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

So I think we are live waiting for some of the other video images to click in. I don't see everyone yet, but we'll get started. I think we'll -- folks will come on in another moment or so. So my name is Matt Miksic. I cover medical devices at Credit Suisse. I'm very pleased to have with us today Integra Life Sciences joining us again at our 30th Annual Healthcare Conference. So we have Carrie Anderson, Executive Vice President and Chief Financial Officer, who we've definitely lost the video for, but I'm sure will come back on here in a moment. We have Mike Beaulieu, Director of Investor Relations. We also have Chris Ward, who will be joining and taking over the Investor Relations role at Integra. So welcome, Chris.

Thank you.

And welcome, Carrie. If you can see us, we can't see you, not just yet, but I'm assuming that you'll be with us in a moment.

I can see all of you. So I'm hoping that maybe it's just on your end [indiscernible] once we get started.

We can see you loud and clear. Perfect.

So maybe if we could start, as we have with many of the sessions this week, on just your perspective on the current environment in terms of the surge in the U.S., staffing in the U.S. and elsewhere, if you're seeing any staffing challenges at centers and hospitals and any other factors or trends that you saw throughout Q4 or Q3 and how you're thinking about them into Q4.

Yes. Thanks, Matt, and very happy to be here today and talk about Integra. Certainly, the third quarter did see COVID impacts for our company as well as many other companies. So the impacts were real. Fortunate enough for Integra, we had some other things that went in our favor, and one of those being a very successful launch of our new intracranial pressure monitoring system, our CereLink that added about $5 million worth of revenue and really moved us to just above the midpoint of our guidance range. And if you take that contribution out, our revenue would have been closer to the low end of our guidance range, so certainly an impact with what we were seeing. I would characterize it a couple of things, and I think this is pretty similar to what other companies have shared, is that there definitely was a COVID impact. And it was more regionalized, more in pockets of parts of the country and in parts of other countries outside of the U.S. rather than a blanket type of impact on areas where there was low vaccination rates. But I think the new factor here that weighed heavily on the third quarter was the staffing shortages. And it's not -- it wasn't just in the nursing areas of hospitals, but it was also administrative staff shortages as well that really start to put pressure on scheduling. And as a result, there was deferrals of procedures that happened in the third quarter in some parts of our business on the neuro side as well as even on the wound reconstruction side on plastics and surgical reconstruction. And I would say that the other area was around supply chain disruptions. And those issues are becoming more acute. I think our team did an awesome job in the third quarter, managing through those and getting product where we needed to. But those are all factors that are still present, haven't seen any diminishing of some of these factors going into the fourth quarter. And certainly, those hospital staffing issues continue to be prevalent as well as more acute supply chain disruptions. So all of those things kind of factor into our guidance expectations for the fourth quarter when you kind of have all of those macro factors still swirling around creating some level of uncertainty, and we pointed to the low end of our guidance range. I think all in all, though, in the third quarter, we did see some nice growth. We were almost 7% organic growth compared to 2020 and almost 5% organic growth compared to 2019. So despite all of those things that are happening there, we still managed to have a really nice respectable quarter in the third quarter. And we're -- hopefully, we'll be in a position in 2022 to have more clarity on some of these items but still a bit of churn and uncertainty as it relates to COVID and I'd call the aftershocks of COVID.

Sure. Yes, it seems like no company this quarter -- just about no company was -- in our universe anyway was able to escape some of the pressure either in staffing or through pauses, regional pauses on procedures and so on. And I guess the question is one of the things that's unique about Integra is your reliance on the ICU for cranial surgeries for neurosurgery. And so we heard early in the earnings cycle, some of the folks who reported early expressed this confidence in a hospital's ability to respond to staffing challenges. I think it's already kind of assumed that hospitals have just gotten the hang of testing protocols and vaccine protocols and all the things that were difficult early on. Visitors now in the hospital, again, all these things have changed dramatically in the last 6 or 9 months. But looking forward, there's confidence in hospitals' management around staffing issues. How is that changing? Or how confident are you in your ability to manage around ICU availability going forward?

