Thanks, everyone, for joining us here at the end of the second day here at the Jefferies Healthcare Conference. Again, I'm Raj Denhoy with the medical device team. Up next, we have Integra LifeSciences, and we're doing a fireside chat. So if anybody has any questions, please feel free to chime in. From the company, we have Sravan Emany, the company's head of strategy, as well as Pete Arduini, the company's CEO. And so again, we're just... Pete, maybe I could just start with, I think the question that probably comes up the most is the company's guidance, not only over the short term but also over the next several years for accelerating growth at the company.
The first part of this year is expected to be a little bit below where your trend is, but then you're going to accelerate as you move into the back half of the year, and one of the questions we get a lot is just sort of what gives you the confidence in that as you look out over the next several quarters that you will see that acceleration?
Yeah. So thanks, Raj. So clearly, one of the big components of our work with the company over the last 18 months was this acquisition of Codman. And we'll probably talk about that a little bit more. But we substantially have that integrated here as we exit the second quarter. And through all of 2018 and even in the beginning of the back half of 2017, it was a significant lift for us. But that enabler has really positioned us well, I think, as a company from our global infrastructure, our capabilities, and also our number one position within neurosurgery. You also, I think, are aware, many of you, that we divided and split our channel within orthopedics and our tissue business last year, which really now positions us well to be able to grow and provide the focus in the different areas.
And so as we provided guidance for this year and really in the first half of the year, we were rather cautious in the first half, mainly because we still had some significant lifts to do on the integration. One of the big ones in the first quarter was around moving the final TSAs. So these are the services that J&J was providing for us for Codman in all of Western Europe and moving away from that onto our own systems and at the same time converting our IT. And we completed that successfully as we exited Q1. And so our guidance has reflected a slower first half ramp, mainly because of the disruption with the integration. And secondly, the other side of that is, why do we feel confident in the second half ramp?
The first part is, year over year, our sales force, now that they've been divided, they've been in their territories for some time, are very stable, well-trained, up, and ready to go. That's a big difference in a year. Obviously, the first half to second half, one of the biggest items is what I just mentioned, which is the integration disruption or lift. Particularly, the lift on our European team is gone, fundamentally dissipates by the end of Q2. The third part of it is new product introductions. We have coming out this year about nine to 10 new products, seven within our CSS area, which we've introduced actually already. They're all approved. Folks are trained. We're out selling. The shipments of those sales, initial sales, will really start to take hold here in late Q2.
But the vast majority of those will be in the second half. And I would say, Raj, in the second half, we need about a 6% growth profile to be able to have 5% for the year. And think of it this way, I would say kind of 4% core business growth, which is not a whole lot different than what we've done in previous years with all the disruption that I mentioned, and then 2% coming from these new products. And we can talk a little bit about the products. But that's how we think about the profile. And then as we roll into 2020, we would expect to accelerate our organic growth above 5%.
Okay. We can take each of the segments separately. So you started with the Codman surgery business. You mentioned with the acquisition of that business from J&J, you now have significant scale in surgery. I think you're probably the largest company in neurosurgery at this point, close to $1 billion in that segment broadly. So maybe that business has actually continued to perform well. I think it grew close to 3% in the first quarter, and you're not getting to much more than that. So that business really just has to continue to maintain that level of growth. So maybe you could talk a bit just about that, right? So you mentioned some new products. So what kind of sustains that level of growth? And is there a potential now, given the scale of that business, that you can even accelerate it faster?
Yeah. Maybe I'll comment about broadly. But then Sravan, maybe you can comment about the products that we've got lined up. But at a bigger picture, particularly when it comes to the channel itself, we've been very fortunate of holding on to the reps. We've kept the turnover down. I think the integration around the world has done quite well. And particular geographies like Japan and China, where we had very small teams, we now have large channels, either 100 to plus reps direct plus an indirect channel complementing those in China, where we would have over 400 resources out selling our products. So we do have the girth and the scale. It does enable us now to actually, either through distribution agreements or acquisitions of products, be able to fold more in and have the capacity in that channel because we've added the extra resources.
