All right. Good afternoon, everybody. Thanks so much for joining us. My name is Matt O'Brien. I cover med tech here at Piper. Very excited to have the management team of Integra here, and I gotta thank so much for coming up and v isiting with us. Appreciate that. Would love to start off with, and I'm gonna be bouncing around so forgive me, with just the Q3 results and, you know, some of the things that impacted numbers there. Can you just talk a little bit about those and then we can dive in from there?
Sure, well, I would say look at a broader picture. You know, this has been a big year of integration for us. I think most people that follow us know that we integrated, have been in the process of integrating Codman acquisition. So that's been a huge part of it. And really hit all those key milestones. Within the quarter, you know, we had talked about a step up in growth, which we actually saw but not quite the level that we had hoped for. So we were running at, you know, 3% growth in the first half planned based on the disruption.
W e stepped up to about 6%, b ut two items that came up within the quarter that we mentioned on the call were around the impact of what we call Day 2 Countries. I would say a slower than planned ramp up in our extremities orthopedics metal business. And so, you know, Matt, I think the Day 2 Countries, for those that don't know, it's when you acquire a company. It's pretty typical to have some of the smaller companies that have longer registration timelines to actually be still managed by the seller for a period of time.
Our first half's numbers were pretty much on track to where we had thought they would be, and then we started seeing a slowdown in the third quarter. The challenge is that many of those countries we get a report out thirty days in arrears, so you kinda get two peeks into it within the quarter. And so that was $2 million. I think we've had some good discussions with our partner there. And we aren't planning for any major step-ups. But I think relative to kind of controlling any further leakage, I think we think we're in a good spot there.
The other part was on orthopedics. And I think that's a bigger disappointing one in our control. You know, we this year made a big investment and change to split our channels. So if you think about us and many companies that grow up from a small med tech to a mid-tier, we had a co-mingled channel of tissue products and orthopedics. And we first started out, it was great for cost of sales. It was limited competition. Worked out quite well. As times have gone on, there's more focused channels on each side.
We were kinda handicapped, and anytime you take that split, it's a challenge, and we split it early in the year. A big portion went into our advanced wound care group, which, actually is having a spectacular year. Less of those folks went into orthopedics. We have some distributor and some direct, but we had to hire quite a few folks, and I would say at the end of the day, the team was a little bit overestimated some of the ramp time, and some of those last roles were filled in July, and we think it's probably a six, probably closer to nine months till they're fully productive.
Got it.
Those are the two points. I think they're transient, but they were obviously disappointing within the quarter.
Okay. So thinking about the extremities business or the ortho business a little bit, that's always been an area where these sales force expansions have been painful. I've seen it multiple times in my career. So, you know, it's something that tends to linger too a little bit longer than expected. So, you know, without talking about Q4 too much, just maybe exiting Q3, are you starting to see the productivity levels of that group build? Is it a competitive issue? One of your competitors is getting stronger in the lower extremity side recently. Just any of those dynamics at play?
Yeah. No, it's much more kind of an internal kind of play. I would say, you know, we're still a very small player within orthopedics. For our whole company, right, it's under 8% of our overall revenues for the company. But, you know, we've been focusing on this world-class ankle portfolio that we have. We just launched a new revision ankle.
Okay.
So what we're really doing is now with a complete lineup of a lower team and a team that can also focus on nerve and tendon repair. Whereas in the past, that team was. Some of those items might have been five, six, or number 20 on the priority list. They've moved up. So now with people in roles, people trained, and also I think the right leadership team, we've been successful bringing in some experienced orthopedic leaders into the team. I feel pretty good about it. Now, there's a difference between moving from, you know, down 5% to up 10%.
You know, our goals are we're gonna be very pragmatic about it and move this business into positive territory. Move it in to be accretive to the company average. And then we'll take a look at how we can deal with performing at kind of where an extremities market is up in the higher single digits.
Got it. How big a deal is the revision ankle that you got your hands on now? Because I know a lot of doctors are hesitant to use the one system on the primary side without a revision to come behind it just in case they need it.
Yeah. I mean, we think it's a big deal. It's less a big deal of the actual sales of the revision product. Probably a whole lot more to say. We will entertain your portfolio. So now with the Salto ankle, which still has the most data of any ankle in the marketplace, our Cadence ankle, which was internally developed and is performing extremely well, having a revision product that we can revise anybody's product in the marketplace, we think is gonna be quite effective. And that's obviously one of our target areas for that sales force is to really spend a higher percentage of time on ankle and ankle fixation.
I would say ankle we've been in very good shape. Fixation we've had some weaknesses. We have a few launches that are coming out. One in particular, the Panta II, which actually will be ready here in the first quarter. So, s ales force stability and experience, some new products, those are really the key here we see to getting the growth that we would expect to come out of that business.
