Well, quite good about. And then, like, the last wave of big TSAs will come off in the middle of 2019 in places like, you know, Japan, as an example. But all in all, it's going extremely well. The long lead item is the transition manufacturing agreement, which is actually down the road here in Mansfield, where we will have a couple years to get out of the J&J facility, which is a shared facility, and move into our new facility, which is already built. And we're doing the equipment validation, that type of thing. But Mike, maybe you wanna comment on the OUS commercial integration 'cause that was a big lift.
Yeah. Yeah. And I'll just, I'll highlight just a couple of countries that I think are of interest. So, both China and Japan were very different model changes for Integra with J&J. The Codman business had big established direct businesses. So both of those went very well. So if you think about a commercial transition, we've blended the teams. We've got clear territory structures. Compensation is laid out, integrated the teams. And we're now through multiple training cycles. So I think we've made really good progress. And essentially, all the day one and day one and a half transition countries for us are all fully up and running from a commercial standpoint with good sales cycles under their belt now. So we feel good about the progress we've made.
To Mike, just to follow up, you know, the growth outside the US, at least by our math, looks like it was a little bit lumpy in the first half of the year. First quarter was stronger than the second quarter. I don't know. Correct me if I'm wrong, but what's your expectation going forward?
Yeah. No, it's a good question, I think. So, you know, for the first half, we were essentially a low single-digit growth business. A lot of that had to do with transition. If you think of what a sales organization goes through, particularly with an acquisition of this size, time out of the field, training required, you know, these are highly technical, clinical products. And so we're not surprised with that number. We certainly expect acceleration in the back half. And the drivers of that are, you know, simply more time in field, more time in role. We now, as I mentioned before, do multiple training cycles. And so, you know, I think low, low single digits first half, and we're definitely expecting the acceleration of the back half.
And Glenn, back to the kind of integration. So the TSAs, the 60%, that first wave that went off in July, any color on how that's gone?
Oh, it's gone extremely well. I mean, the first several weeks are the critical weeks. And I think we mentioned on our earnings call that we cut off a day or two early in order to facilitate a smooth transition so that we would take orders, get them shipped out of our distribution centers. And I think that was a good decision. Well, it had an impact that was probably $1 million-$1.5 million negative on the second quarter. You know, it's a timing issue on the sales. And it enabled a very smooth transition. We've had essentially no issues in the first wave of cutover. So we feel really good about that. And Switzerland, which is coming up now, I would just say we've done these plant transitions before. And so my confidence level that things are gonna go well is extremely high.
That's the IT support in the next few weeks?
Correct.
The TSAs remind us of where you benefit from the TSAs going off. Is this sales? Is this cost? What's the impact to Integra for the 60% of the TSAs going off?
Yeah. So keep in mind, we are not supporting customer service, the ordering process, cash collections process. So technically, there could be an implication to sales if it was not done smoothly and done in an efficient manner. But the real implications are, you know, the cost aspect of this. Obviously, J&J is charging us a cost for these services. We believe once we pull this into our infrastructure, we'll be able to do it cheaper than what we're being charged. You know, so far, so good. The biggest effort, though, is really outside the US, and so we're being a little bit cautious around expectations and what this could mean for twenty nineteen, but clearly, if we do this well, which we expect to do, there should be a cost benefit to Integra once we get through mid-twenty nineteen.
That's helpful. And just kinda level set us on kinda the revenue guidance for the year and the progression. First half, I think, you know, you're guiding to 5% organic for 2018.
Yep.
You did 3%, I think, in the first half. First quarter, second quarter wasn't that different, but I think second quarter's a little better.
You expect above 6% in the third quarter, and the fourth quarter looks like it's similar, I think.
Yeah.
It's gonna be able to.
Yeah. Just make the math work on the 5%. You know, we didn't give specific guidance for the fourth quarter, but it would imply something that's north of 6%.
So North of 6% in.
For Q3 and Q4.
Yeah.
Q3, you would expect to be better because the comp is easier because of the hurricane impact being greater. Is that fair?
