All right. Great. We're going to get started here. First of all, I'd like to welcome Integra LifeSciences and Stuart Essig to the stage here. We're going to unpack the story. There's been a lot of developments in the company, and I'm looking forward to the conversation. One thing there is the disclaimer readout that I have to do. Go to the Morgan Stanley website, you'll find it there. Maybe to start us off, Stuart, since returning as CEO, where have you focused your attention and what progress gives you the most confidence today that Integra will be successful over the long term?
I've been in the role now five months.
It's been very interesting. I've focused most of my time on working with our quality and operations people to make sure we continue to develop supply. We had a long period of time with quite a number of supply challenges because of some of the quality issues in one of our sites. But we've been, in the last three quarters, bringing most of our products back, and I probably spend 70%-80% of the time with the ops group.
Okay, great. What are the biggest changes you've seen across the company that allows you to say, all right, the consistency of the business is coming back, and you feel like you have that predictability rebuilding.
We had close to 25 years of really quite extraordinary growth, both organically and from acquisitions. But in the last four or five years, we've struggled with some of our quality system issues. What I'm really happy to see is that a lot of the work that we set out to do three years ago has been completed. We have been working with a compliance master plan to basically harmonize the manufacturing sites. We have 17 manufacturing sites as a company. We have been putting in place common quality metrics and initiatives across all our sites. To the extent that we had out-of-compliance activities, we have been working very hard to repair them.
We have literally gone to the bottom of every one of our sites, brought in external consultants, former FDA-ers. In the last two or three years, we have had a number of very successful FDA audits. We have had our notified body in all of our sites every year. We are just making good traction.
Yeah.
We have said that on our warning letters, we will have, by the end of this year, all of our responses submitted. We began producing SurgiMend, which is the third product that we wanted to bring back to market in our new Braintree site, and we began manufacturing in the second quarter. We expect to launch that in the fourth quarter. So lots of operational progress. Still plenty more to go.
Yeah.
But the reality is I haven't spent particularly that much time with our commercial team because they've done great. They've held the business together through a period of great turmoil. And what I did say when I returned is we have a really nice opportunity to go back on the offensive.
Yeah.
We promoted a couple of our leaders into divisional president roles. We've put both of our divisions under one common chief commercial officer. We are in the process of getting synergies across our businesses as opposed to just within our two divisions. Lots of change, but I think mostly change for the good.
Yeah. Okay, great. That is very helpful to table set folks, but I also think what investors are looking for important indicators, right? Whether it is KPIs or milestones. So what should they look out for over the next few quarters that you think are some of those leading indicators on the progress being made?
We have had three quarters in a row now where we have not had any major upsets in our manufacturing or an ability to supply product.
Yeah.
We have also reduced dramatically our spending on compliance. We have reduced dramatically our spending on European EU MDR program, and we have completed or nearly completed the construction of our Braintree facility. What that means is our cash flow has increased significantly throughout the year. When you think about the number one financial metric I would look at over the next four quarters is the growth in our operating cash flow and our free cash flow.
Okay, great. Well, look, I want to dive into the portfolio opportunities and competitive positioning. You touched a little bit about the strength of the commercial sales force keeping the business as intact. I guess on the supply reliability and product availability, as that improves, what do you think are the biggest opportunities to translate those commercial relationships that the commercial team has done such a great job of holding onto, into growth across the portfolio?
Sure. Our portfolio is roughly two thirds neurosurgery and related products, and one third tissue reconstruction products. The dynamics are different in the two parts of the business. On the neurosurgery side, although we have had, throughout the last two or three years, periods of inability to supply product, they have generally been only a few months at a time.
Which meant we really did not have a significant impact on our market share. We are now in the process of having most of those products back in stock. We have really starved our international business.
We have a nice opportunity to bring some of those products back internationally that we unfortunately didn't have inventory for.
It is, to some extent, just executing on our commercial strategy and having enough product to deliver. But in our different components of our neurosurgery business, we are number one or number two in each of the categories, and they are products that have been used by neurosurgeons for years. To the extent we have gotten product back in the market, we have taken our market share back. We have a number of new products that we are in the process of launching or will be launching in 2027 in the neuro side of the business. We launched our AURORA Surgiscope, which is a very interesting product for use in minimally invasive neurosurgery.
