Okay, good morning. Welcome to the 29th Annual Oppenheimer Healthcare conference. I'm Steve Lichtman, Medical Device Analyst at Oppenheimer. Very happy to have with us today, Integra LifeSciences kicking off the day. With us today is Glenn Coleman, Chief Financial Officer of Integra. Also in the room, Michael Beaulieu from Investor Relations. Glenn's going to have some prepared remarks, and then we'll have some time for Q&A here in the room. Turn it over to Glenn. Thanks, Glenn.
Thanks, Steve. Good morning to everybody in the room. Good morning to those listening in on the webcast. It's a pleasure to be here at the 29th Annual Oppenheimer Healthcare conference, so thank you, Steve, for having us. My name is Glenn Coleman. I'm Chief Financial Officer and Corporate Vice President for International Business at Integra LifeSciences. I'll spend roughly 15 minutes giving you a high-level overview of Integra LifeSciences, what we do, why we think we're an attractive investment opportunity over the long term, and then we'll do about 15 minutes of Q&A. So a little bit about Integra. We're a diversified, mid-sized medtech company with annual revenues of about $1.52 billion based upon the midpoint of our guidance range for 2019. We're headquartered out of Plainsboro, New Jersey, just down the road from Princeton University, and have about 4,500 employees worldwide.
We trade on the Nasdaq Stock Market under the ticker symbol of IART, and today have an enterprise value in excess of $5 billion. We have two business segments. These are global business segments, the larger of which you can see is Codman Specialty Surgical. It represents almost 2/3 of our overall business, and here we have a number of products used in Neurosurgery, as well as a broad portfolio of instruments that get used in ENT, laparoscopic, and general surgical procedures. This part of our business is expected to grow organically 3.5%-4% in 2019, which is a slight increase over 2018. If you look at the other part of our business, Orthopedics and Tissue Technologies represents a little over a third of our overall business. Here we make products for implants in small joints of the body.
Think of that as the hand, the wrist, shoulder, ankle, and foot. And we've also got a tissue technologies platform, and these are products that regenerate tissue in the body through the body's normal healing process and absorb into the body. This is a faster-growing part of our business. We expect organic growth this year to be 6-8% in this part of our business, and that's up from 5.5% in 2018. What that all means, if you look to the right, is our total organic growth expectations for 2019 are 5%. Expect about 100 basis points of EBITDA margin expansion to a range of 24-24.5%, and adjusted earnings per share growth of about 10%-12%.
An important point to highlight on the chart is the lower left part, which is 25% of organic growth coming from new product launches. As we look at our plans for the next five years and how we're going to grow 5%-7% consistently, we expect to have 25% of that organic growth coming from new product launches, and 2019 should be no exception. We have over 10 new products that we're expecting to launch here in 2019, and I'll talk more about those as I get into the segment details. You also see here a statistic that talks about 40% of our portfolio coming from sales generated from regenerative products. This is really important because these are the faster-growing products in our overall company and the most profitable products that we have. So the faster these products grow, the more profitable we become.
And then finally, you can see our international sales represent about 30% of our total company sales. If you go back two years ago, this was about 23%. An important point to highlight is the progress we've made over the past five years as a company. We have grown double digits with acquisitions each and every year over the past five years. We've grown our adjusted earnings per share double digits for each of the past five years, and we've had over 700 basis points of EBITDA margin expansion since 2013. So we've made great strides over the past five years, and that's really positioned us well moving forward as we've built more scale as a company, and it enables us to be a much more profitable company going forward.
This next chart's an important one because it shows the end markets in which we sell our products into. And you can see on the right, the key takeaway would be we participate in stable markets, markets that are growing, and in many cases, markets that are growing very fast and very rapidly. If you look at Neurosurgery and Precision Tools and Instruments, these are markets that are growing in the low to mid-single-digit range, but are very stable, very consistent from year to year. And in some cases, you see growth in markets outside the U.S. in Neurosurgery that are even growing faster, such as Asia. In wound care, a big part of our business, you can see outpatient wound care, reconstructive procedures growing double digits. And again, this is consistent with the rates we've put up as a company in this part of our business.
