Good afternoon, everyone. I'm Robbie Marcus, the Med tech Analyst at J.P. Morgan. Very happy to have our next session with Integra LifeSciences. Bring up Jan De Witte, the new CEO, for a presentation, then we'll do some questions and answers.
Okay. Thank you. Thank you, Robbie. As said, I'm Jan De Witte. Still a relatively fresh and new CEO of Integra LifeSciences. I'm here with Carrie Anderson, our CFO. She's gonna join me up here, yeah, for the Q&A together with Robbie after. First things first, our safe harbor disclosure. As a reminder that some of the statements I'll be making are forward-looking. Let's get started. I think that many of you here in the room or on the webcast follow Integra for several years. I do hope that there's some people who do not know Integra that well and come away after this presentation as excited as I am about the potential of Integra LifeSciences. First, high-level introduction.
A little more than a year ago, I had the pleasure to join as a CEO of a world-leading company that I consider a world leader in restoring patients' lives with breakthrough technologies in neuro and regenerative care. We have essentially two big business segments. Two-thirds of our business is Codman Specialty Surgical. It's a leading player in neuro access, neurosurgery, neuro monitoring devices and disposables, and a leading provider in specialty instruments. The other 1/3 of the business is our Tissue Technologies segment. We have a very broad portfolio in complex Wound Reconstruction disposables and are a leading innovator in surgical and breast reconstruction. What ties these two segments together is Integra's deep domain knowledge in regenerative technologies that we leverage in the two business segments, but also in partnership in private label agreements.
We're a company with proven staying power since 1989, annual revenues of $1.5 billion, 90% of that coming from recurring consumables. We're leveraging our scale and focus to bring industry-leading new products to surgeons and their patients. We do this across 130 countries with, at this point in time, around 30% of our revenues coming from outside the U.S. Let me go a little bit deeper in each of these segments, starting with our Codman Specialty Surgical. The $1 billion segment, which we call CSS, in short. Concentrated activity in neurosurgery. We've been building a market-leading portfolio and a market-leading direct sales force.
Our global scale allows us to offer solutions across multiple disease states, like brain lesion surgery, including minimal invasive technologies, traumatic brain injury care, and neuro monitoring and hydrocephalus care. 20% of that CSS business is in our specialty surgical instruments, where we have a top three position in neuro, ENT, and general surgical procedures. We're a leader in a $5 billion accessible market, a market that's growing 3%-5%, and where we have the ambition to grow above that market by focusing on sub-segments in that market that have above average growth rate, as well as geographies where we have not penetrated as deep as we can.
This expansion of the business is enabled by four big levers: great technology, deep R&D technology, R&D capabilities, a global presence, and a strong M&A capability, both to add and tuck-in products, yeah, but also adjacencies to this CSS platform. Second segment, Tissue Technologies. Half a billion dollars in revenues, yeah, for this segment. This segment or this business represents the broadest set of regenerative technology platforms in the industry, ranging from highly engineered collagen technologies to bovine dermis to porcine and amniotic tissue, and now also including resorbable synthetic mesh, a technology that we recently, two months ago, acquired as part of our SIA acquisition. All these technologies support multiple leading brands, very known brands in the industry like our Integra Dermamatrix, AmnioExcel, SurgiMend, and NeuraGen.
Now, for those of you that have followed Integra over the past couple of years, I hope, you will have seen that we've made great strides to shift the portfolio in this Tissue Technologies business towards parts of the product technologies that are more differentiated, that deal with more complex and challenging surgical reconstruction and wound care cases, and away from more of the traditional wound care, lower technology wound care activities. The market where we play in is a $2 billion market growing at around 8%. Just as with the CSS segments, we're focusing on the above average growth segments or sub-segments in these markets.
Again, with new products, new clinical indications for our existing technologies, as well as expanding into geographies and expanding private label agreements. With organic and inorganic investments, we're focused on those higher growth segments within primarily surgical reconstruction as well as complex wound care. Since I took over as CEO, a bit more than a year ago, I've worked with our leadership team to rejuvenate and focus our integrated business strategy and extend it to all levels of the organization, with the objective to accelerate growth and profitability of this great platform. We're rallying the business around five pillars, five strategies, innovating for outcomes, growing internationally, broaden impact on care pathways, and then two enablers, driving operational and customer excellence and cultivating a high performance culture.