Yes. I mean I think it still creates a -- pockets of variability, things hopefully that we can manage through. And again, I think we showed the diversity of our product portfolio in the third quarter with the results that we did. But it's still going to be a challenge, and I still think it creates a level of variability in the fourth quarter. And I think the big question mark is how much of that persists into 2022. And so we'll have to stay tuned for that. But I think we'll continue to work with hospitals. The beauty of our portfolio is that these procedures can't be deferred for extended periods of time without having adverse consequence to patients. And so there is only a certain time line that you can defer a procedure. So at some point, these procedures will be scheduled. It's just a matter of time here, but there could be some disruption short term as that -- those staffing issues cause some scheduling challenges.

Right. Fair enough. Well, congrats on managing, I think, better than folks expected you to given your reliance on ICUs and some of the reports that other folks had printed for the quarter. Maybe you mentioned CereLink. It would be helpful to go through some of the growth drivers currently and things that you can carry into 2022. So CereLink, as you mentioned, delivered this sort of $5 million increment in Q3 revenues, which was helpful. What could that quarterly run rate start to look like over the next several quarters without stopping short of trying to get you to give us a 2022 number.

Yes. Well, CereLink is a really important launch for Integra. And I think about this that there's been really no new innovation in the intracranial pressure marketplace over the last decade. So this is being launched at a great time as capital continues to recover. And it offers some enhanced features that are really important to clinicians as they can better manage their patients. So it has advanced kind of data analytics. It's got a better user interface, and it's more accurate, so some really great innovation that we're driving here. We've launched it in the U.S. and Europe. Q3 did benefit for what I would term as early adopters. So we started in Q3 with a limited commercial launch. And by the end of September, we moved to full market launch. And so we had several orders -- many orders that had come in early in the quarter. And as we moved it to a full market launch, had the inventory, and we're able to fulfill a lot of that demand in the third quarter. And so some of that benefit is coming from the fourth quarter into the third quarter. I would still expect that the fourth quarter will see some nice contribution of CereLink, maybe not at the same level as because you had that initial pent-up demand that you were able to satisfy in the third quarter. The thing to think about CereLink is that it will have many, many years of growth for Integra. So it has an installed base of about 8,800 units and about a little under half of that installed base sits in the U.S. and Europe. And so as you think about the opportunity for CereLink over the next couple of years, lots of opportunity as we continue to replace that existing aging installed base with new CereLink sales. And then in 2025 is our targeted launch for China and the other half of that installed base sits in China. So it will have another wave of opportunities for multiple years of growth. The thing to remember about CereLink is a razor-razorblade type of model. It has a very nice recurring revenue stream associated with it. So you have the initial outlay of capital sale as you see that installed base and then you have micro sensors that come along with that, that provide a nice source of recurring revenue. So that's why I'm saying it's a really important launch for Integra as it provides that multiyear opportunity for growth for us.

That's great. And I think the perception was that this was -- there was a little bit of a delay to this launch looking back over the last couple of years and maybe there was a risk that you'd lose some traction in the meantime because we talk to clinicians and folks in spine and neurosurgery, and they -- it's interesting, in the world of med tech stocks, Integra isn't obviously the biggest fish in the pond, but in the world of neurosurgery suite in the hospital, they're kind of viewed as the brand that sort of surrounds that space. And so I guess what's your expectation? What are you building into your ability to sort of, I don't want to say claw back, but sort of regain mind share with the launch based on what you've seen initially and maybe some of the features and functions that you think make this such a strong product given that some of the folks may have started using something else in the meantime while they're waiting for it?

Yes. I think, again, there hasn't been a lot of innovation in the space. So I don't think there's been a tremendous amount of competitive threat in the space. And I think many of our customers have really just waited until our product is launched. So I think with the enhanced feature set that I had talked about already that it is coming at a very nice time to drive incremental revenue. So our expectation is that we haven't really lost opportunities here and it's a matter of just having the product availability to satisfy that demand. And remember, Matt, this was a $30 million business for us at the time of the Codman acquisition. And so we were required to divest our legacy business to a company called Natus. And -- but we know where all that installed base is. And again, there hasn't been too much of any real innovation in the space. So we know where the opportunities are. And as we continue to manufacturing product, we obviously are going to go after those opportunities in the U.S. and Europe and then have the chance to get that recurring revenue stream. So we're very optimistic that, over time, that this will become a $30 million revenue product line for us. And my expectation, it should do more than that because of the expanded feature set of this particular new product innovation.