Extremity Orthopedics is very fast-growing when you think about arthroplasty procedures in both shoulder and ankle. Ankle is probably the fastest-growing area when you think about small joints. We have a number three share position today in ankle and a very competitive portfolio in shoulder. And then finally, our Private Label business, when we look at the end markets that we sell our products into, expect about single-digit growth, mid-single-digit growth in that part of our business. The overall takeaway is very good end markets for us. Doing a bit of a deeper dive into our Codman Specialty Surgical segment, you can see our sales for 2018 were $964 million, broken down roughly 70/30 between Neurosurgery and Precision Tools and Instruments. And what we have is a big addressable market for us, which is $3.5 billion. We are the worldwide leader in Neurosurgery.
We have the broadest portfolio in the industry. You can see on the left top part of the chart, we have 14 number one leading brands. To name a few, in dural repair, we've got the leading dural graft called DuraGen, the leading dural sealant called DuraSeal. We're a leader in cranial stabilization with our Mayfield product. We have a number one device in tissue ablation, which is used for the removal of both liver and brain tumors called CUSA. And in even programmable valves, we have a number two position when you think about Certas and Hakim, our two programmable valves. So great portfolio, a number of leading positions there, sold through the largest sales force. A lot of this was enabled through the Codman acquisition. You can see the growth in our channels both in the U.S. and outside the U.S.
Today, we have over 125 resources commercially in the U.S., and outside the U.S., over 450 supporting this business, and with that significant expansion, you can see a significant portion of our sales outside the U.S. come from this segment of our business with 37%. If we look at the key growth drivers for CSS, number one is improved sales effectiveness, so what does this mean? Back in the beginning of 2018, we brought together two of the largest neuro sales forces and changed essentially every single channel we had in the company. Obviously, that resulted in some disruption, people getting familiar with their territories, adding more resources. We should have stable channels now in 2019, and that should drive improved sales force effectiveness. We've got a number of new exciting product launches.
Probably the one I'd highlight the most is CereLink, our new intracranial pressure monitor that will be launched here in 2019. But we've also got a number of other products, including a new toolkit for our programmable valve. This is important because it really simplifies the treatment for hydrocephalus for our neurosurgeons. We're also launching an electrosurgical generator, enhancements to our CUSA product, which now we have a bone-cutting capability that was just launched in our national sales meetings this past month, and a number of other products. So lots of new products that'll drive organic growth in that 3.5%-4% range in 2019. We also are still working through the exit of the TSAs with Johnson & Johnson. That's the back office functions for things such as IT, distribution, customer service, logistics.
J&J still provides a lot of that support for us outside the U.S., but we've recently taken over all of those functions in Western Europe here in the first quarter. And by the third quarter, we'll be moving off those same services in Japan, which will really be the last key milestone for us in getting off of these TSAs. And with that, should come more of a focus on our growth moving forward and improved profitability. And then continuing to manage through our life cycle products and portfolio, as we bring together these two large portfolios, doing a SKU rationalization, including looking at some of the changes taking place in Europe with medical device regulations. And so looking at some of these end-of-life cycle products and moving them on to newer platforms.
Moving to our Orthopedics and Tissue Technologies Business, you can see our 2018 sales are just over $500 million, broken down 60% Wound Reconstruction and about 20% each between Private Label and Extremity Orthopedics. And what's a very large market opportunity for us, about $6 billion, and a very fast-growing area for us overall as a company. Here, too, we have a number of number one positions when you think about inpatient burns, skin substitutes. And if you think about the treatment of a wound, from preparation to treatment to protection, we have products that are number one in all three buckets. So in preparation, we have a medical-grade honey. In the treatment space, we have three different technology platforms between Omnigraft, PriMatrix, and AmnioExcel . And then on the protect side, we have the number one leading boot called the Total Contact Cast.
In 2018, we made significant investments in our OTT channels. We went from three to four channels. We split our inpatient business between extremity metal and our regenerative business called Wound Reconstruction. And you can see now we've got four dedicated focus channels, which we believe will drive faster growth in 2019. In addition to the channel changes, we've got a number of new product launches here along with clinical studies that we're working on. So two important clinical studies are AmnioExcel Plus, our next-generation three-layer amniotic Tissue product, which we expect to have reimbursement for later this year, and also PriMatrix. In the orthopedic space, we've got a number of new products we've launched here as well, including a glenoid base plate that was just launched here recently.