These five pillars are a great way to understand what we've been doing over the past year, 2022, but also how and where we aim to accelerate in 2023. Let me go briefly through those five, yeah, big levers of our strategy. First on innovation. For more than 30 years, Integra has been a technology innovator, targeting clinical but also economic outcomes, elevating standard of care. People who follow the company, yeah, remember 25 years ago, Integra Skin, the first, yeah, product with the PMA, the first device that received a claim of tissue regeneration, which spawned a new era of patient care that Integra today still very much leads. We innovate for outcomes in three ways. First, yeah, developing new indications for our technology, yeah, with the supporting clinical evidence.
Something, if you look at the business today, we're doing with our breast reconstruction PMAs. Second, developing new surgical approaches like with AURORA in minimal invasive neurosurgery and intracranial hemorrhage. Finally, bringing new technologies to our care areas like with an acquisition we did a while back, Endexo and BACTISEAL technologies, which we integrated our catheters to limit the clogging and infection risk. If you look at 2022, we've continued to organically bring new products into our portfolio, into our markets. If I think about the CUSA and AURORA tool set, we've launched a new product in our Tissue Technologies called NeuraGen 3D for nerve reconstruction and brought existing products into new markets.
A few weeks back, yeah, we launched a couple of our ACell portfolio, MicroMatrix, Cytal, and then Certas hydrocephalus product into the European market, existing products, yeah, into new markets. In 2023, we're gonna continue to focus on strengthening our customer and clinical insights by building a stronger strategic marketing capability and clinical capabilities in the market. We're focused on making our portfolio more digital with projects that expand our capabilities into either analytics, yeah, or companion app, a companion app type capabilities. We're gonna continue to execute, yeah, on the PMAs, specifically in breast surgery, yeah, with our SurgiMend product and with our DuraSorb, yeah, acquired product, respectively aiming for PMAs in 2024 and 2025.
On the growing international dimension, with 30% or only 30% of our revenues coming from outside the U.S., we, on the one hand, have a solid global footprint, yeah, but we believe that number should be more like 40%, 50%, and we can leverage that footprint to really go and accelerate, yeah, our capture in the international market. If we look at last year, we again demonstrated we can grow and launch new products in these international markets. Specifically, yeah, we've done well in Asia, done well with our indirect channels. We also have last year completed a major project where we mapped out our international opportunity, our international entitlement, translated that, yeah, in product market strategies, which at this point in time, yeah, guides, yeah, how we put our resources, how we invest in the international markets to capture those opportunities.
A few months back, we hired an international leader, fully dedicated international leader. He's gonna be the first Integra senior leader who's gonna be based outside of the U.S. Harvinder Singh will be based or is based as we speak in Singapore. He's there to give a full focus to the international market, strengthening our local commercial market access and regulatory capabilities, accelerating, broadening our commercial footprint. A lot of focus we have on the Chinese market and penetrating into tier two and tier three hospitals, and then advancing our In-China-for-China manufacturing opportunities. As we think of, as we think where we're headed with our CSS and Tissue Technologies portfolio, we're focusing on how that portfolio fits within the care pathway.
Okay, the journey that a patient takes from diagnosis to treatment planning to surgery to postoperative care. We've also looked at, from a surgeon perspective, yeah, where are the unmet needs where we have the technology and the access, yeah, to solve for the surgeons. Today, we're strong, very strong in acute care in the hospital setting, and we plan to leverage that strong position to grow more deeply in acute, as well as broaden our impact by moving, yeah, upstream in the care pathway into preoperative care, as well as downstream into additional sites of care. Looking back again at 2022, yeah, we deepened our impact in acute care by accelerating our ACell-acquired portfolio in our commercial channel. Had a very good second half performance there.
Two, the strategic study we did in both divisions to identify where in the care pathway do we have the right to play, the capabilities to play, the access to play, and can generate business that's synergistic with our current position, okay. That leads to road maps, both upstream and downstream, organic roadmap, but also inorganic road maps, which we call our M&A game board. The SIA acquisition that we did two months ago, very much is one of those targets from our M&A game board that we chased and that we landed as part of our strategy in breast reconstruction.