And in particular, these new launches, I think, are our first stepping off points. Sravan, you may want to hit on those.
One of the great things about the Codman acquisition from our perspective is we're able to accelerate many products that were in the pipeline for Codman and bring them to market this year. We've got seven or eight new product launches on the CSS side of our business, the largest of which is a new ICP monitor called CereLink, which, as many of you may recall, we sold the Integra ICP monitor called Camino to Natus as part of FTC-required divestiture to acquire Codman. We're now relaunching in the market this pipeline product that we saw J&J had at the time, the acquisition, and bringing it to market. Reception has been fantastic. There's a large install base of existing ICP Express monitors, which was the old prior J&J version of their monitor that we can penetrate.
There's a new headlamp that we're launching this year, which is for xenon light, which is a fantastic light. We've got a new bone-cutting tip for our CUSA Clarity ablation device. It's probably the one piece of CUSA Clarity that may have been a feature relative to our competition that we felt like we could match the level of competition that's out there on the market today. So a host of products that we've launched this year. Two other ones that are important are one of the major things that we acquired in Codman was a hydrocephalus shunt or programmable valve business. So a new, what I'll call, finder or essentially a programmable valve toolkit for the shunts themselves, basically a next-level leap in technology enabling better performance from doctors.
I would just comment to say that many of these products, because they are upgrades or enhancements to legacy channel areas, don't require significant VAC reviews and approvals. So our confidence that there's some pent-up demand in the monitors, some of these are 15, 20 years old, things in the shunt area, we've spent a good chunk of time putting some clinical focus around it. We're really one of the only leading companies that has an MRI-compatible valve and actually have done some extensive third-party research to show that certain valves in the marketplace actually can be changed if they don't have the technology that we have, meaning moved by small household magnets. I think some of this education to broader clinicians, people are looking at it, and I think it's information that's going to help move share for us.
Right. So it's fair to say, though, that I think if you had to maybe rank your confidence, well, I shouldn't ask you that, but you're probably pretty confident in this business, right, that given the scale, again, the products that you're launching, there's 3%-5% sort of guidance, right, you're given kind of longer term for CSS actually seems relatively achievable, if not conservative.
Yeah. I'd say I think we believe it's very achievable. I mentioned when we had bought Codman that we thought that even though the market is growing at, say, 2%-3%, that there's an opportunity in years to grow at 6%. And I still feel that way as the leader. A big part of the growth of the market is tied to innovation that is invested in. And I think we'll see how these play out. Most of these launches that Sravan just spoke to are 2-3-year peak year sale windows. And so 2020, 2021, they'll also be adding quite a bit of contribution. And we believe that. We have in our pipeline other products will be coming out next year. And I think there's plenty of tuck-ins too to add into this that which can accelerate to the higher end of the range.
Right. Which leads us to the other part of the business, right, which is the smaller of the two segments, but the one that you have higher hopes for accelerating growth, which is the OTT segment. And within that, there's two large components, wound and then orthopedics, right? And so it's probably the one that we get the most questions on, you probably get the most pushback on. And part of that is based on the idea that this business has for a long time been viewed as a potential accelerator of growth, but it hasn't really materialized up till now. And you made the change over the last year to restructure the sales force, particularly on the wound side. So perhaps you could offer a little bit about the strategy and what gives you confidence, again, that first question on accelerating growth.
Yeah. I think [those are] fair questions. So first of all, all of those underlying markets have the potential to be high single-digit, low double-digit players. And I'll talk about the markets a little bit more specifically because even though it looks like it's an ortho and a wound market, there's actually about four to five sub-markets, which actually gives us a little bit more flexibility. So historically, we had our sales channel integrated as one, meaning one rep sold extremities orthopedics. They called on a podiatric surgeon for maybe nerve products. They called on a plastic reconstructive surgeon. And 10 years ago, for cost of sales, it was a good strategy. Today, with as many products as we have in competition, it just wasn't effective, hence why we split it. We now have channels that we can grow separately and have them focused.
