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

Get started here. I'm Robbie Marcus, the med tech analyst at JPMorgan. Really happy to introduce the CEO of Integra, Jan De Witte. Jan will do the presentation, then we'll do some Q&A after.

Perfect. Thank you, Robbie. I'm Jan De Witte, the CEO of Integra LifeSciences. With me here is Lea Knight, our CFO. Together, we'll cover with Rob the Q&A. First things first, our safe harbor disclosure. As a reminder that some comments during this presentation are going to be forward-looking. So let's get started. I know many of you, when I look through the room, have been following Integra for many years. Also see quite a number of new faces and I hope that we have more on the webcast that don't know us that well. And I hope that you will come away as excited as we are as a management team about Integra's future opportunities. And so I'm going to take a bit of time taking us through the potential of the company, markets, portfolio but also the path that we're executing on to strengthen our capabilities and make sure we capture all of these opportunities. So let's start with high-level Integra, okay? We're a world-leading company committed to restoring patients' lives through unique technologies in neuro and regenerative care. We operate with 2 big business segments. First one is Codman Specialty Surgical. It's about 2/3 of our revenue. Codman is a leading player in neuroaccess, neurosurgery, neuromonitoring devices and disposables and also a leading provider of specialty surgical instruments and soon to be a leading provider in ENT with the anticipated completion of our Acclarent acquisition. Acquisition that we announced last month and that we expect to close in the second quarter of this year. And then the second big segment is Tissue Technologies and 1/3 of the company with a broad portfolio in complex wounds reconstruction and leading -- and a leading innovator in surgical and breast reconstruction. What ties these 2 segments together is our deep domain knowledge in regenerative technologies, technologies that we leverage across both businesses but also through our private label activities. Integra is a business that operates in attractive end markets with close to $1.6 billion in revenue, of which more than 90% is recurring, driven by procedure volume. We leverage 2 distinctive competitive strengths, okay? First of all, our leading brands, we bring clinically differentiated technologies to surgeons and to their patients. And we do this across the board with a scaled, experienced and trusted global commercial footprint. So let me go a bit deeper into our markets and then these 2 segments and divisions. What I believe makes Integra distinctive is that while we are a midsized player in med tech, we're a big and leading player in the attractive markets where we are present through our focus and through our brands. We play in markets with growing patient populations driven by chronic diseases and emerging market dynamics and both in our Codman business and our tissue technology business. Our markets, we bring differentiated technologies and innovation to markets where that matters. Like with our technology for selective tissue ablation with our CUSA capital equipment or the introduction of minimal invasive surgery in neurosurgery or the PMA products that we're driving either in skin substitutes or in breast surgery. And with these technologies and innovation, we access high-growth niche opportunities where surgeons are uniquely influential in the buying decision and where customer relationships make a lot of difference. Our total accessible markets add up to about $9 billion TAM at a -- growing at a solid 5%. 2/3 of that, again, is neurosurgery, growing at 4% and 1/3 is complex wounds reconstruction and surgical reconstruction, growing 8%. The fact that we are a big and leading player in those markets where we're present allows us to provide deep focus on these markets with critical scale, breadth in our portfolio and depth in clinical education, with a tenured and trusted sales force that have deep reach in those markets. And in addition, our global commercial footprint enables us to leverage our technology and innovation investments outside of the U.S. And we can leverage our strong balance sheet and strong financial [indiscernible] to complement our organic dynamic with systemic and targeted M&A for accretive growth. If I go a bit into our 2 divisions and starting with Codman, playing into the $6 billion specialty surgical market, our Codman business represent a bit more than $1 billion in revenue for Integra. Concentrated in neurosurgery and specialty instruments and soon to include ENT, as I mentioned. And we enjoy with our Codman business a long legacy and a strong position with a market-leading portfolio and direct sales force. Our global scale allows us to offer solutions across multiple disease states, such as brain lesion surgery, including minimal-invasive traumatic brain injury and neuromonitoring, hydrocephalus care. And then with our specialty instruments segment, we capture a top 3 position in neuro, ENT and general surgical procedures. And then as we will close our Acclarent E&T acquisition, we're going to be adding about $1 billion in U.S.-based accessible market with accretive growth and with strong adjacencies with our legacy CSS business, which will also strengthen our R&D capabilities and fuel innovation opportunities between ENT and CSS. Our aim with our Codman business is to grow above the market, above that 4% and we do this by investing in higher growth segments, like advanced energy, minimal invasive surgery and ENT, expanding into higher growth geographies like we're doing in Asia and investing in unique technologies to grow share in markets like what we're doing with our Endexo and Bactiseal combo catheters. Jumping to our Tissue Technologies business, $0.5 billion in revenue, a leader in a $2.5 billion accessible market and a business that represent the broadest set of regenerative technology platforms in the industry. We're talking here about highly engineered collagen, bovine dermis, porcine and amniotic tissue. And since 1 year now, we also have a resorbable synthetic mesh platform, a technology acquired as part of the SIA acquisition about 1 year ago. And so all these technologies support multiple leading brands across complex wounds and surgical reconstruction, while the private label market enables us to leverage our technology and our manufacturing capacity in markets where we don't have a commercial footprint. Like with the Codman business, we aim