Yeah. Well, I, I wouldn't say better 'cause we'll have to see how Q3 ends up. But we expect Q3 to really be the turning point on organic growth for 2018. So above 6%, we feel quite good about. You know, normally, the third quarter, there's a seasonal downtick sequentially because of the vacations in Europe and everything else. We're actually expecting a sequential increase in sales. And it's gonna really come from the OTT channel changes and the people that we've added there. Right now, we've got really good momentum in our regenerative business on the inpatient side. I am really pleased at what I'm seeing.
I expect what you saw in the second quarter, which was, you know, almost 10% growth with pretty much growth across our entire portfolio of regenerative products to continue and even at a faster pace as we get into the back half of the year, but to your point, we wanted to ease your comps. And just to put that into perspective, if we hold our sales dollars flat from Q2 to Q3, so same level of sales, it would actually get us about 5% organic growth as a company and 10% in our orthopedics and tissue business. We obviously expect to have sequential increases. We feel quite good around our third quarter. I think after we get past the third quarter, we'll give some more color around the fourth quarter.
But this should be a nice turning point for us here in the third quarter.
That's helpful. Just a question on EPS for the year. I think the guidance, you're guiding to the highest, or you're guiding to $2.36-$2.42. It implies the second half is gonna be about 51% of EPS, by our math. Historically, it's been about 56%.
Of the year. We went back and looked at a few years. Why would the second half be so much such a lower percentage of EPS.
Compared to prior years?
Yeah. So maybe to put it into context, assuming that we hit the high end of our guidance range, we're looking at a 25% increase in earnings per share year over year. And a lot of that driven by the Codman acquisition and accretion. So when we talk about these EPS numbers, take a step back, 25% EPS growth year over year, we feel quite good about. To your point, you know, it would imply that there's upside to our numbers if you just look at the historical numbers. But keep in mind, we have a lot of new products that we're gonna be rolling out in the early part of 2019 coming from the Codman portfolio: an electrosurgical generator, a new irrigator, a new ICP monitoring platform, which we're quite excited about, a toolkit for the programmable valves. So lots of new products.
And the R&D spend is gonna be a bit higher and elevated in the back half of the year versus what we've done probably historically. In addition, we're ramping up the marketing efforts around a lot of these new product launches, both on the CSS side as well as OTT. You know, OTT, we have an ankle revision we're launching. That's not only a revision that can be used on our ankle but also on our competitor ankles, and a number of other products and clinical studies. And, you know, clinical studies are becoming more and more needed in order to get reimbursement. And, we're spending a lot more money in the back half of the year on clinical studies, in order to support our products.
So it sounds like, actually, there could be upside if you wanted there to be.
In the second half of the year, but you're gonna reinvest some of that, to drive some of these new product launches in 2019. Is that?
That's fair.
The way to think about it?
That's the way to think about it. And, and obviously, you know, we're doing our best to overachieve as well. And we'll see, you know, what we're able to do. But, I feel really good around what we did in the first half of the year with EPS, a combination of margin expansion, which, you know, you've seen us about 100 basis points year over year, expansion, which is pretty much in line with our plans. You've seen us continue to drive our tax rate lower, continue to make efforts around how to best utilize our debt structure and reduce our interest expense. And we've done a lot of things to drive the EPS numbers, which we think there's potentially more upside. But we have a lot of investments to make in the back half of the year.
Just thinking about,
Two thousand and nineteen, you know, I think, you know, you guys laid out a plan last at the analyst meeting in December, I think, to grow 5%-7%.
On an annual basis. That was for each year, I assume. So if people you know, at this point, we should assume, you know, you can do five to seven in two thousand nineteen. I mean, given what you're planning to do in the second half of eighteen, is that a reasonable assumption?
Yeah. So I'll go back and just reiterate what we said back in December, which was 5% organic growth this year in 2018. So obviously, at the lower end of the range, knowing that we were gonna do these channel changes and the risk around that and the disruption factor, we obviously would expect 2019 to be a faster growth year than 2018. So to answer your question, yeah, we expect to be within that range. Certainly, we would expect to be higher than 2018 between the lack of disruption, additional commercial investments and resources that we're making, and new product launches. And I think the combination of all those factors, coupled with healthy end markets, we feel quite confident that we'll, you know, be above where we land in 2018, but should be within that range of 5%-7%.
You talked about three or four new products, ICP, the generator, the toolkit. I think you mentioned a few others, but it does seem like you have a lot of singles and doubles.