I think our performance with orthopedics within the first quarter, putting up positive numbers for the first time in a while, is proof that just the focus in the channel helps. On the other side, with all the tissue businesses, we actually have a lot of good things going on. Outpatient wound care, many of you follow, a lot of things going on in that space. We have a new amniotic product called AmnioExcel Plus, which is a tri-layer product. Its uptake is looking very, very good. We're ramping up our capacity to meet the overall needs. We also have multiple other products within that family. Our strategy there, Raj, is really all about getting a broad basket of solutions, which is where the market's moving to.
Albeit, this has been taking a little bit longer than we had hoped when we first launched, but I don't see a whole lot of change within that strategy. Second is the inpatient side, which is burns as well as trauma and reconstruction. This has been a very big growth area and a dominant position for us for quite some time. We see quite a bit of growth opportunities into new procedures in the trauma area. There's new players coming into the market, some competitive, but some also complementary, which are actually driving more use of our product as they may affect epidermis in conjunction with dermis repair. The other two areas are in surgical reconstruction, which is ab wall and also breast reconstruction. None of these are aesthetic work, but typically post-trauma and/or oncology-based work.
We see some definite opportunities with our technology to outperform allografts that have been traditionally used. We see that as an opportunity to be a high single to low digit grower. The last one, which we've been a historical leader in and drifted away from, is in nerve. Our nerve products, we have quite a nice portfolio, but we've also invested in. I would say, as we get into 2020, we'll be launching some new products. Each of those platforms, now that we've separated our channels and candidly are through a lot of our broader integration, I think you're going to see more focus in those. Each of those will have opportunities to accelerate our overall company growth. I just remind you, I think all of those segments have gross margins that are significantly above the current company average.
Right. And on each of those segments, so you mentioned chronic wound, trauma and burn, surgical reconstruction, nerve. These are all very, as much as they all fit under reconstructive, they're all very different markets, right? And the basis of competition in each of them is different. And so the question is really, how do you differentiate yourself in each of those, right? Because you talk about a broad portfolio, but does having a broad portfolio across the different segments in a sense really matter? Because how you do in trauma and burn might not impact how you really do in surgery and might not impact how you do in nerve. Each of them is a separate business, right?
Yeah. And I think it's a good question. Look, from a make standpoint and a design standpoint and a clinical evidence standpoint, there is significant benefits from a common platform because our engineering team and our capabilities group can share that research, which supports all those. From a clinical evidence standpoint, there's clearly some crossover savings on platforms. On the commercial side, I would agree with you, it is different. There needs to be different value propositions, but it starts with being able to fund individually separate channels that can be intimate. And again, we just made that move last year. And I think we'll see how we do this year. But I would say early signs are already very good that the focus channels will make a difference to your point because how you sell into plastic reconstructive surgeon is very different than the motivations in outpatient wound care.
Right. And so are the sales forces now in each of the, I suppose it's four areas, right? Are they established and secure at this point?
Yes.
Yes.
Yes. Yes. It's been 18 months since we've started this process, so yes.
Right. And is there anything you can share just even in terms of productivity or how is one or any of them doing better than others? Is there still some challenges you're trying to overcome in making sure all of this starts to gel as we move into the back half of the year?
Yeah. So I think we would say that it's been shown in some of the numbers we had last year, right? So last year, inpatient wound reconstruction and care business really performed very early on. The returns on increased focus in that channel started to come through. I think this year what we're seeing, and I think Pete mentioned this in the first quarter call, across our regenerative businesses, we're seeing demand really, really pick up and in some cases outstripping our ability to get there. And so the amount of demand in the market is really strong. And I think that the big part of that demand is demand generation that comes from having focused channels.
You mentioned, I think also in the first call, that you are expanding manufacturing, I think, to meet some of this demand. And so where does that stand at this point? Can you meet the demand in the marketplace?
