonna be one of the growth drivers for us and even into 2023. We're launched, we're moving forward, and we feel like we've got differentiated capabilities with our monitor versus others on the market.
Great. Thanks, Glenn. Just secondly, you know, obviously, the organic business is offsetting ACell coming in light of your initial expectations. You know, as you look at that business and how it can be a stronger driver ahead, can you talk about what you've identified as potential fixes and what your outlook for for ACell is overall over the next, say, you know, 12 to 18 months?
Sure. Just a couple of things I wanna highlight in terms of the positives around ACell. We still think this is gonna be a great asset and a synergistic fit to our business. If you just look at the third quarter, you know, I called out in my prepared remarks, MicroMatrix, the powder formulation, are actually growing sequentially. That was a good positive sign. We did grow ACell sales in a number of our existing accounts where we already have relationships established, and so that was a big positive. You know, we still have some COVID challenges in terms of getting account access, especially to the newer surgeons, but we have put plans in place to get better performance moving forward.
A big part of those plans is putting in, you know, more resources and getting better coverage, especially around the top 250 accounts across the portfolio. Those plans are underway. We're hiring more people. I think as we get more access in the fourth quarter here, you'll see more product trialing taking place. We'll do more with the value assessment committees. We feel like we're on a good path there. More education. Just to give you some context around this, we completed 13 specific ACell education events alone in the third quarter, and that's obviously gonna have a positive impact as we go forward. We're gonna be adding more resources, getting better account coverage. I think access will open up for us better in the fourth quarter.
This is gonna take us a few months to get to where we wanna be, but certainly, expecting to see an improvement in the business. We're already starting to see some positive signs, which I'm encouraged by.
Great. Thanks, Glenn. Thanks, everyone.
Thank you.
We will now take our next question from Anthony Petrone from Jefferies. Please go ahead.
Thank you, and I want to congratulate you, Peter, as well on the role at GE. Good luck, and we hope to stay in touch going forward. Of course, good luck.
Thanks.
To the Integra team, as the transition is finalized here into the end of the year. Couple of questions just on COVID, and then I'll have a follow-up on SurgiMend. Just on COVID in the quarter on two specific areas related to Delta hospital access and then maybe even an impact to trauma cases. Is there sort of a way to quantify your sort of lowering ACell here, for instance, another $6 million or so versus or $7 million versus the lower end of the range? You know, how much is actually linked to limitations on hospital access? And then just going into Tissue Technologies specifically, did the company see a lower incidence rate of trauma that led to the Q-over-Q downtick? And then I'll have a follow-up on SurgiMend. Thanks.
Yeah, Anthony, I'll take that. If you recall, our original guidance for the third quarter was $382 million-$389 million. I would say that $389 million, which was about sequentially flat from where we ended up in Q2, really represented, you know, very little COVID impact, essentially, you know, a continued recovery from COVID trends. I would say that as where we landed, certainly we saw a COVID impact. It pushed us closer to the mid- to slightly higher than the midpoint, and then we had the CereLink benefit. If you kind of look at that, we probably would have been more closer to the lower end of our guidance, had it not been for the successful launch of CereLink.
All in all, as I go back to my comment and Pete's comment, the diversity of the portfolio really showing through the third quarter and overall producing a really balanced result of $387 million. I would largely say that if the COVID headwinds had not been there, we certainly would have been at the high end of that range for sure. I would quantify that as kind of that's the headwind from COVID. As it relates to the areas that were more impacted, certainly the surgical and reconstruction area of our Tissue Technologies business is probably the area that sees the largest impact. These are breast reconstruction, these are complex hernia repair procedures that can be deferred for a period of time.
As I mentioned in my prepared remarks, against 2019, surgical plastics and surgical reconstruction was still down compared to 2019 levels. I would say within wound reconstruction, that was probably the area that was more COVID impacted within Tissue. Anything else, Glenn, that you wanna add?
No, I think that was well said.
Okay.
Just a quick follow-up on SurgiMend. I know one of the nuances here was the company was not able to see the real-world evidence heading into the AdCom meeting. You know, just wondering if I believe now the company has actually been able to see that real-world evidence. So maybe just a comment on those data and how you think it influenced the outcome of the panel and any early thoughts here on, you know, how the path forward in breast reconstruction may change. Thanks.