In 2019. Could you kinda just give us a quick run-through of the new products that'll contribute in 2019?
Yeah. So it's pretty much the products I mentioned. But I'll just say this. When we think about new product launches, several of those that we've already launched have multiple-year upgrade cycles. And so I look at a product like CUSA Clarity for tissue ablation. These are products that remove tumors in the brain and liver. You know, that's a product we expect to see very healthy growth, obviously, in 2018, but continuing in 2019 and 2020. So I consider that to be a new product launch with some multiple-year runway ahead of us. Then in addition to that, you know, we look at products like the DuraGen, which came off the market before we bought the Codman business. That's gonna be back on market. Again, it's probably a single or a double, but it's gonna help our growth rates.
The irrigator, we launched a pair of bipolar forceps, already this year. So that should continue to ramp up. But the point is, there's a lot of new products. The key for us is to have a good cadence of introduction. We don't wanna overwhelm the sales force with seven new products. So we're figuring out our cadence on how we wanna roll this out. But all of these products are gonna add to growth as we look at 2019 and then more significantly in 2020 when you have that first full year.
But what's the timing on the generator?
We just said early 2019.
And I think, Larry, they're all spread across our key categories too, which is nice. So if you look at the launches, a lot of them came from the Codman acquisition. They live in advanced energy. They live in traumatic brain injury categories. They live in our hydrocephalus category. So you look at our key drivers that are neural growth. We've got good cadence across all those platforms.
And Mike, at the analyst meeting in December.
You talked a lot about, you know, Japan and China.
Yeah.
You gave some very specific numbers on kinda the incremental contribution there.
So what are the drivers of those, of that? And, is that, you know, what can we look forward to in 2019?
Yeah. So if you look at those two markets specifically, talking to Stuart and Mike about Japan first, you know, Japan pre-Codman was essentially a small business selling one product for Integra. And then you incorporate now the Codman products, which Japan was a very strong country for Codman. And if you think about the Codman business in general, it was bigger outside the U.S. than the U.S. So you know, it had a split in the 52-53 range of business outside the U.S. And so when you look at Japan, we've really just transformed that business from a one product you know sales force of really less than 10 people to one that's in you know the range of 70 people selling a full portfolio. We've seen very good engagement synergies across dural repair.
We've seen great synergies around advanced energy with the combination of electrosurgery and the business that came from Codman. I think for China, it was about integrating these two sales forces and getting the layout right across the multiple provinces in China. And they've gone very well. I think Codman had a very strong traumatic brain injury platform in China. And I think that's one area we've really seen rapid growth for the business so far this year.
Yeah.
I would just add in terms of Japan specifically. You know, we just got approval for CUSA Clarity earlier this year in Japan, which we're quite excited about. We're expecting approval for our leading dural graft DuraGen in Japan probably early 2019, which is quite exciting. You know, these are meaningful products. These aren't singles or doubles in terms of these markets. These are more, you know, triple or a home run potentially. We're really excited about, you know, what that does for our dural repair franchise, what it does for our tissue ablation advanced energy franchise.
I wanted to drill down on dural repair, but before that, just to close the loop on 2019, at the analyst meeting, I think you laid out a goal, 12% underlying EPS growth through 2022, and you know, the street's at about 13% next year. But is there anything you would, there's still a little bit, I think, Codman accretion.
But it is, I mean, I don't consider twelve, thirteen to be a big disconnect. But any color commentary on how people should be thinking about EPS growth given the goal you laid out at the analyst meeting?
Yeah. You know, I'm not gonna give any specific guidance for 2019. I think we're very committed to at least 12% earnings per share growth each and every year. And when I look at it, it's not just looking at the bottom line EPS number. Part of it is we need to get at least 100 basis points of even a margin expansion. And then that coupled with, you know, lower interest expense and lower tax rate, are also gonna drive that performance. But, you know, we're looking to actually get operational performance and significant margin expansion where we can drive from 23.5%, which is where we kind of expect to land in 2018, to 28%-30% by 2022.
So it's not just looking at EPS, but how we're gonna get there, getting gross margin improvements between better sales productivity and getting better leverage on our G&A costs.