We have, in 2027, a product that we call Libertís, which is essentially an anti-clog catheter that can be used both in external ventricular drainage as well as in hydrocephalus devices. In both of those areas, we are the market leader, but these are new products that can have a major impact on limiting clogging and therefore limiting explants. A lot of hydrocephalus is in children. Typically, they have their shunts exchanged every two or three years.
The longer you can have a child avoid the surgery, the better the outcome for the patient. On the neuro side, there is both new products as well as simply driving market share internationally that can seriously impact the business. On the tissue side, we have had a number of challenges with product unavailability.
Yeah.
In prior years, we had challenges with our Integra Skin, which is our leading product in terms of availability. By the second quarter of last year, we had, for the most part, product back in stock. We've been able to return to market with that product, to market shares previously roughly in line with where we were before some of these product shortages. We also relaunched a product called PriMatrix, which was out of the market for two years.
Okay.
We believe we've taken back roughly 50% of our pre-quality system revenue. Again, we have the broadest range of tissue repair skin substitutes. The salesforce is trained to sell across the range, and we're now back for the first time in 2.5 years having all of the products available for the reps. But we have to earn our share back, and it's a really competitive market. A little bit different than neuro. There's 10, 20, 30 companies with skin substitutes.
Right.
I think we have the broadest range, but we've got places where we've lost business, and we've got to go earn it back.
Okay. You started touching on this a little bit, but where do you believe Integra has its strongest competitive advantages, and how do those competitive advantages support the company's long-term growth potential?
We have such a broad product line and such a balanced product line that it is unusual if we do not have some business in any major hospital in the U.S. But there are big chunks of our portfolio that are not in some of these hospitals. Because of the way we have been structured with these two divisions, we have really gotten minimal leverage between the two divisions. We have ±25 individuals who focus on enterprise, which means selling directly to IDNs and GPOs. We really have not leveraged the sheer breadth of our portfolio in those big accounts.
Yeah.
That's a big focus for us in the next 12-24 months, which is just leveraging our presence in a number of really significant accounts and making sure we're selling across the portfolio.
Yeah.
The other strength we have as a company from a technology perspective is our tissue reconstruction products. We have, again, the broadest array of technologies. We have a synthetic product that we've brought to market in the Hernia Repair area. It has the potential, with the PMA that we're working on, to go into breast reconstruction. We take those tissue products also into our neuro division.
Our DuraGen product, our dural grafting product, we're the market leader. It's sold through our neuro sales force, but it's manufactured in the same facilities as our wound care products. I think leveraging across the two divisions, leveraging in our customers, and then driving international. We've gone from about 20%-30% international as a company. Some of the better, larger companies are 40%, 50%.
Yeah.
That's just about penetration. That's just about being present in the market and having the sales and marketing infrastructure to drive. We've grown a lot, but there's still plenty of room to grow.
Okay. In there, you talked a little bit about leveraging existing hospital relationships across the portfolio. As you think about the combination of neurosurgery and tissue reconstruction, what is the biggest opportunity to create value from that combination?
I think it's just the ability to negotiate hospital-wide deals across our portfolio.
Yeah.
In some hospitals, we're the major player in tissue recon, and we have no presence in surgical instruments.
Right.
It's really just about selling across the portfolio.
Yeah. Using that mind share that you already have within the hospital across it. Okay. As you think about, investors are always concerned around top-line growth trajectory and understanding that. How should investors think about the tissue reconstruction portfolio in particular and the growth trajectory that it is on over the near term and midterm?
I would distinguish between our short-term guidance, where we have been relatively conservative because of the number of product availability issues that we have had as we go through this journey from a corporate quality system perspective. But if you go back before 2024, we were growing our overall business at 4%-5%, our neuro and surgical business slightly below that, and our tissue business somewhat above that, mid-single digit. If you look at our competitors in tissue, they have grown a lot faster than that, and I really think it does have to do with the last three or four years of product availability. I think longer term, there is every reason to believe we can get back to, at a minimum, our prior performance, which was mid to high single digits on tissue.