to grow above the market through new products, new clinical indications supported by clinical evidence as well as expanding geographies and private label opportunities, while we focus our organic and inorganic investments on the higher growth segments. And our investments in implant-based breast reconstruction is a great example of going after a accretive growth segment. For those of you who followed our Investor Day earlier this year and also last year, we drive our strategy focused on 5 key pillars with a goal of accelerating growth and profitability and creating value for our shareholders. These priorities remain the priorities for 2024 based on accomplishments in last year and lessons learned. We're updating our focus, specifically further driving operations and customer excellence and a performance culture to accelerate that innovation and growth capability. So I'm going to cover some of these 5 pillars. Now let me start with operations. So over 2023, we've continued to strengthen, focus on operations and customer excellence as a key strategic driver, a key strategic enabler. And while Boston recall and the factory shutdown shifted some of our focus and resources towards quality system remediation, we did make significant progress in strengthening several of our operational foundations by building out manufacturing capabilities, like in our factory in Le Locle in Switzerland and building our first in China for China manufacturing capabilities. We've upgraded talent and leadership to drive performance in a world which is more complex and more unpredictable from a supply perspective. We've established new capabilities from a life cycle management perspective and procurement to ensure quality and availability throughout the life cycle of our products. And we've introduced a stronger and more detailed performance management. And in 2024, our priorities are pretty clear. First priority is to bring our Boston products back into the market, sustaining the upgrades that we've made in our quality management system and not just in Boston but we've done that across the enterprise. And we're further advancing supply resilience and strengthening efficiency methods as a way to step up our ability to drive productivity and make that a core capability for Integra. Maybe brief on Boston, a brief update there. As we outlined, I think it was in the third quarter earnings call, we have 5 key milestones to progress towards bringing Boston back in the market. Back in the market, mid-second quarter to end second quarter, mid-May to end June. We remain on track to that time line. We restarted the factory mid-November, a little bit before Thanksgiving, ahead of the end of the year. And that allowed us to start producing batches of products to start validating products, validating processes, refining process and further preparing the sites and the teams there for the key audit milestones that are coming up here in the first quarter. And so while the Boston recall and remediation has posed significant challenges to the business in 2023, it has provided us a clear North Star for our operations and quality system. And in parallel to the Boston remediation work, we have also worked last year in implementing these lessons learned across all of Integra. And that's what you see in the right-hand side of the page, what type of topics we've driven across the enterprise. With regard to margins, although Boston remediation again has delayed some of our gross margin improvement trajectory, we're confident in the levers that we have as a business. And we have further insight in how and where we can drive margin accretion. And this covers volume, mix, price, operational efficiency across our supply chain, procurement and supplier management actions, process, yield improvement and improvements in our footprint and SKU rationalization where that would be needed. Now in order to further accelerate this momentum, we are kicking off a project and initiative in 2024 with the help of a third party, okay, who will work, a consultancy that will work with our operations leadership over the first half to identify and activate the next phases of projects that we can initiate after we get Boston back into the market. Yes, opportunities, projects that drive the next levers of margin improvement across our main factories and with that establish the path and the capabilities for sustainable margin improvement for the business. As we work to develop capabilities, people and leadership make a difference and over '24, yes, we are further activating a holistic project to step up focus on creating a high-performing organization. I'm not going to go through this page, but yes, we're touching these key drivers that you see on the right-hand side of this page. And so with that, all of this is to enable our innovation and our growth. So let's talk about innovation. For more than 30 years, Integra has been a technology innovator, targeting clinical and economic outcomes and elevating the standard of care. And we do this in 3 ways, okay, developing new indications for our technology, supported by clinical evidence. Again, I mentioned breast reconstruction is 1 area where we're very much doing that. Second, developing new surgical approaches like we do with Aurora, our surgiscope where we introduced minimal-invasive neurosurgery and minimal-invasive intracranial hemorrhage surgery. And finally, we bring new technology to our care areas to improve quality and productivity like what we're doing with our combo catheter. When I look back at 2023, okay, lot of accomplishment. We brought CereLink back into the market, the international markets. We're going to do the same in U.S. again over the first quarter. We're well on track there. We continue to make progress on our breast PMA strategy with both SurgiMend as well as with DuraSorb. And we continue to innovate organically, broadening our CUSA tip portfolio and broadening or improving our Aurora portfolio. And we continue to also invest in foundational R&D, specifically in regenerative technologies. In 2024, we'll further step up, continue on that momentum, strengthening customer insights and clinical capabilities, making our portfolio more digital with projects that expand analytics and companion app capability. And we're going to continue to execute on clinical programs and PMA studies. Over the next couple of years, we see new product innovations, new product allowances as a significant accelerator of our organic growth. And this is a page where we summarize or give an overview of some major areas for organic new product introductions, starting