Yeah. So I think it obviously so the short answer is over the long run, yes. I mean, our strategies with our plants, our raw material approaches will get there. I would say in the first half of the year, we are meeting adequate levels to meet our overall forecast. But I would say there's probably still some upside once we maximize that supply. And I think it would look at in our traditional products that we are based off our original IDRT platform, we had some constraints at the end of last year. This year, that's all in good shape now. Our products that are bovine fetal products out of our Boston facility were going to be coming into the second half of the year at a really good position.
I would say the one that we're chasing the most is amniotic, mainly because it's one of the fastest ramp-ups for us. As you know, there's some disruption in the marketplace. I think our three-layer product is actually perceived as better handling and capabilities than anything else out there. So we're managing how fast we ramp that, but it's a good problem to have right now.
So when you think about the opportunities, taking a step back between the two different segments, again, Codman, the surgery business, the neuro business, and then the orthopedic tissue business, one, you could argue in CSS has scale. There's fewer competitors there. You have a bigger presence there. One could argue that your chances of success there are maybe better, right? And yet one is smaller. Maybe it's faster growing, but it's much more difficult to be successful in. You've chosen to make orthopedic tissue the focus, it seems. Is that still the strategy in a sense? Or is there perhaps a reason to maybe invest more in CSS to really drive growth there?
Yeah. I wouldn't say we've made just OTT the strategy. I would say what we're putting our energy behind is, I would say TT as a growth vehicle across those different regenerative platforms, stabilization of our orthopedics business so that it is not an inhibitor, but begins to be a contributor. And then in CSS, Raj, I would say we are definitely counting as we come out of all this integration that it does become a faster contributor. So to the point, on a 3%-5% growth level, having it be in a 5% to push to the upper end of that, we clearly believe that CSS with these new products, with the global expansion, can play that.
But when you purely look at the math with the markets that we're in in OTT, one of those markets or two of those markets being able to have a slight pickup because of new indications and such has the greatest potential to actually move our overall organic growth rate. So I like the idea of having four or five shots on goal in OTT based off of common platforms that we can leverage the technology, we can leverage indications to try to find which ones that we can maximize. And again, I think the separate channels now is definitely positions up commercially to do that.
Right. So maybe just a question on M&A because Integra over the years has been a very acquisitive company. Your debt ratio, I think it still leaves you quite a bit of capacity at the current level. So what is your current thinking around M&A? And maybe the better question is, are there still areas where you think you need to invest or areas where there are potentially holes in your portfolio?
Yeah. So first off, from a financial perspective, we're ready to do M&A. I think our leverage ratio on a net basis is below three times, got over $1 billion of revolver capacity at the moment. So we have the capability to do M&A at the moment. From an areas of investment perspective, I think focus on regenerative medicine, continue to build out those channels, build out the bag for our established channels and what our reps can use when they call on their docs. That space is evolving rapidly, as you know, Raj. It's changing very quickly. So as we look at what could be potentially disruptive in that market, we're keeping a close eye there. Also on the neurosurgery side, again, looking for new potentially disruptive technologies that can fit into the largest sales force in neurosurgery globally is what we're looking at.
All tuck-in-type acquisitions, nothing of the scale or size of Codman or complexity.
I'd just add to Sravan's points that now that we substantially have the completion of all of the integration work done with Codman, the bandwidth from the leadership team, not just us here, but our extended top 100 goes up significantly. So now's the time to take a look at those. A Codman-type deal isn't something that we would focus on, obviously. But there's now a large amount, as Sravan said, of individual products, multi-products, small plays that you could plug into this broader Codman structure or platform products within tissue. I think the great and exciting part about the regen tissue space is there's probably five to six X more companies that have come out to the market that could very much be complementary to our strategy. I think over the next few years, those will be on both sides of that focus area.
Interesting thing about Codman with the position we have now, we do have the opportunity to think about subtherapeutic areas or types of removal approaches, things of that nature that we've thought of ourselves more as the aggregator of all the supplies. I think there's an opportunity to think more therapeutically about that space since we now have the scale.
