Integra LifeSciences Holdings Corporation (IART) Earnings Call Transcript & Summary

Thank you, everyone, again, for joining us at the Jefferies 2020 Virtual Health Care Conference. Again, I'm Raj Denhoy with the Medical Vice Research team. Up next, we have Integra LifeSciences. And from the company, we have Mike Beaulieu, who does the company's Investor Relations as well as the company's President and CEO, Pete Arduini. So first of all, thank you guys for joining us today. We have about 25 minutes, and we're going to do Q&A. If anybody has any specific questions they want to ask, they can e-mail me, and we'll try and fit them in, but it's pretty tight.

So maybe, Pete, we can just start with kind of an overview of the business where it stands today. I know you've probably gotten asked this question a number of times over the last several weeks, and I don't want you to give an -- well I would want you to, but I don't expect you to give a mid-quarter update, but maybe I could ask you just in terms of how the recovery has been tracking for you. Has it been tracking sort of better than you would have expected, sort of, in mind or things opening up more slow than you would have thought? Just some broad thoughts on how things are opening up.

Yes, Raj, thanks for the question. I would say, look, in short, I think we're in line with what we expected. As we reported just about a little over 1 month ago, April was a tough month. It was down about 45% across the business. Some of our businesses in Orthopedics were down more, closer to 80%. Some of our businesses such as in Tissue and areas of neurosurgery less. And we've seen some continued improvement here within May. But as we said during our update that depending on the range that we're looking at, if April or May only improved slightly better than April and June were in the low 200 range and if we see some improved growth over this window, we could be in the mid 200 ranges from a Q2 standpoint. But I do think we're seeing positive change. And I think June and July, ultimately, for us, are going to be the big months for the year, meaning, what we see there because there's so much going on in the world and understanding what type of normalcy we get back on our growth rates.

Is there anything that you could point to other than sort of daily sales volumes that are kind of informing your outlook, things like surgery schedules, training? Any other data points you could look at or offer in terms of what's happening?

Yes. No, it's a good question. So obviously, daily sales, in particular, kind of trailing 10-day run rates tend to be important for us. But early on, we developed a kind of electronic-based model survey that each of our channels picked -- it's roughly about 80 doctors. There is some mix of purchasing folks amongst our different channels around the world. And every -- fundamentally, 10 days or 2 weeks, we ask the same set of questions. The reps kind of talked through and reported that some of the questions are what percent of your businesses at level it was to last year versus this year. So we're actually gathering some of that data and we talk it about it at a procedure level. So it's been actually pretty well aligned to what we're seeing and how things will progress.

Understood. The other aspect of what's happening currently is you talked a bit about what you're doing on the expense side as a business, and you've taken some action. You've moved to 4-day work weeks for some folks, furloughing some staff. Not all Medtech companies have followed that same path. Some have actually chosen to invest more aggressively in this period. How do you think the -- your decision is impacting competitively? Or do you think it could impact you competitively as you sort of pull back a little bit?

Well, I think we haven't really pulled back. I think we've been prudent. So I mean, if you look at our company as a mid-cap diversified with some leadership positions, some other areas of the business that we're trying to build leadership, at the beginning of the year, we refinanced the company. A lot of good plays took out there that really balanced or shored up our balance sheet at the beginning of the year. And then we moved pretty aggressively on the cost cycle. Why did we do that? I think two reasons. One is not knowing how deep this could be and making those early, obviously, positions us to have more degrees of freedom later. And the second thing is our company has been founded, and our growth strategy has also been tied in to have capabilities with M&A and other moves. And so we wanted to be able to preserve that. I would say it's been great to be able to hold on to our employee base for the rebound. That was a big part of why we did what we did. We also used this time period to actually fully fund and keep the plants running where we actually had supply issues in 2019. And so I'm glad to say that we're able to close that gap. And I think as volumes come back, that's going to be one of the positives for us is to be out of a supply-constrained issue. And the last part of this is, is that I think R&D pipeline, the critical areas, we've been able to actually keep those programs funded and moving forward, things such as our intracerebral hemorrhage program, our neuromonitoring platform, our nerve [ rollout ] products. And I think as long as this fundamentally is contained within 2020, meaning that our expenses, we could start bringing back to normalcy as we exit the year at the latest. All of that should hold true as well as we've used some of these funds that keep our sales force funded. As you know, in the United States, they're much more leveraged on commission rates. And so we've been able to not pay them completely whole, but to keep them in a respectable range to be able to pay their bills and be ready as [ we slow the impact ].

So the question around the competitive dynamic. I know it's been only a short period of time. But do you think -- maybe the better way to ask it is, have you seen any increase in turnover or have people responded negatively to some of the activities you've done internally?

