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

Good afternoon, everyone. I'm Robbie Marcus, the med tech analyst at JPMorgan. Very happy to have our next session with Integra LifeSciences, bringing up Jan De Witte, the new CEO for a presentation, and then we'll do some questions and answers.

Okay. Thank you, Robbie. As he said, I'm Jan de Witte, still a relatively fresh new CEO of Integra LifeSciences. I'm here with Carrie Anderson, our CFO. She's going to join me up here for the Q&A together with Robbie after. But first things first, our safe harbor disclosure reminded that some of the statements I'll be making are forward-looking. But 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 are 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, I'll have 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 work leader in restoring patients' lives with breakthrough technologies in neuro and regenerative care. We have essentially 2 big business segments. 2/3 of our business is Codman Specialty Surgery. It's a leading player in Neuro-access, Neuro-surgery, Neuro-monitoring, devices and disposables and the leading provider in specialty instruments. One -- the other 1/3 of the business is our Tissue Technologies segment. We have a very broad portfolio in complex wound reconstruction disposables and our leading innovator in surgical and breast reconstruction. What ties these 2 segments together is Integra's deep domain knowledge and regenerative technologies, technology that we leverage in the 2 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. And 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 Surgery, so 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 neuromonitoring and hydrocephalus care. 20% of that CSS business is in our specialty surgical instruments where we have a top 3 position in neuro, E&T and general surgical procedures. We are a leader in a $5 billion accessible market, a market that's growing 3% to 5% and where we have the ambition to grow above that market by focusing on subsegments in that market that have above-average growth rates as well as geographies where we have not penetrated as deep as we can. This expansion of the business is enabled by 4 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 but also adjacencies to this CSS platform. Second segment, Tissue Technologies, $0.5 billion in revenues 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 technology that we recently, 2 months ago, acquired as part of our SIA acquisition. All these technologies support multiple leading brands, well-known brands in the industry like our Integra Dermal Matrices, 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 technology 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%. And just as with the CSS segments, we're focusing on the above average growth segments or subsegments 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. And so with organic and inorganic investments, we're focused on those higher growth segments within primarily surgical reconstruction as well as complex wound care. So 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 pillars, 5 strategies: innovating for outcomes, growing internationally, broadened impact on care pathways and then to enable us driving operational and customer excellence and cultivating a high-performance culture. These 5 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. So let me go briefly through those 5 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, remember 25 years ago, Integra Skin, the first product with the PMA, the first device that received a claim of tissue regeneration, which found a new area of patient care that Integra today still very much leads. We innovate for outcomes in 3 ways. First, developing new indications for our technology 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. Or finally, bringing new technologies to our care areas like with an acquisition we did a while back, Endexo and BactiSeal technologies, which we integrated in 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, we launched a couple of our ACell portfolio MicroMatrix, Cytal and then Certas hydrocephalus products into the European market existing products into new markets. In 2023, we're going to continue to focus on strengthening our customer and clinical insights about 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 or companion app type capabilities, and we're going to continue to execute on the PMA specifically in breast surgery with our SurgiMend product and with our DuraSorb acquired some product, respectively, aiming for PMAs in 2024 and 2025. On the growing international dimension with 30% or only 30% of our revenue is coming from outside the U.S. We, on the one hand, have a solid global footprint but we believe that number should be more like 40%, 50% and we can leverage that footprint to really go and accelerate 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 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 in product market strategies, which at this point in time, guide how we put our resources, how we invest in the international markets to capture those opportunities. And then a few months back, we hired an international leader, fully-dedicated international leader. He's going to be the first Integra, similarly who's going to be based outside of the U.S. So Harvinder Singh will be based or is based as we speak in Singapore. He's there to give a full focus to the international markets, 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 2 and Tier 3 hospitals, and then advancing our in-China for-China manufacturing opportunities. As we think where we headed with our CSS and Tissue Technology portfolio, we're focusing on how that portfolio fits within the care pathway, okay, the journey that the patient takes from diagnosis to treatment planning to surgery to postoperative care. And we've also looked at, from a surgeon perspective, where are the unmet needs, where we have the technology and the access here 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 upstream in the care pathway into preoperative care as well as downstream into additional sites of care. Looking back again 2022, 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. Through 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. That leads to road maps, both upstream and downstream organic road map, but also inorganic road maps, which we call our M&A gameboard. The SIA acquisition that we did 2 months ago, very much is one of those targets from our M&A gameboard 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 going to further build those solutions that provide value and outcomes to our customers. We're strengthening our market access and enterprise selling capabilities to monetize, commercialize those solutions. And we're going to further execute on a well-filled M&A gameboard. 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 are less predictable. We've faced significant inflationary pressure. But over '22, we've responded very well. We've pretty much pulled every lever with several projects that strengthened Integra structurally as well as improve our cost position. We closed the 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. And in '23, we're going to 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 further improve our yields and conversion cost, productivity and start to make that part of our culture. And so that brings me to this slide, where 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 '22, again, we got quite a bit of recognition, external recognition for that. But this is a never-ending story and especially to build that in the culture and the identity. So we continue to do this in '23 with a specific focus on 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 5 levers to give you a better sense of where and how we're driving our business as we continue to focus in '23 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. And for me, that's an easy discussion. I think from experience, I've learned that the drivers of sustainability, the drivers of ESG success are very much aligned with the drivers of doing good business. So that's a bit an overview on Integra, our mission and our strategy. Let me turn back to results -- 2022 results that, yesterday, we preannounced, they are more detailed on our website. But 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 in supply chain predictability, more challenging than I have ever seen in my career. But in this tough environment, we delivered approximately 4% organic growth for the full year. If you would excludes our CereLink product at which we had a recall from that, we would be closer to approaching the 5%. So 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 and also delivering at or above the EPS earnings per share that we projected way back in February. This is a result of a broad series of actions on pricing, operational efficiency, careful OpEx management here to protect and drive our profitability. All of that coupled with financial discipline, is one 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 going to have our earnings call in February 22. So at that point in time, we'll go more in depth on all the specific drivers. Let's now shift to our long-term outlook, long-term financial targets. Last year at the virtual JPMorgan, I communicated that I believe 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% to 7% range with further improvement of our gross margin and EBITDA margin, and as a result, delivering double-digit EPS growth. And so today, I reconfirm this target. This is where we should end. Yes, I believe we know the path to get there. The path from a timeline, of course, has been impacted by '22, '21 COVID impacts. And in our May Investor Day, we're going to give an update to what's the time line we see in getting to these targets. So stay tuned for May 4 investors. At that time, we'll also see how the year '23 is shaping up. We do expect '23 definitely by the summer to be more of a normal year again, and that definitely would help us in projecting out our long-term targets. So I'm not going to 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. So why do I think that this is a business that can grow 5% to 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. So if we execute well in this market with the portfolio that we have, that forms a basis of 5% growth. And then 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 minimal-invasive neurosurgery. International has the potential to yield above-average growth definitely as we catch up to our penetration in International. And in 2022, we have organized, we've resourced to really go with more energy and focus after that international opportunity. And then 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 '22, we've demonstrated that we know how to manage the P&L in a difficult environment, and we're going to continue to drive those levers, benefit from volume leverage while continuing to invest in our strategic priorities. And as many of the macro environment normalizes, we have several levers to further improve our margins. First, with our Tissue Technology business growing faster than our CSS business and having also a higher gross margin, there's a mix effect that we will benefit from, and then we're bringing NPIs to market at a higher gross margin profile. We're going to continue to focus and drive margin accretion, focusing on price capture, manufacturing yields and conversion cost efficiencies in our operations. And then balancing this with the right investment. We have several areas where we can build for the future. We're going to 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. And so 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 an eventful 2022, I think it's -- these are the 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 want to 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 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 a changing world, to strengthen our operational resilience and accelerate our organic innovation capability. But also a business that can really bank on a strong balance sheet, a great financial discipline, great M&A capabilities. So 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, but also the expansion opportunities that lie ahead. And we started the year 2023 fully focused, fully engaged around these 5 levers in our integrated strategic road map, something that over the past 9 months, we've been focused on building those capability. And so with that, I think we do have time for Q&A. I'm going to call Carrie Anderson to join me here.