Okay. And then that makes sense. And again, I apologize for bouncing around. But back to the Codman deal. So I think you and I or maybe Glenn and I talked about this when you announced that transaction.
Yeah.
I was skittish just because I had seen Symmetry by Codman Specialty Surgical and it was very difficult to integrate. You seem like you've integrated things very well so far on the Day 1 Countries side. Is there any risk to, you know, some unforeseen, you know, slowdowns in revenues out of those territories, from here on out?
So like most things in life, I'd never say never. But, I think we've done a really good job. And most of the next steps are repeats or round twos of something we've already accomplished within the first, first year. So as an example, in the first quarter, which would be arguably the majority of the major work left on integrating Codman, there are three events. One is integrating the OUS data into our ERP system. So as many of you know, we had about 28 ERP systems. We're down to 2. We've stood up all of our systems and integrated other acquisitions.
So we've got a good team that knows how to do it. But there's risk there. We feel like that's manageable. TSAs for the big western countries, so the Germany, the France, the UK. Keep in mind the United States, until July, J&J did all of the, all the backroom work for us. Process orders, customer service, all that. We switched over in July, had very few issues. Obviously had some, managed through those, learned from those, and now we'll do that for Western Europe. That approach is very, very similar to what the experiences, successful experiences we had with the U.S. The third is these Day 2 Countries.
There's a higher portion of the bigger revenue countries that happens at the end of the first quarter. Again, most of these are distributor-based countries. Many of those, the distributors will still stay with us. Most of those countries, the distributor manages the inventory, the customer service, all that already. So it's a much more, I don't wanna say paper exercise, but there's a lot of legal components that you have to get done, and as long as you keep a lot of the sales force intact, the impact to the customer should be pretty minimal.
I and then we've got a well-oiled team. And I would say if you look at all the steps we've taken this year, it's come across pretty well.
Yeah. Yeah. It's definitely something you guys are really good at with the integration side of things. So makes sense. All right. So to flip over to, or just I guess to stay within the, the neuro business, a little bit, just thinking about, you know, one of the consolidators in the space acquiring one of your big competitors. And I know you've got long-term contracts. But how do you keep investors from being concerned about the potential impact of that consolidator who's historically been pretty good at acquiring assets and growing them quickly from really disrupting you?
And I know there's still room to go as far as converting over from traditional sutures to the gels. But, you know, how do we get comfortable that that couldn't be an issue maybe in even 2020?
Yeah. I mean, look, if we come first of all, we compete with all the big guys, right?
Yeah.
Most of our competitors, particularly when it comes to CSS, our competitor is ten times our size. Hence why it was a really important strategy for us to acquire Codman so that when it comes to those segments we compete, we are one of the largest players. So in the case of the HyperBranch acquisition, look, I think we compete with the acquirer all the time.
Yeah.
On the dural onlay market. We do quite well. We battle it out. We tend to be, obviously, the leader within that segment. I think obviously they coming into it brings more capabilities for sure. But I think between our channel reach, how we've contracted, what we've done, I think we'll fare, you know, very well.
Okay.
I mean, a lot of investors ask, how do you think this plays out? I don't think it's a whole lot different to an underserved market with two drugs in some cases.
Yeah.
Where, you know, when there's a turnover of distributors to direct, there's some disruption. And the incumbent, us, probably has a benefit as the new team ramps up, you know. Will we hold on to all of our share? Probably not.
Yeah.
And we wouldn't model something that way. And then in the next phase, which in the case of ours, I don't think is much longer than a year, 60% of the market is either using not the appropriate product or no product at all. And so for two players preaching the same story about what this can do as far as reducing errors, reducing risk, and cost.
Yeah.
We think that, you know, both companies will benefit from it.
Got it. Okay. Makes a ton of sense.
The last comment on this is just we have indications as well.
Yeah. You've got the indications as well.
Spine as well as the cranium. You know, both represent about, you know, half of the marketplace.
Got it. Okay. What about DuraGen in Japan? How big is that market? And how aggressive are you gonna be there next year?
Yeah. So to that point, you know, Japan, we were really not a player at all just a few years ago. We had a handful of folks. We were a distributed market. The acquisition of Codman brought us a complete direct structure. So obviously prior to that, we're going through a distributor and kind of collected about $0.50 on the dollar out of revenue standpoint. Now that we have that direct capability, we've got a strong KOL network that we inherited from the Codman team. We're pretty optimistic about it. You know, most people look at Japan and say shrinking economy. But when it comes to neurosurgery.
Obviously the older the population between falls and also the propensity for brain-related ailments, tumors, and such goes up. And so it is a market presence that can be quite valuable for us. There's not been an approved dural bovine or other type of xenograft approved in Japan before. So this would be the first product out. We're almost finished through the approach. We have to get approval and also the reimbursement. And so we think by, you know, second quarter or so in that window of time, the combination of all these should be there. It's a very smart, educated, obviously, group.