Okay, great. There has been a lot of noise in the marketplace within the wound care market. The recent CMS reimbursement changes are shaping the way that the outpatient wound care market is operating. What opportunities does that create across your tissue reconstruction portfolio?
Broadly speaking, ± 90% of our tissue products are sold into acute. Whether it's the hospital or the surgery center or wound care center, we never really had a big presence in the physician office. Therefore, we never had significant reimbursement for our products. The issues with reimbursement that drove CMS to change the way in which products were priced principally had to do with the amniotic tissue products. From our perspective, those prices have been driven down 80%, 90%, and we've basically never raised our prices to those very high levels.
Yeah.
That means that the physicians who were benefiting from these high prices really have no reason to do the procedures in their offices, and we expect those to be driven back into the wound care centers, into the adjacent surgery centers to the hospital, where we're the strongest.
Right.
We priced our products essentially in line with what the new CMS ruling is, and a gain, 80%-90% of our sales fall into a DRG, not a direct reimbursement from CMS.
Okay, great. That's helpful. We talked about some of the products not being available, supply chain issues, et cetera. As you're preparing for SurgiMend, in particular, to relaunch, what are the key priorities, and what will define a successful return to the market?
SurgiMend is a surgical mesh that is approved as a surgical mesh without any specific label. We have completed a PMA, all the modules except for the manufacturing module, on SurgiMend in order to get a breast reconstruction indication. We expect to have that audit by the FDA sometime in 2027. That will open up the ability for our sales force to sell into plastic and reconstructive surgery. The market now is dominated by a product sold by Allergan. It's an $800 million product, and we see a lot of potential to penetrate that market.
Our data in our PMA demonstrates some real utility of the product when compared with others, and we have many loyal customers who would like to see the product back on the market. Similarly, our DuraSorb product, which is a resorbable polymer mesh, it is still on the market. It's been on the market for about three or four years. It's been growing at double digit. We've also been doing a PMA clinical trial for that. We would expect to submit that data sometime in 2027.
We're hoping to be the first company in breast reconstruction to have two PMA products available. There's a lot of interest in this at FDA. There's a lot of interest in the clinical community. Women's health is a big topic, and breast reconstruction in oncology is a huge opportunity for us.
Okay, great. Folks love analogs, and I am sure you do as well, but there are lessons learned from relaunches. As I think about PriMatrix and the proof points that you have seen through that relaunch, as well as the lessons learned, what data can you share with us so that we can think about appropriately categorizing that SurgiMend relaunch?
The rough guidance that we have given on the SurgiMend relaunch, and it really is just an analog with what has happened with our PriMatrix product, is we were able to earn back in three quarters roughly half of the revenue that we had prior to the stop ship.
Yeah.
We are essentially guiding to probably follow that trajectory. What we did learn is to spend the bulk of our time with our traditional customers in a relatively small number of accounts. To be sure that they are getting the adequate inventory, that they are getting the adequate support. Then we open up the market to more of our sales reps and more accounts. I think you will see a very steady launch of SurgiMend. We are not going to rush it out into the market. We will go back to the users who were dedicated to it, and then as our sales reps learn how to sell it again, we will start to open it up to other accounts.
Okay, great. Why do not we switch gears a bit and talk about the P&L growth and the leverage that you are planning on getting in the business and seeing that improve. As you look at 2026, what are the key factors that could drive performance towards the high or the low end of your guidance range, and where do you have the greatest areas of confidence within the business?
The biggest opportunities in the back half of the year is going to be having adequate supply on the neuro side of the business of a number of our products that have been on the market, but we continue to sell more than we can make.
In particular, the international market will provide some upside for us in the event we are able to meet the demand internationally for the products from a neuro perspective. On the tissue side of the business, it depends on the extent to which we are able to continue to regain accounts with the Integra skin and continue to drive market share with PriMatrix. The good news is we really don't have supply issues now on our tissue side of the business.
Yeah.