We've got an ankle revision product that was launched just a few months ago as well, a Panta II , which is a product that we use for external fixation, and a number of other products. So we're really making great progress on getting these new products launched in a timely manner that will drive organic growth. Looking at our international business, you can see the significant transformation we've made since 2015, where we had just over $200 million of sales, where today we're over $425 million. So more than doubling our business. Again, representing about 30% of our total sales as a company. But really, you look at two critical markets for us where we've doubled in size, that being Japan and China. If I go back five or six years ago, we literally were just starting our operations in each of these countries.
We hired our first person, set up a legal entity. Today, we have over 70 employees in each of these countries generating sales in excess of $40 million and growing very rapidly. A key part of our strategy outside the U.S. is new products and getting those launched, but also new product registrations, so think of new product registrations as taking some of our flagship products in the U.S. and getting those registered in markets outside the U.S. Great example would be DuraGen, a product we've had in the U.S. market for many years. Last week, we got approval to sell that in the Japanese market, and that's a great success for us. Another example would be our CUSA product that we received approval for in Japan in 2018, so how do we grow our international business and grow it in the mid to high single digits?
Well, continue to invest in our channel, driving these new product launches on time and new product registrations, and then moving past these TSAs and starting to stand this business on its own, which we're getting further along in the integration process and should be complete by the end of the third quarter. And I'll just wrap up with our key focus areas for 2019. First, we got to complete the Codman integration and exit the remaining TSAs. In 2018, we got off the TSAs in the United States, Canada, Australia, New Zealand, and China. In the first quarter of this year, we got off of the TSAs in Western Europe, and by the third quarter, we'll be off Japan. But we still have work to do. Second is leveraging these expanded global channels that we built in 2018. We've now got bigger channels, more focused channels.
We believe that we need to see better productivity across our sales force and with that faster growth. Executing on over 10 new product launches. So far, so good. We are on track to launch all these products in terms of getting them out into the market on time, but we also have to make sure we have commercial success with all of these products. And we've just rolled those out through our sales teams this past month in our national sales meetings. Increasing investments in regenerative technologies. We'll continue to do this. This is critical as part of our long-term strategy. And a big part of this is investing more in clinical studies and then executing enterprise contracts. The nice thing about Integra is we are not a single modality company.
We have a broad portfolio with leading positions that we can leverage across our entire business and do broader contracting. A greater example of that was the recent win of the Healogics contract, where we are a preferred supplier to over 700 clinics. If we do these things right, do them successfully, you can see what we expect to achieve in terms of our financial goals for 2019: 5% organic growth, double-digit EPS growth, 100 basis points of EBITDA margin expansion, and an acceleration in operating cash flow. Those are our goals. We're positioned for faster growth in 2019 and beyond. We just leave with one final point. Why do we think Integra is a unique long-term investment? Number one is we expect faster organic growth and expect to grow organically in the 5%-7% range over the long term.
That's driven by differentiated products, leadership positions across our portfolio, and attractive end markets, which you saw earlier. Second, we've got a regenerative technology platform with differentiation across both of our segments. And these are products that are growing very rapidly but also carry high gross margins. Third is we've got significant opportunities to expand our profitability and EBITDA margins. I mentioned the 700 basis point improvement from 2013 to 2018. We believe we can drive EBITDA margins to the 28%-30% range by 2022 when we get more scale. And then finally, we've been an acquisitive company. We do this really well. Doing accretive tuck-in acquisitions is part of our strategy. And I would argue a lot of companies have one, two, or even three of those factors, but very few have all four. And we believe that's what differentiates Integra as a unique long-term investment opportunity.
So with that, Steve, why don't we turn it over to Q&A? Thanks,
Glenn. I'm glad you're here. So I'll kick it off, and then we have a microphone in the back if anyone has any questions. So I thought maybe I would kick it off actually with international.
Sure.
Certainly near and dear to you. So you talked about the opportunity. So what's your outlook for that international business looking ahead, bringing in Codman, built out the infrastructure there? So talk us through about the increasing opportunities to funnel through Integra products into that infrastructure.
Yeah, so when we look at the international business, clearly an area of opportunity for us, if you think about 30% of our sales coming from outside the U.S., still a relatively small number. It's even lower than that when we look at our orthopedics and tissue business. We think with Codman now we're going to build the scale. We're building all the infrastructure. That infrastructure can be used, obviously, on the neuro side, but also on the OTT side once it's built, when we have customer service capability in many places around the world, distribution, IT, and so forth. Clearly, we're seeing now, though, more selling synergies across the portfolio amongst the team, so the beginning part of 2018, a lot of territory changes taking place that I mentioned before, a lot of people that we had to fill in terms of new territories.