They're well aware of the products from the global markets over the last ten years. I think it's gonna be a good fit. So, you know, does this have the potential to be, you know, a $20-30 million business or so? I think those are reasonable. But like most things in Japan, they take time. This plus our CUSA Clarity, which we just launched direct, as well as the rest of the new products, we see Japan over the next three years to be a nice growth vehicle for us.
Makes sense. Okay. So I'll get back to CUSA in a second here. But just turning over to the wound care business, you know, Healit, Healogics, the partnership there that you have, I know you seem excited, but you kind of try to tamp down expectations a little bit. That's 700 hospitals. That's enormous, right? So when do you get access to all of those centers? And then have you been selling there in the past? Or is this a complete greenfield for you?
Yeah. So the reason I like to temper this is in this space, nothing changes radically, right?
Yeah.
There's still decisions that are made doctor by doctor. So the great part is it's recognized by Healogics, which is clearly has half of the wound care centers from a management standpoint in the United States. They're well respected. They've never really recommended products. They've more so run the operations. And I think their model of having a GPO, so to speak, having certain products that are recommended, this is the first time they've done it. So setting customers up, setting structures up takes some time.
So I think the front end of the actually administrative part is much longer than a traditional contract that someone that runs these that way. That being said, they obviously have their opinions, the value creation, but they have, a lot of, opportunities to kind of direct it. We still need to spend time with doctors.
We, I would say that our business there was quite small. So it's not like there's a large cannibalization. It's more upside. But it's gonna be a methodical process. This is a multi, multi-year agreement. And so I think even in the first year, the uptake will be kind of linear and consistent. And we wanna have a very good experience with those users.
If you were using someone else's products, you know, and the sourcing team said, "Gee, really good value, seems to be very similar," we want those doctors to be delighted, not just, you know, feel like it's adequate. And so with our portfolio of PriMatrix, Omnigraft, our AmnioExcel, we can bring a one-stop shop. From an amniotic product to a broad range of xenografts and so, you know, I think it's gonna take a few quarters until we start, you start hearing us talk more about those broader wins. But we've got this contract over the next, you know, three years and the ability to keep on growing.
Got it.
So those are the kind of things that we wanna demonstrate. And nothing really changes that quickly in wound care. And again, it's one of the areas that we think we bring a lot of the core capabilities to be successful in over the long run.
Okay. Let me pause real quick, see if there's any questions from the audience. Okay, so I'll keep going then. You know, to say the least, one of your competitors in wound care has had some disruption. Let's leave it at that. How are you benefiting from that?
Trevor, do you wanna take a shot at that?
Sure. So to Pete's earlier point, nothing changes rapidly in this market, in advanced wound care. I think we are getting from an engagement perspective, we're getting more discussions with doctors. And our sales force is starting to have better and more proactive discussions with whether it's the VA or other IDNs in general. Healogics clearly is a big proponent or sorry, a big help or tailwind in that regard.
That said, I think what we're seeing in the market today is we're not seeing much rapid change, partly because the issues around that competitor tend to be more financial, SEC, Wall Street driven than they are product driven. They have a very good product, a competitive product, and the doctors, you know, they seem to be at this point in time not recognizing those issues.
So that being said, I think with our presence, with our broader sales force, we now have this much larger inpatient sales force and outpatient. Many of these institutions own outpatient, inpatient business. Our ability to kind of do broader contracting, talk about the portfolio, you know, we're starting to see the benefit of that. But you know, to the point, there isn't an event, so to speak. It's more about continually moving forward.
You know, will there be an event? I don't know. But we're just gonna keep our heads down and keep chugging along and, you know, show why we're a company that you can partner with in the long term, not worry about us and how our practices are and, you know, deliver high-quality products to the patient.
To that end, and forgive me, Pete, we've talked about this a couple of years ago, one of your analyst days. But this wound care industry is littered with companies that have done okay for a while and then failed miserably. I do not wanna put you guys into that bucket 'cause you can contract, you've got data, etc. But how do you keep the growth in that franchise going beyond the next eighteen to twenty-four months?
Yeah. Look, I think broadly, I think the misnomer about us is we've been in wound care for 30 years. N ext year will be our thirtieth anniversary. The first product we ever made was IDRT, right? It was the first product ever approved to regenerate human dermis.
Right.
The hardest wounds there are deep tissue burns. The second are massive trauma either within military. So we're the world experts in that. As we move out from that circle, it moves into vascular-related VLU and DFU. So I would say even though the outpatient world, when it comes to particularly DFU, VLU wounds, tends to be a little bit more of the Wild West or has been, that will get tamed over time. Our core business in the inpatient and in the outpatient, there's pretty significant synergies.