Great. Well, and your connection with those accounts for all the other things you provide should certainly help. So maybe let's talk about ACell. So this was something that, in the middle of the year, you had to sort of start ratcheting down your expectations, good news and bad news, a faster achievement of synergies on sort of the margin side but some loss and dissynergies on sort of the sales side. So similar kind of update here heading into Q4, I guess the question is are we kind of bottoming in terms of the sequential trends or where -- how should investors think about sort of the stabilization and then re-growth net of that business.

Yes. I mean clearly, ACell did not meet expectations for us in the third quarter. We expected to see sequential growth between Q2 and Q3. But the restricted access continues to weigh in our inability to get ACell where we want it to be from a sales performance level. But we did see encouraging signs in the second quarter that just say that we are on the right track, and I think as some of these restricted access subsides that we'll see the performance that we expect. The signs that we saw that gave us some rays of hope here are that we did see sequential improvement in revenue to MicroMatrix. Remember, this is the powderized formulation of the UBM technology. We didn't have anything like this in our legacy portfolio. So it's an incrementally brand-new technology for us. And we think it's a home run product for us as we continue to increase our penetration in the wound reconstruction area. So we saw some sequential growth there. We also saw sequential growth in accounts where we already have an established Integra legacy relationship. And so that, again, tells us that there is a restricted access piece to this that we still need to solve, and -- but our expectations for the fourth quarter is in sequential improvement from the third quarter. It's going to take us some time to get the performance where we expected it to be. We are going to be adding selected reps and expanded territory coverage to address some of those performance issues. But remember that this will move into organic growth in the end of January 2022. So yes, a slower start than what we expected. We're really enthusiastic about the portfolio. I think it's extremely complementary. And so our expectations are very high for ACell, and we believe we know what we need to do to restore the accelerated performance that we would expect. So it moves into organic growth. So a slower start in 2021, but it should be a nice organic growth pickup for us in 2022 as we correct those performance issues.

Sure. And the other side of the slow start, not to try to sugar coat everything, but it did -- I think the question was when you did the deal initially and talked about it, you had expectations for top line accretion and EBITDA sort of maybe neutral initially. And it sounds like your EBITDA has been more positive because of getting after the synergies. The cost of that has been some loss of top line growth. But I guess what's your confidence that you're able to sort of regain that momentum at some point during 2022? Is it mid-'22? Is it by the end of '22 that these reps start all firing on all 6 cylinders?

Yes, it probably is into the second quarter into 2022 that I think we'll have an opportunity to have many of those reps in place. I think the constraint here is the same battle for labor that everybody has, right, in terms of lots of open positions here. And so our ability to be able to get that territory coverage is certainly key and tied to the free flowing of labor to fill those openings. Remember, Matt, that when we purchased ACell, it -- a couple of things here is that it wasn't profitable. It was breakeven at best and largely because of lack of scale. So the revenue where it was at didn't support the number of sales reps that they had. They had a couple of hundred reps supporting that top line business. And so certainly, that was an opportunity for synergies. They were also under a corporate integrity agreement with the OIG. And so that was one of the areas we wanted to close out as well as we did the acquisition. And so part of that was a transition of the sales team as well as closing out that corporate integrity agreement. I think all of those factors kind of came into effect in terms of our integration strategy. We also were able to get a lot of synergies as it relates to distribution, back office, order to cash. All of those things were accelerated. And I can see it in my margins. My margins are benefiting as I look at my OpEx levels of where they are. So we certainly have room to achieve our accretion targets even with the slower start and even adding selective reps and territory coverage back in, we're not adding back to the level of what ACell had to support that business line. So there's still lots of opportunities to see some of those sales synergies continue to stick here. But we're doing what we think is right in terms of expanding that territory coverage, particularly on supporting areas where we didn't have a legacy relationship in some of those hospitals where we think it's most critical to have expanded coverage. So my expectation is that we'll see some improved performance into 2022, and we'll continue to add nicely to the overall expectation of Tissue Technologies in that 7% to 9% organic growth.