That's all now behind us. We still have to get off these TSAs in Western Europe in the first quarter. I think once we move past that, we'll start to see some better growth. But clearly, Q1, as we've already messaged, is going to be a choppy quarter in Europe just because of the disruption factor of the TSA exits, and that was factored into our first quarter guidance. But we look out longer term and see opportunities in Japan and China. I mentioned greater than $40 million. It would not surprise me if both of those are not double that in five, six years from now, given we've got big commercial teams there. We've got new products we're launching and a tremendous opportunity in those two markets in particular.
But the nice thing is, even in a lot of the mature markets in Western Europe, we still have a lot deeper to go in terms of our growth. We haven't maxed out. We've got more products we can launch. And I clearly believe even in those mature markets in Western Europe, Canada, Australia, we could even see faster growth than just low single-digit growth, which is what these markets are generally growing at. So I'm expecting our international business to grow at least in line with the overall company average after we move past these TSA exits.
Got it, and then just secondly, on the EU MDR, you guys have been one of the more vocal companies about the changes happening there and being out ahead of that. Can you walk through a little bit of what you're seeing and how you guys are kind of attacking that issue?
Yeah, so we look at our European business and some of the regulation changes that are taking place. It's going to be a lot more difficult to do business going forward unless you're going to make a lot of investments in clinical studies and getting more data, which is going to be required, and so as we look at the portfolio in Europe, we'll evaluate which are the areas we want to continue to drive more investment and which are the areas we want to pull back on, but clearly, as we look at certain parts of our business, if we have very low runner SKUs and so forth, does it make sense to put a lot of dollars of investment into those? Probably not, but clearly, Europe is an important part of our business. We're going to continue to invest.
And it's an exercise not just Integra is going to be going through, but pretty much every medical device company, medical technology company. And so we'll see how this all plays out. But clearly, there's a lot of work ahead for us as we look at rationalizing the portfolio in Europe.
Shifting back to the U.S., so can you talk about the progress of the realigned sales force, I mean, particularly as it relates to lower extremities? That was something that didn't kick off quite as strong as you would have liked last year. Can you talk a little bit about your outlook there?
Yeah. So let me take a step back and talk about why we made the change we made and then what's happened since. So at the beginning of 2018, we had one inpatient channel that was calling on both hospitals and clinics in the burn centers. So you would have a rep that would be carrying an ankle, a foot system, skin products used for burn patients, upper extremity products. It was just too big of a bag and too diverse. Why did we sell and go to market this way? It was a cost of sales issue for us as we were growing as a company.
We got to a point in 2018 where we could afford the investment to split the channel, get more focus, add more resources to each of the two split channels, and then move forward in a way that we think is going to drive faster growth. If you look at our inpatient Wound Reconstruction business, we essentially doubled the size of the channel from 50- 100 resources. The growth we have put up in that part of our business has been very impressive. We're seeing that double-digit growth rate. You saw some of the market statistics. It's a very attractive end market. We expect this to be a growth driver for us going forward, and I would say that's gone really well. We did a lot of planning, though, to make sure that that part of the business did not take a step back because it's so profitable.
It's so important to us. We had done a lot of planning to bring in external resources in 2017 to prepare for the split. And many of the people, once we split the channel, went over to this part of our business, which meant extremity metal had a number of open territories. We filled many of those in Q2 and Q3 with new reps. We've now got a full channel. We've also added some external resources at the senior leadership level, which I feel very good about. And as we go into 2019, we should start to see better, I'll call it better growth or some level of growth, if you will, in this part of our business. It's been a business that's been declining for us for a number of quarters here.
We've done well in arthroplasty between ankle and shoulder, but our foot system has been down double digits pretty consistently for the past five or six quarters. We believe we'll make that turn in the second quarter. So we've got the channel in place. We've got a center of excellence now down in Austin, Texas. We've got our R&D resources co-located. You're seeing all the new products being launched out of that team now. We've got a new leadership team in place. And I feel quite good. We'll see better performance in our lower extremities business really starting in the second quarter. Hopefully, we can do more in the first quarter, but we already saw signs of it at the end of 2018. While we were down year over year, we had a nice sequential improvement from Q3 to Q4.
We're starting to see signs that we're back to stability and then hopefully some growth as we get to Q2.