We also hired, mid last year, our first chief digital officer, a specialist where we're building now a small team around with a specialist who can work with the different strategic marketing leaders and R&D leaders to help us think through how digital can play in and around our portfolio. 2023, we're gonna further build those solutions that, yeah, provide value, and outcomes, to our customers. We're strengthening our market access and enterprise selling capabilities to monetize, commercialize those solutions. We're gonna further execute on a well-filled M&A game board. In terms of enablers, I think 2022 for any business in the world has shown again, or once more, the importance of resilience and efficient operations. Markets are more complex, supply chains less predictable.
We've faced significant inflationary pressure, but over 2022, we've responded very well. We pretty much, yeah, pulled every lever with several projects that strengthened Integra structurally as well as improved our cost position. Okay. We closed a high-cost factory, outsourced back office activity, a lot of focus on supply chain and manufacturing resiliency and efficiency, and further cloud enabling in our technology. In 2023, we're gonna continue to do that, building more responsive and scalable processes, continuing to invest in projects that make our supply chain more reliable, and investing in productivity initiatives to, yeah, further improve our yields and conversion costs, productivity, and start to make that part of our culture. That brings me to this slide where, yeah, if you look at our team's commercial manufacturing and geography, people do make the difference.
We have a good reputation and a lot of external recognition for being an engaging and inclusive workplace. In 2022, again, we got quite a bit of recognition, external recognition for that. This is a never ending story, and especially to build that in the culture and the identity. We're gonna continue to do this in 2023 with specific focus on the empowerment and agility, working to build more accountability and empowerment throughout the organization, more talent development, and further engagement around diversity and inclusion. If I bring that together, again, I hope the five levers give you a better sense of where and how we're driving our business.
As we continue to focus in 2023, on those pillars, it's really the way for us to, on the one hand, strengthen our core while accelerating our growth momentum. As a CEO and as an organization, we clearly made the choice to execute our strategy with respect for people, planet, and the society in which we operate. For me, that's an easy discussion. I think from experience, yeah, I've learned that the drivers of sustainability, the drivers of ESG success are very much aligned with the drivers of doing good business. That's a bit an overview on Integra, our mission, and our strategy. Let me turn back to results 2022, results that yesterday we pre-announced. There are more detail on our website.
We definitely over the past year saw our markets steadily progress and approach what we consider pre-COVID activity levels. Markets definitely improve. At the same time, the environment in which we operated was still far from normal. Several different types of micro headwinds, supply chain predictability, more challenging than I have ever seen in my career. In this tough environment, we delivered approximately 4% organic growth for the full year. If you would exclude our settling product at which we had a recall from that, we would be closer to approaching the 5%. With that, we delivered top line in line with the expectations.
On the profitability, a lot of focus throughout the year on driving a good P&L, managing responsibly in a tough environment. We expect to deliver adjusted earnings per share that are above the high end of our October guidance range. Also delivering at or above the EPS, earnings per share, that we projected way back when in February. This is the result of a broad series of actions on pricing, operational efficiency, careful OpEx management, you have to protect and drive our profitability. All of that coupled with financial discipline is one, you know, of the skills of Integra that keep impressing me.
Financial discipline on capital investment, returning capital to investors at the right time through share repurchases, and using our strong balance sheet and our financial flexibility to drive a very strong and capable inorganic activity as part of how we drive our strategy. We're gonna have our earnings call in February 2022. At that point in time we'll go more in depth on all the specific drivers. Let me now shift to our long-term outlook, long-term financial targets. Last year at the virtual J.P. Morgan, I communicated that I believed that the targets that were set by my predecessor were the right targets for Integra.
Okay, this is a business that should be growing in the 5%-7% range, you know, with further improvement of our gross margin and EBITDA margin, as a result, delivering double-digit EPS growth. Today I reconfirm this target. This is where we should end. I believe we know the path to get there. The path from a timeline, of course, has been impacted by 2022, 2021 COVID impacts. In our May Investor Day, we're gonna give an update to what is the timeline we see in getting to these targets. Stay tuned for May 4th, investors. At that time we'll also see how the year 2023 is shaping up. We do expect 2023, definitely by the summer, to be more of a normal year again.