Got it. That's helpful. So yes, I think the one question that we've gotten is, well, [ account access affected ] ACell but didn't affect some of the other businesses. And that's really that I think as you described it. Just to sort of make it perfectly clear, there's a difference between accounts that you have relationships with and you're able to sell MicroMatrix and sell -- continue to sell ACell, for example, or introduce them to ACell, if they don't really have it versus some of the accounts and relationships that were lost with the change in sales reps in a given region. So it's those folks.

Yes, you characterized it exactly correctly. And I think those are the points of evidence that we saw in Q3 that where we have the legacy account relationship already established, we will -- we were able to make inroads with them and saw some sequential growth improvement. And it's really being able to get access to relationships and accounts where we just don't have that legacy position that we've had in some of the other areas.

Okay. So let's maybe spend a little bit of time on surgiscope since that's a key program and sort of initial launch for the company. Talk a little bit about that and weigh in into next year without pushing you for guidance for next year exactly.

Yes. So the product is called the Aurora surgiscope, and we had acquired this technology with an acquisition we did back late in 2019. It was called Rebound. And there's 2 opportunities with this transaction that I wanted to talk about. And in terms of the size of the opportunity, we've talked about it adding about $1 billion worth of addressable market to our neurosurgery area. And a little more than half of that $1 billion addressable market opportunity sits in a minimally invasive surgical approach in neurosurgery. And that probably is the near-term opportunity. So let me talk about that one first. And then I'll talk about the other half opportunity, which is the intracranial hemorrhage, intracerebral hemorrhage market, the stroke market. So on the MIS side, think of this as a neurosurgeon's approach to brain lesions, including brain tumors. The traditional approach in getting access to those tumors and those lesions is through an open craniotomy. You can do a lot of damage to a patient -- ancillary damage to the patient as you have to have a flap that should get access to the brain too. And so think about a minimally evasive approach to that same surgery, where you're taking a small trocar type of device, a hollow trocar device that has -- it's completely disposable. It has its own independent lighting source and visualization camera source on it and plugs into existing equipment in the operating room theater. And you can bring instruments down this hollow trocar to get access to that lesion in the brain and to do an MIS approach. And so we have done a limited clinical launch in the third quarter. The goals of that limited clinical launch are twofold. One is to get clinical outcomes, right, to show that the minimally invasive -- evasive approach is successful. And second and even more important is to get economic data that shows there's an economic value proposition to the use of MIS in these traditional surgical approaches. And so that is a big part of what we're focused on here in working with select sites around the U.S. to gain data and evidence to support both of those. And then the second area is in the intracerebral hemorrhage market, the stroke market. So these are deep bleeds in the brain that historically have not had a surgical -- a successful surgical intervention approach. When the bleed is so deep, there really isn't a way to approach that to remove the bleed surgically. And about 50% of patients that have these deep bleeds, they die. And the other half, we don't have a significant -- a positive outcome in terms of their recovery. So again, you can take the same surgiscope. It's a smaller diameter surgiscope in this approach, but it's fundamentally the same visualization, the same camera configuration to it and to be able to bring an evacuator down this trocar device and be able to get the bleed off of the brain quickly. So we are working with KOLs here. We've actually formed a registry called the MIRROR registry to collect clinical evidence on cases that are being done. And ultimately, this early clinical work that we're doing here will form the basis of a randomized controlled trial that we would expect to launch in late 2022. And think about this as what you're trying to be able to show is that early intervention in getting to these bleeds in the brain sooner and getting the blood off of the brain delivers positive outcomes. And again, you have a real opportunity to transform the treatment of care here for this particular disease state. So both of these opportunities are really important transformational opportunities for this space. You're not going to see a significant contribution of revenue in 2022. Really 2022 is about getting that clinical evidence to support adoption because you are fundamentally changing how surgeons do surgeries here on these particular disease states. You'll see a bigger contribution of revenue starting in 2023 is our expectation there.

Great. So kind of almost an important platform opportunity. The second indication is also kind of unmet medical need type of indication, which I think is even more compelling than sort of the traditional open to MIS opportunities that we're seeing. Maybe talk a little bit about, if you could, the balance of investments that you're looking at to get this done in terms of the cost, in terms of maybe basis -- hundreds of basis points to the -- to your spend and then how that sort of fits with your intermediate and long-term margin goals.