Great. Maybe we can start with the preannounced 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 Tech growth and how that ended up for 2022?

Yes, I'll start there. I think the quarter came in largely where we expected. There were certainly puts and takes, but 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, we are on the wound reconstruction side of the business. So TT is made up of 2 main franchises, which is private label and the wound reconstruction. Wound reconstruction came in high single-digit growth, and that's following a third quarter performance very much similar of high single-digit growth, so 2 quarters in a row of really nice core growth in our regenerative tissue wound reconstruction business. Inside of that particular franchise, it's 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. So 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 CSS management business. That's where our valves and our catheters are, as well as the capital side of the business. Now 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 priced capital, it's $200,000 approximately. And we saw really nice growth in the U.S., and then smaller capital did well around the globe. So nice performance there. So overall, I think we had some puts and takes. Probably the biggest or the 2 areas biggest 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, but we were able to at least still to get to the midpoint of the guidance. So it didn't disrupt at a point where we -- it disrupted our ability to get to the midpoint of the guidance range. Our biggest impact in supply is in our CSS division, particularly in our Dural Access and Repair franchise. And the other area that I would say came in as expected, private label came in, a little bit declined. So a decline in the business there, but 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. So 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. But overall, very, very pleased.

Let me maybe add a bit of 2 steps back perspective, because you heard me talk about our long-term targets and where we should and what I think of the portfolio. So 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. And so when I correct for those, I see both in third quarter and fourth quarter, this confirmation that with the portfolio that we have in the markets that we have, and definitely, when the markets are somewhat back to post-COVID normal, this is a 5-plus percent growth portfolio on which we can accelerate. And then our execution capability, okay, our supply chain and how we deal with the daily challenges that are thrown at us, it's a very strong execution capability as well as our attention to gross margin in a tough inflationary environment, where we drove very good progress and compensating measures on that. So yes, I see in our second half performance data points that I extrapolate into a longer-term performance.

Are you able to quantify the negative impact from the CereLink recall as well as the supply in dural repair?

Yes. Well, the dural access and repair, let's start with that one, we did see negative growth in the quarter. I think it's more of a challenging comp. Third quarter to fourth quarter, not seeing much difference there, but more of 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. So 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. And I think for CereLink, I think the total impact from the recall is about $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 tough comps year-over-year as we don't have that back in the market yet.

And what's the latest update on when we might see that come back to market?

So we still confirm. We think we're going to have the [ product ] back 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 relatively benign and fixed. We're now, in parallel, doing 2 things. One, we're setting up all the test mechanisms, as well as setting up our manufacturing, our supply to bring those components into -- we know how we're going to manufacture and remanufacture. Important at this point, we're sitting with the FDA to align with them on what data is going to be needed, whatever is going to be needed to approve that. We're -- we fixed the issue and what's the path back to market. So all of that is going on as we speak. And I think every week, we get clearer on what is the path between in 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?