That's helpful. So let's drill down on a couple of the businesses that have maybe been, you know, of interest to investors recently. Dural repair has been challenging recently. You just talked about DuraGen, which is one of your two, you know, Dural repair products with DuraSeal, you know, being potentially a triple in Japan. What could that do to the overall Dural repair franchise?
Yeah. So when we look at dural repair, to frame it out, right, it's, you know, roughly $200 million of sales on $1.5 billion as a company. So it's a meaningful part of our business when you look at the graft and the sealant business. We see this business growing in that low- to mid-single-digit range over the long term. You know, we had some challenges as we were in the back half of 2017 with a new competitor that came into the sealant space. We've addressed those. And if you look at the last couple of quarters, you've seen some really nice progress around the growth rates in our DuraSeal business. Last quarter, putting up close to 6% growth. So kinda at the higher end of what we were expecting.
We feel with the expanded sales force, with the clinical indications that we have for both spinal and cranial, in the US and outside the US, we feel really good around what we're doing with that part of our business. Yeah. It's a slow-growing market, though. It's based upon procedures. Procedures are only growing one or two % each and every year. So it's gonna require us to take more market share. It's gonna require us to hold a lot of the share that we have in many markets around the world and getting new products registered in places like Japan. That's how we kinda get to that mid-single digit growth range. You know, it's important for us that we grow this part of our business. It's a big part of the business. It's also a very profitable part of our business.
It has some of the highest gross margins we have as a company.
All right. That's helpful. And so, you know, it can't. Could it do better than low to mid-single digits with DuraGen in Japan?
It's possible, Larry. But I think, at this point, I think we're comfortable saying that's what our goal is. And we obviously strive to do better.
Okay. And the other business that has been soft for you guys has been Extremities. What's the outlook there? I can't. I'm trying to look here, but remind us of the growth in the first half and what your expectation is.
Yeah. So Extremities in total was down in the low single digits when you look at our total Extremities business in the first half of the year. Certain parts of the Extremities portfolio is growing very fast and is doing quite well. So Ankle, as an example, between Cadence and Salto, seeing very nice double-digit growth in that part of our business. Our shoulder business doing really well, growing double digits. What's been the issue for us has been our foot system declining double digits. And we think we've got some new products that we're rolling out. We've got a new fixation product called Panta II, the Panta nail that will be rolled out here in the short term, coupled with the increased focus on our Extremity business. As I mentioned early on, we didn't have the focus that we needed from a sales channel perspective.
Now having those dedicated resources that are, you know, in the hospital setting each and every day just focused on Extremity metal and nerve, we think will make a difference relative to the growth rates. But if we can just get this business to be flat and even a little bit of growth, it'll help the overall OTT growth to be in the 9%-12% range over the long term.
M&A, you just did, I think you just did a raise. This has been an area. What's your appetite for M&A now?
When do you think you'll be ready to do more, so you know, sizable deals, not small tuck-in deals? And is, you know, it sounds like, you know, Extremities has been an area that the CEO, Pete, has, you know, indicated that he, he'd like to be bought.
Yeah. Clearly, Extremities is not at scale where we need it to be. But I would say in terms of M&A, you know, we've got the financial bandwidth to go out and do a deal tomorrow. We just did a $350 million equity raise. Our leverage is around three times, about a full turn down from where we were, you know, several quarters back. Cash flows are getting better. So we feel really good around our balance sheet and balance sheet flexibility. The management bandwidth is not there yet for us to do another deal that's of any size. You know, our focus is getting Codman integrated. We just spent a $1 billion on this business. It's a great business. Got tremendous potential. We think it's gonna add significantly to shareholder value over the next five years. It's getting that integrated and doing it well.
That doesn't mean we have to wait another year before we do another deal. But the likely scenario is more tuck-in acquisitions, you know, over the next, you know, twelve to twenty-four months. You never know when you have another Codman that comes in. But we were fortunate to get Codman. But I would, you know, set an expectation that in terms of another transformative deal, nothing in the short term.
Let's spend the last two minutes we have on the regenerative medicine business because that's been in the news recently with particularly on the amniotics. Health Care Service Corporation isn't covering. That's a Blue Cross Blue Shield, I think, payer. And UnitedHealthcare, I think, put something out recently that impacts your, you know, AmnioExcel and Pri Matrix. And Pri Matrix isn't a meaningful product for you. The amniotics are still small. Can you frame the exposure here that Integra has and how people should be thinking about some of these changes in the market, coverage decisions, and some new FDA guidelines?