Yes. Well, when we acquired Rebound, it was pre-revenue. So we knew when we made the acquisition that it would need several years of market development and some clinical work here to support the launch of it. It is 510(k) approved and it is, again, all about the work on the clinical side to increase and accelerate the adoption of this because it is transformative in nature. And so as we think about the opportunities of our operating expense spend, those are the areas we're going to prioritize, certainly is things like this that support the opportunity to really transform care in this space, and it will be a driver of -- as I think about where my spending levels are today and where they need to be to support this particular clinical study and the launch of this but also, as I think about other opportunities that we just talked about, CereLink, geographic expansion, ACell, all areas that will be prioritized for growth as we think about where our spending levels are today and moving forward. I still think that we can balance that spend with some margin expansion. We're not in a position to give guidance yet for 2022, but I still think we can make the right trade-offs here and balance the right prioritization here, which we've been successfully doing through COVID as well.

Okay. And just to maybe put it into context, is this something that folks -- like when you think about large-scale clinical trials and really the platform development, which is what this is, so the cost starts to -- I'm sure it's all baked into both guidance and commentary that you've made about your long-term margins. But is this -- can you put any size or shape around the magnitude of this investment?

No. We don't have a specific size of that. I would say it's comprehended in our overall kind of view, and again, it's a balancing. We still have the opportunity to generate some revenue on the product as we do some of these case studies and so forth. But my view of this is it's not a significant revenue contributor, but we would expect to get some revenue in 2022 with this that would help offset some of those clinical costs and then a bigger revenue contribution in 2022.

Okay. Of being approved in the market, I guess, is help to kind of offset that [ level ]. All right. Well, then maybe there's a number of other product drivers and growth drivers, but one of the topics that came up on the third quarter call and something that folks have been trying to understand is your PMA application for SurgiMend. Can you talk a little bit about what the sort of -- how you're weighing your confidence in that? I know it's a complex issue. I know it's a very complex issue, but I guess maybe highlight a couple of points as to why you're still confident that will come and at what time do you think that will start to contribute.

Yes. Thanks, Matt, for the question. I want to provide a bit of context on this one because it's important on why we can still have some optimism as it relates to a PMA path forward with the FDA. So I'm going to take you back to 2019, and there was an open forum discussion with the FDA. And at that meeting, they basically declared that all ADMs, acellular dermal matrices, that are involved in breast reconstruction will require a PMA. And they actually reiterated that same message a couple of weeks ago at the American Society of Plastic Surgeons. So to date, there is no ADM out there that has a PMA. So it's important to understand how reconstruction gets done in the postmastectomy world here. About 75% of procedures of breast -- postmastectomy breast reconstruction are done using ADMs. And again, there's no PMA approval on any ADMs out in the marketplace. Of that 75%, about 90% of procedures with ADMs are human ADMs, and again, they do not have a PMA either. So when you think about the standard of care, it really has become using ADMs. And it becomes very challenging to think about formulating a randomized controlled study when you won't have women that will volunteer to be part of a control arm that has no ADM in it. I think the FDA recognizes that and [ steward as ] to a real-life retrospective data set that was called MROC that was done by the University of Michigan. We did not get access directly to this data set, this MROC data set. University of Michigan gave access to that data set to the FDA directly. And we worked closely with the FDA to design a statistical sampling of that data. It did show that SurgiMend met its 2 primary endpoints of safety and efficacy. So you fast forward now into October, and as part of the PMA process, there is this advisory panel that the FDA assembles. It is not bound by the recommendation by the panel. And obviously, they take it into consideration, but they're not bound by it. And this panel is advising on their views of the safety and the efficacy of SurgiMend use in breast reconstruction. The panel was split. And again, I think in our view, there is some optimism that says that the FDA could find a path forward on a PMA for us. And we are working with the FDA in terms of additional analysis of the data set as well as thoughts about a post-market approval study. The biggest area of deficit that the panel talked about in the data set was the fact that there wasn't a lot of 2-year post follow-up with the women that were in this study. So again, formulating a post-market approval study could be a way to still get the PMA approval and -- but commit to this post-market study. So we're very optimistic about it. I think about this as an accelerant to the adoption of SurgiMend. SurgiMend has been a product that has been around in the market for 15 years, and it's been a nice grower for us. There's been many quarters that we've seen double-digit growth on this. And let me talk about that even without a PMA, there still will be opportunities to grow this. But what the PMA does is allows you to market and to train surgeons on the use of the product specifically for breast reconstruction. But remember, 75% of procedures are already being done with ADMs. So there will be growth even if there is no PMA, but again, we think there's a path forward. The unique thing about the breast reconstruction market is that procedures are changing. The traditional approach to the postmastectomy breast reconstruction has been what's called the sub-pec approach, where the breast implant is put underneath the pectoral muscle. And that procedure is changing to what's called the pre-pectoral approach. And think about that as the ADM becomes much more critical in a pre-pectoral approach because it's almost like a sling where it's holding that breast implant in place. So the attributes of that ADM become much more critical. And you think about the attributes of SurgiMend. It naturally works to the favor of that pre-pectoral approach. The sizes of SurgiMend that are available relative to what sizes are available in human ADMs is much more plentiful. Uniformity, the strength of SurgiMend and the ability of revascularization quickly with SurgiMend, all are things that go in our favor in terms of as this procedure starts to change more from that sub-pec to the pre-pec. So my expectation is that we will see growth. The PMA was filed in August of this year. The FDA -- normal time line is about 12 months. So the expectation is that we would find out whether or not we have a PMA path going forward here by the [ first ] quarter of next year but still expect to see some nice growth with SurgiMend.