It's up to our sales force to drive the revenue. I think international and tissue have the greatest potential for upside, and they probably have the greatest potential for downside. On average, we think we are doing the right things.
Okay, great. Let's look beyond 2026. What does a more normal growth and earnings profile look like? What are the proof points? What gives you confidence in the ability to reach that?
If you go back before 2024, 3.5 years ago, we were generating roughly mid-single-digit top-line growth. We were generating a 65% and north gross margin. We had operating margins in the mid-20s. With the work that we've done in our quality system, and with tariffs, there's probably a 2.5, sorry, 250 basis point, somewhat permanent impact on our gross margin.
That we will have to get back through process improvements, through efficiencies. But difference between back in 2024 and now, the tariffs are meaningful and the quality systems and cost associated with that do provide some impact on gross margin. But that's roughly a 250% improvement from where we are right now.
Right.
This set of activities basically cost us 500 basis points on the gross margin, and roughly 250 of them will be in our rear view mirror in the coming 18 months. On the EBITDA side and on the earnings side, we put into place what was called the transformation about a year and a half ago. We've taken roughly $35 million-$40 million out of our operating expenses and some out of cost of goods, and we've said we probably have another $10 million-$15 million that we can take out of the P&L going forward.
Okay.
There's definitely. I talked a little bit about how we've consolidated some of the back office activities in our divisions. We've done quite a number of things to just make our G&A more effective . T here is room in our operating expenses to drive margins, and we think we can get our operating margins back into the mid-20s.
Okay.
The other one, as I mentioned before, is cash flow.
Yeah.
Prior to 2024, we were generating ±$200 million a year of operating cash flow and we do not see any reason we should not be able to run the business that way once we are through a number of the changes that we have made.
Okay. Yeah, and I guess there is the improvements that you expect in some of the cost-out initiatives, but there is also, as the revenue growth comes online, there is increased leverage within the system. How do you expect that operating leverage, in addition to your cost actions and the business mix also importantly, to translate into EBITDA growth and margin expansion over time?
Well, I talked a little bit about the margin expansion. I think our general guidance has been that we expect to grow our earnings per share in excess of our revenue growth. I don't think we've been that specific. We do have some headwinds as you go into 2027, including refinancing our debt and also the incremental tariffs expense that we'll have in 2027 versus 2026. I think longer term, it's about running the business more effectively and driving the top line.
Yeah. Look, I think for you guys, it's always important to be balanced around growth and cost discipline. How are you thinking about that balance of being, again, prudent on cost, but also making the necessary investments to support commercial execution and future growth?
We certainly have not invested as much as we'd like to in our R&D line. We have been cautious in the last few years because of our need to really invest in our existing product lines.
Yeah.
On the other hand, we've had in development a number of critical products on the neurosurgery side. I talked about it. On the tissue side, it's really been about generating clinical evidence. We have invested heavily in both our clinical affairs activities as well as in generating evidence for all of our products. I do think Integra has been a leader in generating clinical papers, peer-reviewed publications, multicenter trials. That's been a real strength of ours over the last 25 years, and I think the data that we've got on our products, it's going to be hard to beat.
Okay, perfect. I want to shift to the last topic, which is capital allocation and portfolio innovation. You've given us a lot of great information around what the pipeline looks like. One thing you alluded to in some of your previous comments was around the company's debt, and the plans to refinance it in the second half of this year. Can you give us a bit of an update on where it stands today, how folks should think about the timeline for the process to be completed, and how they should think about the impact of that to the earnings trajectory of the company going forward?
Sure. Integra LifeSciences has always operated with debt on the balance sheet. It is one of the ways that we grew was by doing acquisitions and then using the synergies and the growth in our business to pay down the debt. Then, for many years, we were doing quite a number of acquisitions as part of our growth story. In the two or three years where we've had these challenges, it wasn't really that our debt went up, but our EBITDA was challenged.
Right.
Our EBITDA is now going in the right direction, and we emerged from 2025 with our debt to EBITDA at 4.5x. We emerged from second quarter with our debt to EBITDA at 4.1x. We've said that in our forward-looking guidance, we expect to be just a little bit above our target range of 2.5x-3.5x debt to EBITDA. That's a combination of paying down debt and generating cash flow and also just generating the EBITDA so that we're more in our target range. Our whole debt package, as it were, will become current in the first quarter of 2027.