I would say people have been very, actually, supportive, our teams, the fact that we didn't lay off a significant amount of folks or RIF organizations, as many different industries did. And the fact that we compete with very large organizations that may have more capital to maybe, say, hold on for a period of time, we use this as an opportunity to really kind of tighten the belt and think about what is dispensable and what's not. I mean one of the things, Raj, that we're doing as a company as we've kind of squeezed the belt is to test old paradigms as well, everything from how many sales meetings does one need to have? How many face-to-face meetings do we have? Things that we're doing here is that the new norm for other areas that actually could not only be more effective with our customers or reps but more cost effective. And so I think this is going to press us to really be smart about how we think about capital investments in the future and expenses. But I don't think we're anywhere at the level where we've actually put ourselves in not -- a noncompetitive situation. I think it's the other way around. I think we assured ourselves that as the spring-back comes, we'll have the right capital and expenses to move on opportunities as they arise.

Understood. One last one on this before we segue. You gave -- I think you were one of the companies that talked about the fourth quarter of this year looking similar to the growth rates you saw in the end of last year, right? So kind of return to that level. I just wanted to ask a bit more about what actually feeds into that. Is that a question more of still depressed underlying demand, but some catch-up on top of that? Or do you expect to be fully back to running at normalized demand at that point?

Yes. Well, what I had stated, I think, was this area that April was kind of a low point, May will improve. June will be better. And then as we get into the fourth quarter, that we'll get back to those '19 levels. And part of the confidence in that and part of what we believe is the fact that when you look at our portfolio, over 85% of it is not elective. I think you could maybe potentially discuss some of the plastics areas are borderline elective, the orthopedics area are. But when you get into the vast majority of the tissue space and all of neurosurgery, they're not elective cases. They obviously can be delayed for a period of time, but not for an extended period of time. I think the other area is, is that our country here as well as others were somewhat caught without full preparation when this took place. And so everything from PPE to all the proper tools to what's going on with -- even the drug regimes and vaccines, I think if another wave does come later in the summer and fall, we believe we'll be better prepared in all of the institutions that we serve. And hence, in a case like neurosurgery or other types of tissue repair, won't be affected at the same level. And so again, I think the products that we have that have a little bit more defensive nature to them, that we're going to continue to see them grow.

Understood. So good. I want to segue a bit to kind of the business, right? So prior to COVID, and then hopefully, as we come out of this on the other end, one of the things I think that, having followed the company for a long time, we've watched the evolution of the strategy of the company, in terms of the longer-term plans you've laid out. As we headed into 2020, the dynamics that were -- seemed to be taking place were that you were divesting some businesses primarily in the CSS segment. You were starting to improve the availability of products and the capacity at OTT. You had several new product launches coming the -- some of all that was you would expect to see some modest acceleration in growth and then some margin expansion as you kind of -- the mix improved. But even as you laid out the plans for 2020, you still were only calling for, I think, 5% top line growth, which is still kind of below the 5% to 7% that you've talked about in your long-range plan. And so a bit of a long-winded question, but one of the things that we struggle with, and I think others do, is that bridge between how you get from where you are at 5% now to this aspiration of being 5% to 7%. And I imagine you want to be closer to the 7% than the 5%. So what accelerates this business over time for you?

Yes. Well, I would start out and say, just the core business itself has the underlying capability to do that. I think if we go back to '18, we had the final integration of Codman. We had the change in the split of the distribution channel within OTT. '19, we put out 6% growth within the Codman business. And we struggled in OTT, primarily one reason, one reason only, which was supply, which we've rectified. I would say we started out the first 2.5 months of the year, really, on track to running at closer to the higher end of that range. And I think as we come out of that, we're going to get back to that. But ultimately, Raj, it's going to be about good execution and continuing to get new products out and sales growth. So I think the Codman side of the business, the new products that we've just launched last year have another 2 to 3 years of legs under them. They typically have a 4-year window of peak year of sales growth. And then we have new products coming out. As you know, intracerebral hemorrhage as well as minimally invasive neurosurgery. On the OTT side of the house, I think we're really going to get back into our stride, bringing that business and Tissue back to high-single, low double-digit growth. We've got some really interesting opportunities that are coming up particularly in the hernia as well as breast reconstruction area. We have a new nerve refreshing portfolio that's going to be coming out. Fundamentally have the products ready now, but have decided to kind of see how the market plays out before we fully launch those products. And for the first time, we'll have full amniotic supply, which we've never really had to be able to compete in the market with a product that's a tri-layer, which we actually believe is going to be well received within the marketplace. It already is. We just need to be able to get -- supply them. So that's at the core. But we do need to plug into this model, some acquisitions and tuck-ins that continue to build out the franchise, particularly on the OTT side of the house. And that's one of the things that we'll be prepared to keep an eye on as well as other tuck-in opportunities to build out the company.