Yeah. Thanks, Anthony. I'll start, and then Pete, you know, feel free to add some comments. Let me just give you some context to maybe start off so you have the right frame, framing out of the situation and then go through a little bit of the MROC data and the FDA panel discussion. Just for context purposes, you know, the FDA has stated that all ADMs, including human ADMs, require a PMA, and that was actually reiterated last week at the American Society of Plastic Surgeons. I think that's an important point. And to date, as I mentioned earlier, there are currently no FDA-approved ADMs with a specific indication for breast, and we are the only company to file a PMA for a breast reconstruction indication. I wanna make sure that that context is well understood.
As it relates to the MROC data, the clinical data that's part of our PMA is partially based off of MROC. As I mentioned earlier, it's best-in-class multi-site study that's been done looking at the outcomes from thousands of breast reconstruction procedures. This is high-quality real-world data, and the FDA has stated to us that it can be used to support our PMA. I also indicated that the FDA has worked with us to design a statistical analysis that's based upon this MROC data. The data demonstrates that the results from SurgiMend PRS are superior to the results in such procedures where there's no acellular dermal matrix that's being used.
As I mentioned earlier, we recognize that there are some limitations to the data, and we're working with the FDA to design a post-approval study to supplement the existing safety and effectiveness data. There's a lot of work going on. We're still moving forward with it. You know, the FDA panel itself is a milestone in the process. Obviously, the panel's decision is important, but the FDA is not bound by the committee. Their recommendation is really advisory. We're gonna continue to move forward with the work that's going on here. The vote from this panel obviously doesn't change any current practices that are going on among surgeons. There is still an urgent clinical need for an FDA-approved acellular dermal matrix to help restore the quality of life for women following breast reconstruction.
We're confident that the existing clinical evidence supports approval.
Obviously, we remain focused on the mission to improve outcomes for breast cancer patients. Pete, I don't know if you wanna add anything else.
Just to emphasize three points. Anthony, we have had access with the submission to the MROC data, knowing what it said, and we know that there are certain limitations to it, and have been, you know, open and interacting with the agency on it. There's no surprises here. I think, you know, always expecting coming through a PMA of having some type of data follow-up was part of our plan. And so that doesn't change. I just wanna make that point. I think the other aspect here about this that's really important is the fact that we believe strongly that SurgiMend has unique characteristics no other product has, including human-based cadaveric product. And that is two things. It's unbelievable strength that it has.
As the procedure volume changes to new procedures with wider coverage, we believe it's gonna bear out to be the leading product. Secondly, our process for how we actually cellularize, its acceptance into the body, low rejection rate is second to none. The third is its characteristics on revascularization, which again becomes very, very important if you want this to be actually an integrated part into the body. Those are the three things that we keep as the beacon tied to what Glenn said, which is, you know, fighting for women to have the right to have a product and reconstruction post-mastectomy. It's a really important part of the plan and, you know, the journey's long, but we think we're on the right path here.
Thanks again.
Yes.
Good luck, Pete. Thank you.
Thanks.
We will now take our next question from Sam Brodovsky from Truist. Please go ahead.
Hey, thanks for taking the questions. Just, I wanted to touch on the supply chain issues that you'd talked about, and I know you've highlighted certainly on the freight side some cost issues. At this point, are you seeing anything that's leading to the company not being able to fulfill demand or any restraints there? Is it to that point yet?
Yeah, I'll take that. Certainly as we think about the third quarter impacts that we saw, I would characterize it as some freight, you know, expense increases, you know, that was probably the majority. Some packaging, particularly on the corrugated side of packaging, and then other supply chain disruptions. Our ability to get product in and get it to where we need to be, yes, there has been some challenges. I would say not to a level in the third quarter where it interrupted our sales performance, but something that we want to continue to watch very closely, and we're continuing to manage that very closely. I would say supply chain disruptions are factoring into our thought process as we think about Q4 and even as we move into 2022.
Glenn, anything you wanted to add on that?
No, I just wanna recognize the incredible work that our global operations team and logistics teams have done, as well as procurement. I mean, it's a challenging environment, but we've pushed our way through it and have had some disruption, but it's been very manageable. I wanna recognize our colleagues that are in these areas because it's certainly a challenging environment, but we're managing through it.
Got it. Thanks. That's helpful. Just quickly on the capital market. I mean, you talked about getting back to more normalized levels next year. How should we think about the cadence there? Is it, you know, maybe first half is still below historical levels, and then the second half it's above that? Or is it gonna be more of a uniform sort of steadily improving?
Yeah.
Over 2019? Thanks.