Okay. So one question, maybe devil's advocate kind of question on this is, given that it's sort of the standard of care, given that you're [ growing ] and given that sort of going up against a large entrenched competitor, I think, in the human tissue graft market for breast reconstruction, I guess why make the investment? Why is this so important to what opportunities you're hoping to achieve with an indication where other folks have operated without one, including yourself for a while?

I mean this is driven by the fact of improving the outcome of women that go through post-mastectomy breast reconstruction. So Fundamentally, we think our product delivers better outcomes, easier outcomes for women, less pain and you can -- again, so our view is that as these procedures move from this 2-part process of the sub-pec to one-step process on the pre-pectoral that this is an opportunity for SurgiMend to differentiate itself from the human ADMs out there. we believe there's a tremendous opportunity for market share gains here with the product that we have. The PMA really just takes the handcuffs off and allows us to basically advocate to market, to train surgeons on it. But we think the product itself actually fundamentally changes to the better some of the outcomes as we think about for women going through this procedure.

Okay. And then the 75% procedures that are performed with a tissue graph like this, what -- is there an opportunity for sort of increasing that penetration? Or is that just a segment of the market that's sort of harder to reach for one reason or another?

Yes. I mean, I think a lot will depend on as new surgeons get trained, they'll be more adept to using an ADM instead of a flap in a surgical approach. So I think it's an evolution of that. And certainly, Matt, if we're able to get the PMA path forward, that's another way to think about accelerating that conversion to greater than 75% ADMs.

Okay. So in the minute or so that we have left, as we kind of wrap up, we could just bring it back to sort of the near and intermediate term, what's the -- when do you expect to have an answer? When will we get an indication that things are going your way if that's the way things play out with SurgiMend?

Yes. Again, I think it's most likely, we'll be in that late Q2, early Q3 time frame that just looking at the FDA's normal time line. We don't have control of that. We'll be obviously responsive to any inquiries of the FDA and obviously, there's a manufacturing element of showing that we have a PMA facility in our Boston facility. So all of that is part of the whole PMA process. So the panel advisory that took place in October is one step of that process, but it is a multistep process that we'll continue to dialogue with the FDA here over the next months and quarters here as we move into 2022.

Okay. So some sort of response in that time frame, not necessarily a definitive response, but that will sort of be the next update you'd point us to?

Yes, I think so.

Okay. Well, listen, I think we're just about at time. Thank you for all the color on a complex issue and walking us through some of the growth drivers for Integra. Really appreciate you joining us again this year.

All right. Thanks, Matt.

Thanks so much.