Yes, a lot of things packed there. But I guess at a very high level, as you mentioned, CSS, the Codman business, did very well last year, and it continues to do quite well. It's a dominant franchise, I believe, in neurosurgery. And yet you've sort of built your strategy around improving prospects in OTT. And so the question comes up all the time of why not focus more on CSS as opposed to OTT? Why not that -- make that the focus of the strategy? It's less competitive, you're dominant there. So maybe just some thoughts around that.

Well, I think the short of it is, is that we've got the capacity to do both. And in times like this, I think a diversified model makes a lot of sense just based on all of the change and uncertainty that can happen. But I would argue, we haven't neglected CSS at all. Last year, we spent over $100-plus million on new technology investments into that business. We've invested heavily within the commercial organization and also some of the existing R&D. And as you mentioned, some of the cleanup that we're doing in the SKU land is in CSS primarily to have that business tighter and actually to be able to drive the margins globally. But that is the goal, it's to focus on both of those and have each of those areas be able to keep expanding into faster-growth markets for us. So I think you're going to see both of those things play out. And I have full confidence that the Tissue business, in particular, has lots of opportunities to grow. It's really just starting in the marketplace beyond Wound Care to be able to expand into a lot of [ nearer, neighbor and ] faster areas that we're one of the best companies that actually meet that need with amniotics, engineered collagen, fully natural collagen-based products and other scaffolds. And so I think in the second half of the year, we'll be able to get some traction. But in 2021, hoping that it's not a year that has other global challenges to it, it should be a year that we can be able to demonstrate that.

Right. And I guess that's maybe the kernel of the question, right, because having tracked you guys for a while, you spent several years -- maybe not several, but at least a couple of years kind of assembling your early portfolio around biologics. You did some acquisition. You built a nice portfolio where you really played in most of the major verticals but then it was sort of last year that you made the decision to split the sales forces to try and perhaps get some better leverage out of what you were doing on the sales side. Then you ran into the supply issues a little bit, but it has been a little bit of an exercise in patience, right, for that business to sort of gel and start to achieve the types of growth that those businesses can afford. And so, again, a bit of a long-winded question, but how would you ask people -- or how would you give people confidence that, that business can actually accelerate and that it won't continue to find issues that slow it down?

Well, I mean, I think, obviously, everything is in the results. And so for some, you're going to need to see it, ultimately, to believe it. And I think the results are not that far away. I think, as the markets get opened back up again, I think we'll be able to see that. I mean, my confidence in how we started the year, I only wish that we could have been able to play that out so people could see it. But we fundamentally have corrected the issues within the operations side. We brought in an experienced outside leader, who's had pharma experience, who's also brought in folks that have had other Tissue experiences. I think that has helped us out quite a bit. We did some major changes in upgrading quality organization on that side of the house. I think the truth is, when it came to human-based tissue and amniotics, we didn't have [ the -- that charge, ] which allow -- that caused some of those issues from decisions or were just not moving quick enough on things. So that's been replaced, and those have been upgraded. I think when it comes to thinking about what you need in clinical studies for reimbursement [ steps ] we've improved significantly and now have capabilities and just much more seasoned around how to be successful in that area. I also think now, particularly post-COVID, customers are now looking for dealing with 10, 15 different players. If there is someone that can bring value in an aggregated format, negotiate that way, have integrated call points and offer different products that meet needs, which we're one of the very few that can do that. I think it positions us well for success going forward. So that on top of a couple of clinical areas that I mentioned, such as breast and other areas that could open us up to new growth areas that we've not participated in are the reasons we believe that high single, low double-digit in Tissue business is there for us in an area that we can be successful.

Yes. I wanted to ask a little bit about the competitive frame, which you've noted -- I mean, if you take breast and plastics, which you mentioned, hernia repair. I mean, these are very competitive markets with some very large entrenched competition. Even when you get into Wound Care, nerve repair, I mean, these segments are -- they're pretty crowded on some levels. And so how do you differentiate -- other than perhaps having a broad portfolio, are there other ways that you can differentiate your product set relative to the other ones that are out there?

Well, I mean, at the end of the day, you have to have proved clinical data, economic data that shows you're as good as, if not better, than the competition. And so it's areas that we haven't invested in the last few years. And I think we'll be able to demonstrate that, particularly when it comes to new areas that we would move into. That's a big part of our R&D investment portfolio is the clinical proof to do so. And I say -- we say that they're -- I think hernia is probably an example, particularly in the synthetic area and such, that is crowded. But in the natural-based product areas, nonsynthetic in-body, it's not significantly crowded. Nerve is not a significantly crowded space. Wound Care, depending on how you cut it, it is. But I think on advanced products and if we think about multiple advanced products that can work together, it's a reasonably limited set of customers and -- excuse me, providers that are out there to support customers.