The toughest wounds and the toughest disease states are covered by guys that grew up using our products and love to see evolutions to the product. You know, as an example, when we picked up Derma Sciences, we picked up a human amniotic pipeline potential. We've updated a product we've just announced that we've come out with.
We've got a clinical study on called AmnioExcel Plus. It's a three-layer amnion product, versus kind of the leader in the market has a two. So it's an amnion horion- amnion layered product, longer shelf life, more activity within the product itself, and we'll be having a clinical study completed by the end of this year, significant enough we believe that will show advantages as well as provide private and public reimbursement. We get something like that into the portfolio as well that really starts adding to our capabilities in that area.
And so I do think to your point, because of some of the issues that have taken place, it has customers at times take pause and say, "Before I jump from, you know, company A to company B, I wanna think about it because I've been burnt by company A." And so that has the propensity to slow down the adoptions and the change. But when you step back from it, there are no products other than these cellular-based products that solve some of these very challenging wounds on diabetics. I mean, we just had a patient at a town hall just two weeks ago who was in a boot for eight years.
Going to see a podiatrist every week to get the bandage changed, and some of her friends never knew her without the boot on. One of our employees was a friend, talked to her about PriMatrix. She had that procedure. She came to the meeting with no boot on. It was the first time in almost a decade she didn't have a boot on her foot, and she was headed toward amputation, so we think passionately there is a big opportunity here, but it's a path that you gotta be patient with, and we think we can be the ultimate leader in this space.
Okay. That's great to hear. So flipping over to, to CUSA Clarity, is that still a high single, low double-digit grower for you next year? Is there still that much runway?
Yeah. I would say, we think there's gonna be some competitors, new products coming out in the space. Same folks that we compete with today. We'll see what enhancements they bring. This has been the biggest, most sophisticated electromechanical product we've developed internally. It's performing extremely well. I think the reliability, the capabilities that we have on sensitive tissue cutting are second to none, and we've been through a good chunk of our installed base.
There's still a good amount to go, but the other half of the market is all competitive installed base plays, and we think we've got a really good opportunity to go in and offer a competitive upgrade system to continue to grow, so you know, from mid-single or high single-digit growth, we definitely see this to be a continuing value contributor really over the next few years. Keep in mind that portfolio is half hardware and half disposables.
And part of our redesign of this product is to create a more elegant, simple disposable that anybody here in the audience could learn how to load this in five minutes or less. Our older versions took a specialist to load it. So that's driven more use because people feel confident. And in developing markets, we've built a cost structure that can be structured so that we can still capture the gross margins needed at a lower price margin, but also with that cassette making it more complicated or challenging for someone to reuse all of the disposables.
Got it.
Which is not a good thing. But as many folks know, catheters and other products happen in markets. So that allows us to capture more of the value.
What about the private labeling business? I mean, that's been on fire recently. How much runway is left there? Is this new facility, manufacturing facility, give you still significant opportunity to grow that business?
Yeah, it's so private label started out, as it does for many companies, as a way to deal with excess capacity. We try to really keep it close to our knitting, meaning not doing a private label area that doesn't have synergies rest of the business. Most of our private label leverages core platforms that we have. And we make a decision of where we're not gonna go direct or a channel and private label for other folks, whether it be in some dental products or it might be in products that touch in areas of orthopedics or e ven aesthetics where we don't plan to go direct.
We do have more capacity. And I think where plastic and reconstructive surgery is evolving, there is interest for broader partnerships, even with biopharma companies on drug delivery type capabilities, to integrating, and using some of our platforms for all types of scenarios. So I would say, keep looking at us playing a bigger role with private label. I think there's even some smaller investments that can help us grow. We like that business because it runs, you know, 40% type EBITDA margins.
Right.
It has lower gross, but r equires significantly less SG&A.
Got it. Okay. So you pointed investors towards kind of low end of the 5%-7% number you put out at Analyst Day. So why the low end of the range, and which gets you to the mid or upper, upper end of that, that range next year?
Yeah. I mean, I'll start out just. We'll give guidance in February as we normally would, but you know, obviously coming off of a quarter where we didn't hit all components, we wanted to make sure that investors understood that we see ourself being in the five to seven next year. That was really the main part of that message. Look, I would say if you think about the company, 2018 was the most disruptive year. In the history of the company. So largest acquisition, and it's a carve-out from one of the largest corporations, which makes it challenging.
Second is thousand sales territories around the world, at least 900 of them had changes in every country in the world. 2019 will be the first year where we don't have all those changes. First quarter, I mentioned three integration items. We have to get through that. As we get through that, I see, you know, the consistent ramps that we would expect. So that, that's how I think about, you know, as we go into 2019. We get this behind us and we've got some interesting opportunities to grow.
Got it. So I have another eight questions, but we are out of time. So I think we'll go ahead and wrap it there. So thanks so much, guys, for coming to the meeting.
All right. Thanks.