Yeah, Sam, I would say that I would expect continued gradual improvement. In the fourth quarter we are expecting sequential improvement of capital from third quarter to fourth quarter. Fourth quarter normally tends to be higher capital because it's the end of the most fiscal year hospital budget. Hopefully, some of that capital, some of that cash will be let loose into some capital purchases. That's figuring into our thoughts for the fourth quarter. As we move into 2022, I think it'll be a continued gradual recovery back to 2019 levels. I think you're probably thinking about that correctly, that more normalization, but when that will happen, not for certain, but certainly I would expect it to be more gradual.
Yeah, I would just add to that, you know, a big part of our capital business is outside the U.S. I'm very encouraged by what I'm seeing in certain markets like Japan, even in the fourth quarter here, in terms of what the capital funnel looks like, the customers' willingness to move forward. I'm expecting in places like Japan as an example, to see maybe even a faster recovery and hopefully some good news as we exit the year relative to our capital business. You may remember, this part of our business used to be sold through a distributor, and now we're selling through our direct sales force. We have a dedicated channel specifically selling capital, and we're seeing some really good benefits as a result of that change we made about, you know, 12 to 15 months ago, so.
Yeah, I would say that the smaller capital, small to mid-size capital is seeing a faster recovery relative to the larger capital. For us, larger capital is $200,000. It's CUSA. So that's the one that's probably slower to come back, even though we had again, even if you excluded CereLink, which is our new ICP monitor, our capital did see double-digit growth, low double-digit growth in the third quarter. So some nice recovery, even on the larger capital, but certainly smaller and mid-size capital bouncing back even stronger. As Glenn mentioned, a really strong funnel that we have good visibility on. Our view is the competitive landscape has not changed. It's more just an extended selling cycle.
Next question, operator.
We will now take our next question from Robbie Marcus from JP Morgan. Please go ahead.
Oh, great. Thanks for taking the question, and congrats on a good quarter. Pete, I'll add, we'll miss you, and best of luck.
Thanks, Robbie.
Maybe to start off, I was hoping you could spend a minute on ACell. It looks like the guidance is moving down again. Would just love to hear sort of what's going on there, why the step down, and also if you could touch on, just quickly, you know, what's assumed for some of the one-time items in fourth quarter. Is there, you know, any further CereLink purchases in bulk or restocking, or just how do we think about what's assumed in the guidance there?
Robbie, it's Glenn. In terms of ACell, as I mentioned, we are seeing some positives here as we exit the third quarter. It's just gonna take us a little bit more time to make more progress on the ACell business. A big part of that is getting better account coverage that I mentioned earlier and getting better access as COVID hopefully dissipates a bit here as we get towards the end of the year. It's just gonna take us a little bit more time, but you know, we should see a sequential improvement in the ACell business in the fourth quarter. We do expect that we'll see much better results as we go into 2022.
You know, as it relates to kind of, you know, new one-time items in Q4, listen, we're still expecting to see more CereLink purchases in the fourth quarter but not to the same extent as we saw in the third quarter because of the initial orders that we received. That would be one that I would call out. Carrie, I don't know if there's anything else you'd want to call out.
Yeah. I would say, obviously, instruments at 15.5% growth in the third quarter was a bit of a step up, so I wouldn't expect instruments to be as strong in the fourth quarter. As I mentioned earlier, sequentially, capital should be stronger than the third quarter as fourth quarter normally is. I don't think there's much, you know, lumpiness other than just continued gradual recovery. I think our fourth quarter guidance at the low end at $403 basically reflects the fact that we would expect continued gradual improvement in revenue from Q3 to Q4.
Got it. Carrie, on SG&A, you know, that was a big delta, came in a lot lower than what the street was thinking. How do you think about, you know, what percentage of normal you're at on spending? How much was held back? How much, you know, might have been faster ACell synergy capture? Just trying to get a sense, you know, as we all start thinking about next year, how much of that spending has to come back? How much is structurally lower? Thanks.
Yeah. I certainly do agree that there was a benefit of faster ACell synergy capture in our results. Definitely, that is what you're seeing as part of some of that improvement in SG&A. But we are not at normalized levels. I would expect that our SG&A areas will continue to move up sequentially from Q3 to Q4. I'd expect a step up in our quarterly spend, and that will likely continue into 2022. I think as we think about the growth catalyst that Glenn had updated on in his prepared remarks, there was a lot of great things going in our favor as we think about our new product introductions and some of those exciting products like the Aurora Surgiscope.