Yeah. So, you know, around the UnitedHealthcare decision, you know, they basically looked at the evidence behind a number of products that were being reimbursed. I think they removed something like 66 products from reimbursement, of which 2 were Integra products, PriMatrix and AmnioExcel. You know, I would say if we look at the impact to our business associated with just removing those from reimbursement, it's less than $1 million in 2018. So clearly not significant. On the flip side, we believe it could actually be a benefit. When you think about 66 products coming off reimbursement, they have to go somewhere with a patient in terms of a skin substitute. And we still are on reimbursement with our leading products such as Integra Dermal Regeneration Template, our mesh product, OmniGraft. So we have a number of products that are still on reimbursement.
And it's only a handful of products now, right? So they gotta go somewhere for these skin substitutes. And that should offset or even give us a positive benefit in my mind, you know, these reimbursement changes that were just announced on UnitedHealthcare. You know, on the Blue Cross Blue Shield decision, very insignificant impact. Several hundred thousand dollars is the way you can think about that. So, you know, we're keeping our eyes on the reimbursement landscape. Obviously, we're doing more and more clinical studies to keep our products on reimbursement and ones that have come off to get them back on. So to your comment earlier about where we're spending money, we're spending a lot of money in the space so that we can have our products, you know, on the list of reimbursable products.
So how big is your reach? Remind us again of the size of your regenerative business.
So it's 70% of the total orthopedics and tissue business. You can think of that as a, you know, $500 million kinda segment. So 70% is regenerative products. That includes private label, which are all regenerative products. Private label's about $100 million or so.
But a lot of this is inpatient. And I don't think inpatient is in the crosshairs of these reimbursement changes. Is that true?
It's both inpatient and outpatient. Yes.
but like your IDRT for burns, that's a pretty big product.
I would think that that's, you know.
That's still on the list for reimbursement.
Right.
So those are the products that they're still gonna reimburse, which is to my point. You know, when a patient comes in now and they go to get a skin substitute, 66 products that we previously used are no longer gonna probably be used if they're not reimbursed. Integra still has a list that are going to be used, and we think that that's gonna provide a positive benefit for us over the long term.
Where's OmniGraft?
It's still on reimbursement.
And so, long term, positive.
Could there be some near-term disruption, confusion, that kind of thing?
It's hard to say. But again, the near-term negative impact is insignificant for us. So we're looking at this as a positive decision for us. And could we lose $500,000 of revenue between now and the end of the year if we didn't pick up any new business? Yeah. That's a likely scenario. At the same time, we feel quite good around the products that are gonna be reimbursed and the fact that we're gonna offset that or potentially even have a bit of a positive impact.
Right. That's helpful. We've got a couple of minutes left here. Let me see if there are questions in the audience. You know, one area you guys have started talking about more is nerve repair, as an emerging area of refocus, I would say, for the company. How meaningful could that opportunity be for Integra?
Yeah. So it's a relatively small part of our business, probably a little over 1% of our consolidated sales today. Very fast growing. If you look at some of the competitive landscape, other companies growing very rapidly. We've got a great portfolio, you know. We've got a nerve conduit, which is used for short gap procedures. We've got a nerve wrap. We have damage to the peripheral nerves. And we've got a really interesting product coming out of our R&D pipeline down the road, which is a drug-device combo, so we have a great portfolio. We've got a focused team now that's selling it, which has been a big issue for us in the past and one of the reasons why we haven't seen the growth that you would expect.
And so we think the combination of those two is gonna position us well to get some good growth out of the nerve business. And I will say in the second quarter, we had our best growth rate we've had in probably two years on nerve. So feel quite good about it. We actually have won some bigger contracts recently and have nerve as part of those wins. And so, you know, we look at it and say, "Nice opportunity. If you're gonna be successful as an Extremity rep, you gotta be able to sell an ankle. You gotta be able to sell a nerve. If you don't do those two things, you're not gonna be successful." So we're driving the team in that direction.
All right. Perfect. Glenn and Mike, thanks so much for being here.
Thank you.
Thank you.