That definitely would help us in projecting out our long-term targets. I'm not gonna go deeper into the specific numbers, but let me go a bit deeper into the main drivers that we see behind those top line and profitability targets. Why do I think that this is a business that can grow 5%-7%? Well, first, if you look at the different markets where we play, our CSS market, our tissue technology market, if you mix that up, that's a market that grows 5% in itself. If we execute well in this market with the portfolio that we have, that forms a basis of 5% growth. The job is to accelerate that growth with new products.
Organically bringing new products to market with a stronger NPI process, or bringing new solutions to the market that transform standard of care, like we're working with SurgiMend and DuraSorb in breast, and AURORA in minimally invasive neurosurgery. International has the potential to yield above average growth, definitely, as we catch up to our penetration in international. In 2022, we have organized with resource to really go with more energy and focus after that international opportunity. With the balance sheet and the M&A capability that we have and the M&A opportunities we see, we have opportunities to bring growth accretive adjacencies to our segments.
On the profitability and cash flow drivers, I think in 2022 we've demonstrated that we know how to manage a P&L in a difficult environment, and we're gonna continue to drive those levers. Benefit from volume leverage while continuing to invest in our strategic priorities. As many of the microenvironment normalizes, we have several levers to further improve our margins. First, with our Tissue Technologies business growing faster than our CSS business and having also a higher gross margin, there's a mix effect that we will benefit from. Then, we're bringing NPIs to market at a higher gross margin profile. We're gonna continue to focus and drive margin accretion, focusing on price capture, manufacturing yields, and conversion cost efficiencies in our operations. Then balancing this with the right investment.
We have several areas where we can build for the future. We're gonna continue to put OpEx in those areas to build and capture the future opportunities while continuing to focus on structural improvements, specifically in our G&A part of the business. Further lean out some of the structure in the business. That brings me to the final page and some key takeaways. I mean, for me, as a new leader in the business, I think for all of us in a COVID period and a eventful 2022, I think it's these occasional moment of truth to look into your business, look into the mirror.
When I do that for Integra, I see a business with, one, a strong commercial presence in attractive, stable markets that value our broad portfolio and value our differentiated technologies, and wanna pay, the right value, the right price for that. I see a business that has significant opportunity to expand where we play and how we play in adjacencies along the care pathways. Where we already have a very solid presence today, extend our play with, you know, organic NPIs, with digital capabilities, with international expansion, and with M&A. I see a business that still has significant opportunities to strengthen our capabilities in the changing world, strengthen our operational resilience, and accelerate our organic innovation capability. Also business that can really bank on a strong balance sheet, a great financial discipline, great M&A capability.
After a year in this business, I'm more excited than ever about not just our mission and our team and its potential to further grow. Also the expansion opportunities that lie ahead. We start a year 2023, fully focused, fully engaged around these five levers in our integrated strategic roadmap. Something that over the past nine months we've been focused on building those capability. With that, I think we do have time for Q&A. I'm gonna call Carrie Anderson to join me here.
Great. Maybe we can start with the pre-announced fourth quarter results. came in just a hair below the street, 3% organic growth for the quarter, 4% organic growth for the year. Any trends you saw that you could talk to, whether it was Codman growth versus Tissue Technologies growth and how that ended up for 2022?
Yeah.
You want to go, dear?
Yeah, I'll start there. I think the quarter came in largely where we expected. There were certainly puts and takes. I think we came in right in line with our midpoint of our guidance range. I think if I look at the TT side of the business, some of the areas of strength were on the Wound Reconstruction side of the business. TT is made up of two main franchises, which is private label and the Wound Reconstruction. Wound Reconstruction came in high single digit growth. That's following a third quarter performance very much similar of high single digit growth. Two quarters in a row of really nice core growth in our regenerative tissue Wound Reconstruction business. Inside of that particular franchise, sits ACell. ACell saw low double digit growth in the fourth quarter.