We wanna make sure that we're supporting those market launches, as well as looking at further NPIs. We have NeuraGen 3D coming into the market early 2022. A lot of really important projects moving forward, clinical studies that we wanna make sure that we're supporting. I do expect that our OpEx will move gradually up from Q3 to Q4 and continue into 2022. I still think we can manage some margin expansion into 2022, but we wanna make sure that we are supporting that top-line revenue growth, because I think it bodes really well as we think about our long-term 5%-7% organic growth.
Great. Thanks a lot.
We will now take our next question from Craig Bijou from Bank of America. Please go ahead.
Good morning, everyone. Thanks for taking the question. I'll add good luck, Pete, on your next endeavor. You know, a couple follow-ups here. Just wanted to ask on the ACell access issues. I don't know if this is for you, Glenn, but you know, really just wanted to understand the access issues. Is it not being able to get to some new physicians and get the products there, or is it a vac issue in the hospital? Just wanted a little bit more color on what those access issues exactly are.
Yeah. The reality of it is, with COVID, where we have existing relationships, we're actually seeing really good progress on those particular territories and those particular accounts. It's really where ACell was selling prior, where we don't have an existing relationship, where we're struggling to build those relationships in a COVID world. Having said that, I think that will start to improve here in the fourth quarter. It's not just a COVID issue. I think we have to add more resources and get better coverage and do more educational events. That's a big part about what we're gonna be doing. You know, probably half of it's an access issue and half of it's a coverage issue. That's the way we think about ACell.
Again, we're expecting to see a sequential improvement in the fourth quarter and better performance going into 2022. I feel confident we're gonna see that.
With the plans we have in place.
Got it. That's helpful. I mean, any way to quantify or to understand where you guys see sales going? Obviously, you know, the expectations have come down from, you know, the low or mid-80s from where you were when you first made the deal. A lot of moving pieces, COVID in there. I mean, any way to understand how we should expect that business to grow in 2022 or beyond? You know, when can it get back to that original, you know, your original guidance for the business?
Yeah, I would generally say that, you know, we would expect that ACell will grow at in line with the rest of the TT business. Our expectations for Tissue Technologies is 7%-9% organic growth. Our expectation long term is for ACell to grow at that type of rate. I'm encouraged, as Glenn mentioned, that we have our plans in place. We know what we need to do, and it will take a little bit of time, but my expectations is that it will be a full contributor. Just remember that it turns to organic next year. We made the acquisition on January 20.
Even if with a lower start, as we think about moving into 2022 and get all those plans in place, we will see a pickup in organic growth with ACell back on track. The expectation is that we will see some nice growth in 2022.
Great. Thanks, Carrie. Thanks for taking the questions, and good luck, Pete.
Thanks.
We will now take our next question from Ryan Zimmerman from BTIG. Please go ahead.
Great. Thank you. Pete, good luck. It's a pleasure working with you. Maybe just wanna circle back on SurgiMend for a moment. You know, listening to the AdCom's comments, you know, one of the things that they were talking about was kind of longer term follow-up data before approval or that they were looking for longer term follow-up data. You know, I just want to understand, you know, is there any chance that you think that the agency would wanna see longer term follow-up data before approval as the committee was kind of most focused on that? Could that, you know, in any way prohibit approval at this point based on your discussions?
You know, as a corollary to that, you know, this, just to be clear, this is for a specific label on breast utilization, but there is some utilization among surgeons today maybe using SurgiMend for breast reconstruction, just not with a specific label.
Yeah, to the last part, Ryan, the answer is yes. There is clearly utilization in multiple plastic and reconstructive procedures, but with an on-label indication, we would obviously be able to promote it, focus on it, and grow the market. I think as you know, we're fundamentally have the access outside the United States. In some markets like the U.K., there is a pretty evolving approach to doing these procedures. You know, we would hope to reach an approval here and then be able to do follow along studies to open up different approaches, this subpec and prepec approach as the point. To your question on the panel itself, I think the reality of it is there's a lot of different ways this could go with the agency.
We think there's a preponderance of direction that we go towards that we have a pathway to get there. It ties back to we knew what we were coming in with the MROC data. We've been working with the agency quite closely, as well as other companies have as well. There's been a lot of debate about the MROC data, but it's the best that's out there. I think with no products proved, having that data that shows, you know, high safety levels, having European real-world experience of really positive outcomes and procedures, and then being able to do an appropriate follow-up study along with approval, we think is a very realistic case. Now, to your point, could it be that there needs to be a prospective study done?
I'm sure that's one of the options that's out there, but we believe that the pathway without having to do a randomized prospective study pre-approval is very much within our hands. We've got work to do with the agency over the coming months. You know, as more data comes out, we'll be chatting with you about the progress on it.