It terminates at the beginning of 2028, and we don't want our bank facility to go current. What we've said is in the back half of this year, and we're in the back half of this year. We expect to refinance the whole debt package, and we're going to do it in the bank market and the debt markets. We have no need or desire to do anything in the equity or equity-linked markets. I think we've indicated that given where rates are, we're somewhere between 100 and 200 basis points above our current rate, and our current rate is in the low fives.
Mm-hmm. Okay. That's helpful. You touched a little bit on the journey that the leverage ratio has been on over the last few years. How do you think about the pace of deleveraging towards the bottom end of that target range that you mentioned of 2.5x - 3.5x versus reinvestment in growth for the future?
First of all, our commitment to both our equity and our debt investors is to get our debt level in the 2.5x- 3.5x . To the extent we're generating cash flow, it's going to go to paying down debt. Also, while the company has grown quite successfully through M&A over the years, we're not eager to do M&A until we're in a position where we feel like the challenges that we've had in our operations are really settled down. We haven't been on a hunt for deals for a while now, and we're unlikely to be in the coming months. That being said, longer term, we've done quite well by acquiring products that were under-marketed, by acquiring products that we could drive through a larger sales force. That's been a good recipe for us.
In terms of organic growth, it's sometimes hard to see the amount of organic growth we've had in our business. But putting it in context, in our tissue products, we've gone from nothing 25 years ago to well over $400 million, and that's all organic growth. We've grown the businesses that we've acquired as well. We'll continue to invest in product development. As I said earlier, it's probably more on the clinical side on tissue, and it's more in continuing to innovate in devices on the neuro side. But we are a developer of products, and we've generated some really dynamic products, and we intend to continue to do so.
Okay, perfect. Look, I think you've touched on a lot of the innovation and portfolio development, which you expect to be contributors to Integra's future growth. I do think it's kind of helpful for folks to understand the capital allocation strategy today. You walk through where it is in the near term, but down the road, how do you expect that to evolve? Reinvestment, portfolio development, M&A, what do you think is kind of the steady state capital allocation strategy for the company?
Well, over the years, we have kept debt in the 2.5x-3.5x range. To the extent we had excess cash flow, we bought back stock. We bought back a lot of stock over the years. Intermittently, we did M&A, and we've been active in the capital market, so if we see a larger deal, our largest deal was roughly $1 billion. We bought Johnson & Johnson's neurosurgical business, Codman. We did that deal with all debt, and then shortly thereafter, we did an equity deal at a very attractive price to get our balance sheet back to the target ratio. We're not shy in issuing shares, and we're not shy in buying back shares.
Similarly, we've been an active user of the debt capital market. We have a view of having a balanced investment in organic growth as well as in acquisitions.
Mm-hmm. Perfect. Well, look, we just have a couple of minutes left, so maybe if there's a couple of things you would like investors to keep in mind over the next 12 - 18 months, obviously, significant progress against the challenges that have been faced by the business over the last few years. What messages do you want to leave investors with that look out for over, again, that next 12 - 18 months, next time we're on stage again next year?
Yeah. What I would say is the message that I have been trying to provide to both investors and our employees is, first, we've got a strategy that works. We're not going to change the strategy. We need to focus on customers and patients and employees and frankly, spend all of our effort getting our reputation where it has traditionally been with our customers, which is as an innovator and as a collaborator. It is really about getting back on our front foot.
I think we're at the point now where we have enough confidence in our return to normalcy that we're telling our commercial team that we're on the go. I think watch our cash flow over the next 12 months, watch our momentum with our sales force, and watch that we continue to run the business in a way that doesn't have as many hiccups as it did two, three years ago.
Okay, perfect. Well, look, you've given us a lot of important detail on the business and the progress being made. We're looking forward to seeing that continued progress, and we'll see you next year again.
Thank you. Thanks for inviting us to your conference, and thanks to folks in the audience for listening to our story.