Combined with our third quarter performance, the second half delivered low single digit growth. I think we've really turned the corner on ACell and really bringing that back to some nice accelerated growth. On the CSS side of the business, I think a couple of areas of strength is our CSF management business. That's where our valves and our catheters are, as well as the capital side of the business. Obviously, we're still under a recall for our CereLink ICP monitoring device. If you exclude the CereLink and you look at the rest of the capital portfolio, we did high single digit growth in capital in the fourth quarter, and that was really driven by the strength of our CUSA capital. CUSA for us is our highest ASP, you know, priced capital. It's $200,000 approximately.
We saw really nice growth in the U.S., and then smaller capital did well around the globe. Nice performance there. Overall, I think we had some puts and takes. Probably the biggest or the two biggest areas where we came in exactly where we expected, but obviously were detractors in the quarter, were supply chain challenges, those still persisted. We are seeing elevated supply chain back orders that likely will still persist as we move into the early part of 2023. We were able to at least still to get to the midpoint of the guidance, so it didn't disrupt at a point. It disrupted our ability to get to the midpoint of the guidance range. Our biggest impact in supply is in our CSS division, particularly on our dural access and repair franchise.
The other area that I would say came in as expected, private label came in a little bit declined. A decline in the business there. That was as expected because all through 2022, we saw really strong organic growth in private label. First half of 2022 did 15% organic growth. A little bit of correction there as our private label partners start to kind of sell out of inventory that they've built up in securing their own supply chains. Overall, very, very pleased.
Let me maybe add a bit of two steps back perspective because, okay, you heard me talk about our long-term targets and where we should and what I think the portfolio. I look at our business performance each time. Does this confirm, does this give me data points, on our portfolio, how it can perform with all those puts and takes? When I correct for those, I see both in third quarter, in fourth quarter, this confirmation that with the portfolio that we have and the markets that we have, and definitely when the markets are somewhat back to post-COVID normal. This is a 5+% growth portfolio on which we can accelerate.
Then, yeah, our execution capability, okay, our supply chain and how we deal, yeah, with the daily challenges that are thrown at us. It's a very strong execution capability as well as, yeah, our attention to gross margin, yeah, in a tough inflationary environment where, yeah, we drove, yeah, very good, yeah, progress in compensating measures on that. Yeah, I see in our second half performance, yeah, data points that I extrapolate into our long-term
Are you able to quantify the negative impact from the CereLink recall as well as the supply in dural repair?
Well, the dural access and repair, let's start with that one. We did see negative growth in the quarter. I think it was more of a challenging comp, third quarter to fourth quarter, not seeing much different there, but more of a, just a tough comp, comparing to last year. It will be a tailwind for us as we move into 2023 as we stabilize supply chain. That's one of our higher profitable segments as well. In addition to being a tailwind on the revenue side as we stabilize supply, it also will be a favorable mix driver on the gross margin line as well.
I think for CereLink, I think the total impact from the recall is about, you know, $12 million-$13 million worth of revenue that we had in our combined second half of 2021 results and our first half of 2022 results that obviously have been figured into our, you know, tough comps year-over-year as we don't have that back in the market yet.
What's the latest update on when we might see that come back to market?
We still confirm, we think we're gonna have the product back, yeah, by the mid of this year now. We feel good about our understanding of the root cause. We feel good about the technical fix that we have. It's a relatively benign fix. Yeah, we're now in parallel doing two things. One, we're setting up, yeah, all the test mechanisms, as well as setting up our manufacturing, our supply to bring, yeah, those components into, yeah, we know how we're gonna manufacture and remanufacture. Important, at this point, we're sitting with the FDA to align with them on, you know, what data is gonna be needed, what evidence is gonna be needed to prove that, we're we fixed the issue, and what is the path back to market.
Yeah, all of that is going on as we speak, and I think every week we get, yeah, clearer on what is the path, yeah, between now and mid of the year to get back in the market.
You've done a nice job down the P&L. Again, in fourth quarter, you exceeded the EPS guidance range. Was that more on gross margin, OpEx, or a combination of both?
It was primarily OpEx leverage. I think, to your point, I think the approach that we've taken in 2022 was protecting the P&L and protecting cash flow. I think similar to other companies, the area that was most challenged in the business from the P&L was the gross margin line. We took it upon ourselves to take a active approach to the management of OpEx to protect that P&L, and I think we've done a nice job of it. In addition, obviously, with the recall announcement in August, that was, you know, a call to action as we understood that we wanted to make sure that we shored up that P&L as we moved through the year.