Okay. Then just, you know, to follow up, this is. I'm sure Jan will have his views on this, but for Glenn and Carrie, you know, there's been significant dislocation and valuation in the chronic wound market, you know, as of late. So, you know, I wanna just get your perspective on kind of how your views are, maybe your appetite to get in more to the chronic wound market separate from reconstruction and, you know, if that's something, I guess, of interest to you based on, you know, the balance sheet strength and profile you have today.
I think one of the big benefits we have, Ryan, is the breadth of our portfolio, and these are products that get sold both inpatient and outpatient today. You know, obviously, we've got a big inpatient presence, but we do sell in the outpatient setting as well. You know, we'd like that to become a bigger part of our business. It's still a focus for us, but I would just say the primary focus continues to be our inpatient business, but we have products that really fit both the inpatient and outpatient setting.
I just add, you know, Ryan, you mentioned the balance sheet strength. I think we've done a really great job of managing and generating cash flow. As I mentioned in my prepared remarks, trailing 12 months, we're at record highs, both for operating cash flow and free cash flow. We talk about a targeted leverage ratio of 2.5-3.5, and we're at 2.3x . Certainly, M&A is gonna continue to be a priority for capital allocation. It gives us a lot of degrees of freedom to continue to be opportunistic in finding pockets of opportunities to expand, not only on the tissue regeneration side, but also on the neuro side as well.
We'll continue to want to be active there on the M&A side, but we also wanna use that cash for internal investments as well as we think about some of the new product innovation opportunities that we have.
Yeah, one of the big growth catalysts we've talked about, Ryan Zimmerman, is the reimbursement study that we have for PriMatrix. We're working forward with commercial payers now to significantly get more coverage with respect to that product. That'll be a big win for us as we get into 2022 and 2023.
All right. Thank you.
Thanks.
We will now take our next question from Jayson Bedford from Raymond James. Please go ahead.
Good morning. Before I forget, Pete, good luck at GE.
Thanks, Jayson.
A few questions. You're welcome. A few questions. Just, you mentioned the pent-up demand in instruments. I'm guessing the market's not growing 15%. Can you just quantify the level of pent-up demand in instrument sales in the third quarter?
Yeah, Jason, instruments, I'd say when you go back to our May Investor Day, we expected instruments to grow probably 3% or so. The fact that we came in at 15.5% can articulate that we did see an incredible amount of pent-up demand in the third quarter. I would say a lot of that demand was coming from the alternative site. Kind of outside the inpatient settings, outside the hospital, seeing a nice bounce back of order demand recovery in that alternative sites of care.
Carrie, just thinking of fourth quarter and beyond, can instruments grow 10%+ for the next few quarters, or when does this die down?
Yeah, I mean, it's hard to know how much, you know, we'll continue to see. I would say that I, with the performance in the third quarter, I think a lot of the pent-up demand is now satisfied. I would certainly think that fourth quarter will normalize and our long-term expectations for instruments is around that 3%. I would say, as we move to more of a normalized level, I think that's what you should expect instruments to be. Both in the second quarter and the third quarter, we saw some healthy rebound in instruments business, that I would attribute largely to pent-up demand.
Okay. I apologize if I missed this, but what was CapEx as a percent of sales if we include CereLink?
Capital, I don't have the exact number for the third quarter, but it's roughly about 7% of our revenue or so. It's not a significant amount. As I mentioned, even excluding CereLink, we saw double-digit, low double-digit growth in the third quarter compared to 2020. Some nice performance in the capital side. Good trends, encouraging trends, not yet back to 2019 levels. As I think about 2022, that can continue to be a bit of a wind in our sail as we move into 2022 as capital continues to normalize and we can start to see growth compared to 2019 levels. Encouraging trends nonetheless for sure in the third quarter on capital.
Okay. Just a quick question on SurgiMend. I assume that the FDA will opine over the next few months. Is it your expectation that the FDA doesn't follow the panel recommendation and you'll receive the PMA next year?
Well, I think in terms of timing, it's really the FDA will decide when and if we get the approval. I think at this point in time.
Yeah, I mean, just to keep in mind, the panel voted positive that was safe. There was a question overall relative to effectiveness based on what they could read through on the MROC data. I think very much there's clearly an opportunity for the agency with the right caveats and follow-ups to find a pathway for approval. That's what we believe and we're focused on. Clearly there's other components that we will need to prove out. For the most part, we had felt that there would clearly be some type of a follow-up study that would be involved with this always.