And so you mentioned earlier that you see a couple more acquisitions potentially in OTT, a couple of areas you want to shore up. Are there -- what are those areas? And where do you think there's still some deficiencies in that portfolio?

Well, I mean, I think -- look, across the board for us, there's tuck-in acquisitions that can fit into CSS, for sure. We did 2 last year, and there's other areas to build out that platform, whether it be even plays into specialty instruments to plays that move into neurosurgery. On the OTT side, the obvious spot is in orthopedics, plugging in other products and product lines to build that out further. And then on Tissue, I think it really is different technologies or platforms that help increase scale in a given clinical segment. I think some of our challenge has been -- OTT has been touching many different segments. I think getting deeper and stronger in a given set of those areas is one of the areas that we focused on.

Yes. So you mentioned orthopedics. So that's also been a point of kind of constant discussion, right, or questioning around your commitment to being a metal-based orthopedic company. And so what's the current answer because I know it changes -- well, maybe it doesn't change, but people keep asking. So what's the current answer on that?

The question keeps changing, right? So look, we started out the year, probably the best start we've had in a long time. Growth rates in the range of what the market is doing, stable sales force, good products. But we have to be bigger to be relevant over time. And so we either have to be able to find the right deals to be able to make the business sustainable and competitive in a very tough business or we have to go alternative directions. But I think when you take a look at our Shoulder platform and Ankle platform, we think they compete with everybody extremely well in the business. And we started out this year demonstrating that. So the key will be as the market comes back and we continue to pick up where we left off in early March.

So the answer is you're committed and you want to get bigger? That's the answer?

I think the answer is we're committed to get this business to where it needs to be, and I would like to grow it, and we've got to be able to find the assets to do it as well as organic investments. If we can't find that, we have to do the right thing, ultimately, for that team and that business. But I still think there's lots of opportunities. And with some of the other consolidation, there's probably going to be opportunities for resources and plug-ins to build the business.

I think I know where you're going with that. Maybe just the last 4 minutes, just so we have. I want to ask a little bit about the other piece of the long-range plan, which is the margin expansion. So that I get everything is off the table for 2020, you're originally looking for 25% adjusted EBITDA margins and the guidance is to get to 30% by 2022. And so maybe you could just ground us again in what drives that 500 -- or what was going to drive that 500 basis points of margin expansion for you?

Yes. I would say we haven't backed off or restated any strategic goals at this point. I think, obviously, a $2 billion number is hard to get to by 2022, but a 70% gross margin and a 28% to 30% EBITDA margin isn't out of the question. And I think the point on that is most of our plans to get there were tied around two areas. There was the restructuring work on SKU rationalization, which we're full steam ahead on. There was plant rationalization footprint, which we're full steam ahead on. And then there was the increased growth based on the channel investments in higher-margin products. And as I mentioned, we were off to the races, doing very well at the beginning of the year. And I'm confident that as we exit this year, we should be on a good track to get there. The question will be how fast is this ramp in recovery, which is why I think what we see in June and July and what that ramp looks like is going to give us some pretty good insights on what's possible on how we finish up the year. But as I look at this company, a 30% EBITDA capability, as with our portfolio mix, is very doable. Getting gross margins over 70% with our product mix, again, very doable. And being a 5% to 7% growth for the reasons we talked about, particularly in neuro, can be maintained at closer to 6%, particularly entering into some of these new areas. There's no reason with Tissue being in -- above that, that we can't be at that higher-end range. And so that's really what we have to prove to our investors and shareholders that we can do it. And I think as we come out of this year, we'll obviously get an opportunity to show that.

We have about 1/2 a minute left here, and I just want to ask quickly on the balance sheet. And really more around your appetite for acquisition, and it sounds like it's unchanged, even despite all of the turmoil out there. And so is that a fair assessment that you're still kind of open for business on the M&A side?

Yes. I mean, Mike, you may want to comment just about the refinancing that we did. I think we're in good shape on the balance sheet.

Yes.

We only have about 30 seconds here, Mike. So, kind of, keep it short.

Yes. So real quick, early February, refinanced and extended our credit facility, so over $1 billion -- $1.15 billion in revolver capacity, over $350 million of that -- of cash in the balance sheet. So good position liquidity and balance sheet-wise.

And on M&A, Raj, we're not going to be backing down. We think this time of change, partnerships, relationships in global markets as well as acquisitions, there will be some good opportunities to come, and we'll be well positioned to take advantage of those.

Great. Well, Mike and Pete, thank you guys very much. We're out of time, but I appreciate you guys giving us some time today. Thank you.

Thanks.

Thank you, Raj.