I'll have maybe Jan talk a little bit about our approach to OpEx as we thought about that and how we're thinking about reinvestment in 2023.
Last summer when we recalled CereLink and made some corrections to protect the P&L, we decided to take it one step further. This was the opportunity to also take out some legacy OpEx and create capacity to reinvest in more strategic areas. If you see us going into 2023, we're gonna bring back some of that OpEx that we held back, but in different areas. First, we're stepping up on the broader R&D, our clinical capabilities, our strategic marketing capabilities to accelerate and improve the effectiveness of our NPI process.
Mm-hmm.
That's one. Second, I talked about international, okay? Brought a new leader on board. We're building in different geographies, stronger marketing, stronger regulatory capability, more feet on the ground to go after those commercial opportunities. As well in the U.S. market, there's still some areas where, you know, we're not as penetrated with the salespeople as we could, so investment there. We've also put some money aside to start running a number of digital pilots, technical pilots, proof of concept pilots, some minimal viable products. Third, we continue to invest in capabilities in our operations and quality to drive more efficiency and quality in that operation. Okay. Four areas where we're stepping up on OpEx, largely paid by legacy OpEx simplification that we redeployed over the past six months.
I wanna touch on the long range targets that you put out, 5%-7% organic sales growth. It's been a while since Integra grew 5%-7%. You did 4% this year, I believe 4% the year before COVID as well. How long-term is it exactly, and what's the line of sight to get from where you are today to, let's say, the midpoint of the long range plan?
Let me answer a different way, right? If we would not have recalled CereLink, and, you know, there's a couple specific suppliers, we would be growing 5% this year already, okay? Again, that's where I keep challenging ourselves on what's our real growth capability. You'll say, okay, there's always stuff that will happen, and you're right. It's our job to have that resilience to deal with it, although some things are, yeah, quite a bit out of the ordinary. That is, yeah, one element is basic good execution, and, I would say today we execute better than a year ago, okay? More agile, more speed in dealing with risks and opportunities. That, yeah, gives us, yeah, that 5% baseline.
We are further driving what we have in our NPI funnel to come to market, commercialize. Well, there's several, I would say, pots on the stove at this point in time to bring this year and next year to bring new products to that market. We definitely have our Tissue Technologies business back growing at around 8%. That's where this business should be. The leverage is up, international leverage is up above that 5%. Those catalysts, they are there. Okay? We build a stronger execution capability out of that, and we should start to see that those numbers confirm.
I think the second half for 2023 will be shaping up to an opportunity for us to be above 5%. I think the first half, I think there's still some things that we're working through. Obviously, we won't have CereLink.
Mm-hmm.
We'll give guidance on February 22nd, but you can expect that that guidance won't have CereLink revenue until the second half. I think a combination of stability and supply will improve over the course of the year, getting to more stability in the second half, having CereLink relaunched in the second half, are all areas I think that we can point to a more stabilized environment to demonstrate our ability to get over 5% in that second half of poor 2023.
Just wanna check. Any questions in the room? Maybe last on M&A. Integra's historically been a fairly acquisitive company.
Yep.
What's your view on the opportunity set of targets out there for Integra, and do higher interest rates change the math at all on your thinking?
One, last year, as part of the different strategic deep dives we've done, we translated that into our M&A game board. We have a quite meaty game board. We know what we wanna go after and are proactively working that. The SIA acquisition was a target that was on the game board in the summer. Took us five months to actually land it. We'll continue to do that. The market definitely at this point is warming up, more, I would say, acceptable to approaches for acquisition. In terms of the interest rate, one, we have a strong balance sheet, we have quite a bit of dry powder in the pocket.
Had good discussions on, in this environment, should our hurdle rate be higher than what it's traditionally been? You know, we've always had a hurdle rate that says we want 10% our return on capital in year five. We've always aimed above that, and we'll continue to do that to make sure that we realize the cost of capital into our M&A.
Okay. Great. Unfortunately, we're out of time. I wanna thank you very much.
Thank you very much.
Thanks everyone for listening.
Thank you.
Thank you.