Just again, because of the age of the MROC data, even though it's a high-quality study and the end level of SurgiMend used in it, that was always in consideration.
Okay, thank you.
We will now take our next question from Matt Taylor from UBS. Please go ahead.
Hi, thanks for taking the question. Congrats, Pete, and good luck to you and Integra with the transition. I just wanted to ask a clarification on Q4, because you got it to the low end of the range. It sounds like October was, you said, as expected, so a decent start. Is that guidance implying that you see some degradation in the environment through the last two months of the quarter with those risks that you called out around COVID and flu and staffing?
Matt, I would say again, $403 is the guidance call for Q4. As I think about October relative to that $403, it came in line with expectations. Remember, first month of a quarter always is the lowest of the three months. You know, if I look at any quarter in any given year, COVID or non-COVID, typically the first month out of the gate is typically lower. You usually ramp your second month and your third month. As I think about October relative to that $403, my expectation is October came generally in line with those expectations.
Okay, great. Then kind of follow up on the, you know, the spending and what it means for margin growth in the next year and in couple years. You know, even with you coming, I guess now above the high end of the EBITDA range, at Analyst Day, you talked about, you know, 28% EBITDA margins in 2023. I guess can you answer kind of two questions related to this topic? One is if you're gonna continue to ramp spending into 2022, can you still grow earnings double digits next year? Are you committed to that? Then, you know, help us understand whether you still feel confident in the bridge to the 2023 guidance that you gave at the Analyst Day.
Yeah, I would say we're not providing 2022 guidance at this time. We'd expect to provide guidance in February as part of our year-end earnings call. Certainly we are focused on what we can control and we've got a clear execution focus at this point. As Glenn and Peter have shared, we've had the most robust pipeline of catalysts that we've ever had as a company. You know, as I think about 2022, there's a lot of things to be positive about. When it comes to spending, a couple of things that I think as you think about where we are on our spending levels today and as we move into 2022, there's no doubt that the staffing situation in hospitals is also affecting many companies like Integra.
Where we have open positions, we're not able to fill every role that we have. Certainly COVID is still restricting spending. You know, we're not traveling as much. We're not going to as many shows. All of those things result in spending that is below what I call normalized levels. Also fuller realization, faster realization of the ACell synergies have all benefited 2021 in terms of lower OpEx spend and higher margins. As I move into 2022, we will normalize that spending. It's too important as we think about that opportunity to grow our revenue 5%-7% that we've gotta make sure that we're positioned to support that revenue growth because there's a lot of great things in the pipeline coming.
Not gonna comment at this point in terms of specific guidance on margins. I think I can still see some increase in margin expansion even into 2022. We're still factoring a number of considerations in here over the next couple of months until we're ready to give more specific guidance in February.
Okay. All right, thanks for the color.
Thanks.
We will now take our next question from David Turkaly from JMP Securities. Please go ahead.
Congrats, Pete, and I'll just try to make this quick back to SurgiMend, if I could. I think there were several iterations of the device, and I'm just curious, were you able to see the efficacy data for both? Did you have sort of your best option in the MROC program, or have you iterated it again? I'm just trying to get a sense of whether the product might be a little different now than what they looked at years ago.
Dave, the product is fundamentally the same from that study. Going forward, we do have derivative approaches and things that could, you know, build this out. When you speak about that study and what we're talking about today, they are apples to apples comparison. There's different sizes and things of that nature, but the tissue, the processing and all those is actually quite consistent.
Dave, any other questions?
We will now take our final question from Larry Biegelsen from Wells Fargo. Please go ahead.
Hey, guys. Good morning. Thanks for taking the question. I had to ask a question just so I could wish Pete well in his new job. Just one question. The Codman TSA or TMA expires, I think at the end of Q4. You guys have said it's material. Is there any chance maybe, Pete, as a parting gift you'll give us a little bit of quantification of how beneficial that might be? Thanks for taking the question.
Larry, it's above my pay grade, but I'll let the team here comment just about how they're thinking about the TMA exit.
No, I would just say, Larry, to the point, we're probably a year ahead of schedule from our initial plans and the TMA transfer is all gonna be complete here shortly. The quantification, we haven't said specifically what it means other than it's one of the key drivers of our gross margin story over the next several years. Plan optimization, plan transfers, this is one of them. We have another one in France as well that we're working on. It's all part of our gross margin improvement plans for the next couple of years.
Thanks, Glenn.
That will conclude today's conference call. Ladies and gentlemen, thank you for connecting. You may now disconnect.