I want to segue to the long-term view, but just a quick question on competition in OTT and just really how you perceive competition, the level of competition right now, because some of your competitors, whether it's MiMedx or LifeCell now becoming part of Allergan, there's been maybe some dislocation in the marketplace. Are you benefiting from any of that? Are you seeing any change in the competitive dynamic?
So we talk about this a lot. I mean, one of the things is the ecosystem and the game board, if you will, is quite dynamic these days. And like most things, I think there's some flips and takes. I think there's some new players into the burn space that brings new competition. At the same time, they also bring complementary capabilities of why you may use our products. To your point, I think in the plastic and reconstructive space, there are some different dynamics, whether it be access to allografts and such in that area, whereas a company that has proven xenografts has some interesting opportunities. And then in the advanced wound care space, there's been a few acquisitions. There's been some companies that are challenged. I think we haven't seen a whole lot of difference in that space.
And our focus is kind of keeping our head down and making sure that we get our supply and our capabilities out there. But in all of those, I feel quite good about our different horizons of success. I think advanced wound care and our outpatient business, we've got more near-term opportunities. I think if you look at plastic and reconstructive and nerve, there's more midterm opportunity for us tied to products and indications, all of those which we are pursuing.
Maybe just in the last minute or so, we could talk about some of the long-term guidance you've given. So I think you talked about getting to $2 billion by 2022. And we've talked about, I think, given everything we've said so far about why you're still probably comfortable with that, right? I think it implies about 6% top-down growth. There's a little bit of acquisition also in that $2 billion, which it sounds like you're also comfortable with. But the other piece is the EBITDA guidance of 28%-30%. We have you guys this year at a touch below 24%. So there's still several hundred basis points of margin expansion. Maybe you could talk about where that comes from. I imagine some of it's mixed, but is there other sources of that margin expansion?
Sure. So some component is mixed, right? So on the gross margin side, one is higher growth. Regenerative technologies contribute at a higher gross margin, right? So that's one. Two, we are still on these transition manufacturing agreements with Johnson & Johnson. So for all the Codman products or some component of the Codman products that they still manufacture for us, we still pay a lofty premium for those products when they're manufactured. So those will be off in our Mansfield facility by 2022. And so between mixed, so maybe the transfer of the TMA, some footprint optimization, broadly speaking, across our portfolio, that should improve the gross margins to that target of 70%-71% that we've talked about. And that should give us a couple hundred basis points from where we are today. So that's more than half of it to start with.
The other piece to do is on the G&A side and the, sorry, the cost of selling side. We're as expensive as we're going to be from a leverage perspective today because we've got the infrastructure. We don't have the growth in sales yet. So as this growth of sales starts to come in, we've got the same leveraging the existing infrastructure, so we'll have greater margins. And then lastly, from a G&A perspective, we're now on one global instance of ERP system. We're down from 30 different systems, almost 30 different systems five years ago. We're down to one single instance. So that has huge G&A implications across our organization, all of which will combine to get us to that 500 basis points that you're talking about.
I'll just add, I mean, just to Sravan's point, that we're in as good a position as we ever have to continue to accelerate top-line growth organically and inorganically with all the different acquisition targets we have. But I think this point on the profit enhancement, very clear line of sight, and something we did five years ago in a similar play with the same team. So we know how to do it, and that's what we plan to do really over the next 18 months.
Yeah, so we're out of time, but I guess you don't want to put words in your mouth, but it sounds like you're fairly confident in both the near-term outlook over the balance of 2019 here and then the longer-term targets. It seems like everything is tracking nicely on those as well.
Yeah. No, I would agree. I think we've got some work to do still here this year, but we feel very good about the guidance that we've positioned, and then I'm quite optimistic about the multiple shots on goal, both for cost and margin improvement, as well as these growth plays, so stay tuned.
Great. Well, thank you guys very much. And thanks everyone for staying here to the end.
Thanks.
Thank you everyone.