Yeah. Just building on that, one challenge in 2018, it was not seeing the back half acceleration sort of overall you were looking for heading into the year. So you're guiding to more growth in second half of 2019 versus first. So what gives you the confidence in that pickup this year? Talk about the differences, if you could, about 1H versus 2H.
Yeah. So the way we laid out the year for our investors and potential investors is Q1, we said it was going to be roughly around 3% organic growth. Q2, a little bit better, but most of the growth coming in the back half of the year. Why do we feel good about the full year of 5% organic growth? Number one is we've got stable channels coming into 2019, both on the CSS side and the neuro team and on the OTT side with the channel changes that we've made. So I feel good about stability of channel to start the year. Obviously, we have these TSA exits in Western Europe in Q1. That's why Q1 is going to be down. But once you move past that and get off these TSAs, I believe we'll have much more focus on selling activities and drive faster growth.
Second is these new product launches. So many of them are happening now. The teams have just been trained on the sales force around the globe on these new product launches. They will have a more impactful benefit to us in the second half of the year, obviously, than the first half of the year. And then finally, I would just say the expected improvement in our Extremity Orthopedics channel. So not expecting much to happen in Q1, but as we get out of Q1, we should start to see the turn in that part of our business and see better growth in the back half of the year. So those are really the three factors that give me confidence that we'll have better growth in the second half than the first half.
Okay. One other top line, and then maybe we hit one earnings question. So there's a lot of changes going on in the wound care space and greater payer focus on PMA level products. In that environment, can you talk to your latest outlook for Omnigraft? Do you see a potential inflection for that product?
Yes. I think when I look at our wound care portfolio, we're well positioned for today and tomorrow. And what do I mean by that? We have three different technology platforms. We have Omnigraft, highly engineered collagen product. We've got a bovine fetal dermis product called PriMatrix. And we've got an amniotic tissue product called AmnioExcel. So we've got a broad portfolio. And so in an environment where we have fee-for-service, which is a lot of what takes place in today's environment, we have products that can be successful in that space, Omnigraft not being one of them because it heals the patient so well and so fast, the clinics don't make a lot of money. And so that's very frustrating. But as the healthcare system moves towards a focus on cost and efficacy, Omnigraft will definitely be a beneficiary. And so we are well positioned for today, for tomorrow.
Omnigraft, at certain points, will hit an inflection point, but it's probably still a few years out as the healthcare system moves towards this focus on cost and efficacy. As we look at it, we're obviously being very proactive with CMS, with some of the larger payers around the benefits of using our products and even willing to look at capitated models or risk-sharing type models because we have great products. We have a great portfolio. And so I think we're well positioned today. I think we'll even be more well positioned in the future.
One of the key parts to the long-term story for you guys is EBITDA, margin leverage. You noted the long-term goal of 20%-30%, and you're targeting solid expansion of 100 basis points this year. Can you highlight maybe two to three of the biggest drivers of that margin expansion plan as you look out over the next few years that gives you confidence?
Yeah, sure. So gross margins, if we look at where we are today, we see our gross margins going up probably 2-300 basis points over the next couple of years to get above 70%. Why we're confident in that is a few reasons. Number one, we're going through kind of a portfolio SKU rationalization, probably eliminate some of the lower margin products in the portfolio. Second is a lot of the growth coming out of the next couple of years is expected to come from our higher gross margin products, the regenerative products that I talked about earlier. Third is we're going through some additional plant work, plant consolidation, plant rationalization. Those types of things will help, including cost reductions in the plants that we are in today.
And then finally, as we get off this J&J TSA that we're on, which is a few years away, we certainly believe we're going to see a nice uptick coming from that as well. So today we get charged a cost-plus arrangement. Even if we can make it at the same cost as J&J, it'll actually give us an upside to our gross margin. So expect gross margins to come up above 70% and then continuing to get leverage on G&A costs. So we've taken our G&A costs down by 600 basis points over the last five years. So that's tremendous progress, but we still have work to go. And so today we're around 13% of sales in terms of our G&A costs. I could see that coming down another couple hundred basis points over the next couple of years.
And if we do those two things, we can still invest in selling and marketing, still invest in R&D, and get us to the 28%-30% EBITDA margins that we're targeting by 2022.
Okay. Great. Let's take the bottom of the hour. Just knock up on me quickly, so thanks so much, Glenn.
Thank you.
Thanks, everyone, for joining us.