again with Aurora Surgiscope platform. This is a new technology that provides advanced visualization and neuro minimal invasive surgery capability. It's a market that we eventually see as a $1 billion accessible market, in a market that will yield significant revenues for Integra over the LRP period and beyond. Second is combo catheter, where we combine the best of both worlds, combining 2 technologies: one, technology that minimizes infection, other technology minimizes occlusion risk. We bring that together in 1 single catheter. Catheter is a big market, $800 million-plus accessible market. With this innovation, we're going to further strengthen our leadership in that segment, take share, take price. And then our complex wounds reconstruction segment, we're driving investments in product innovation and evidence generation for new indications, which will further allow us to continue driving growth above that 7% market growth rate. And then finally, SurgiMend and DuraSorb here. We have the clear ambition to deliver to the market the first 2 distinct solutions with PMAs for implant-based breast reconstruction, aiming to address various clinical contracting and economic needs across multiple sites of care in this fast-growing breast reconstruction segment. This is 1 segment where by 2030, we see this as a more than $200 million revenue opportunity for Integra. International. Today, almost 30% of our revenues are from outside the U.S. So we have a solid global presence. So we believe that this 30% number should be more 40% or above. And we believe we can leverage that footprint to get there. If you look back at 2023, we demonstrated that we can accelerate growth in our international markets, launch new products or existing products in the international markets. And we've built out capability to really have a sustained double-digit growth rate in the years to come. So of 2024, we're going to continue pretty much on the path that we've been with international, strengthening local commercial market access, regulatory capabilities across Europe, Middle East, Africa, APAC, Canada and Latin America. We're broadening our commercial footprint and capturing hospital expansion opportunities in emerging markets and growth markets. And we're going to further advance our China -- in China for China manufacturing capability to strengthen our position in that large Chinese market. As we think about where we're headed with our portfolio, in our logic, we both -- in our CSS, our Codman business as well as our tissue tech business, we focus on solutions and how they fit in the broader care pathway, the journey that patients take from diagnosis to treatment planning to surgery to postoperative care. Today, Integra is very strong in acute care, in the hospital. And we plan to leverage this to first and grow further deeply in acute as well as broaden our impact by moving upstream preoperative care and downstream in additional sites of care. If I look back at 2023, again, we successfully integrated our SIA acquisition, an acquisition that broadens not just our portfolio but also our access to sites of care for breast reconstruction. With Acclarent ENT acquisition, we're adding a strategic and anatomically adjacency to our neuro business, broaden again, our presence in care pathways. And we advanced our digital strategy over 2023 by finalizing market research and design for our digital innovation pilots. For this year, '24, we're going to continue on that track in building solutions that drive value for care systems, introducing more digital connectivity and analytics in our NPI programs. And we also continue to execute on our M&A game board that complements our organic focus. So as I near the end of this presentation, I hope you've gotten a feel for our commitment to delivering long-term durable value for our shareholders, taking you through our markets, our unique position to build out market-leading presence with our differentiated portfolio and commercial strength as well as through future investments in innovation and growth accretive segments and products and expanding our capability to commercialize outside the U.S. While we upgrade our operations capabilities to ensure quality and reliability and laying out the path for durable margin expansion. During '24, we look forward to providing updates on key milestones as we progress with the business on February 28. We're going to update on the fourth quarter, full year '23, 2024 guidance. And updates on key milestones like progress, of course, with the Boston relaunch. And then in addition, near the end of the year, we plan to provide an update to the trajectory towards our LRP plan. And that's going to be following the Boston relaunch, where we intend to set up a virtual LRP update somewhere in the fourth quarter of the year. So in conclusion, I hope that you've gotten a good view on Integra's tremendous opportunities and what we're doing to capture these. We are a global leader with a great legacy in neurosurgery and regenerative technologies. Our portfolio is unique and with a great commercial position in attractive markets and strong opportunities to further build it out in depth and in breadth. We're further enabling commercial success by strengthening our operations, capabilities and building supply resilience and stepping up our ability to drive margin accretion. We're not only capturing opportunities in the high-growth segments with organic moves like transformative NPIs, geographic expansion and digital value add, we're also leveraging our strong balance sheet and financial rigor to complement that with strategic M&As. And so with that summary of our key value drivers want to hand it back to Q&A with you, Robbie.

Thanks. Maybe to start it off, we're going to get the full update on fourth quarter and guidance for next year. Any just high-level thoughts on how the quarter played out, you're willing to share?

Yes. So I think a couple of things. So we are not sharing our fourth quarter results at this point. I think Rob, you and I have talked, I've been on a listening tour since I've taken the role 6 months ago. And I think what I've heard very clearly from our investors as well as our analysts is that there is a desire for more disciplined communication when it comes to our earnings, along with improved kind of clarity, consistency and reliability of results. And so we're taking this opportunity to make a few changes. And so we're going to be doing things like -- and I know this will make you happy, we will no longer exclude discontinued products from our definition of organic growth, effective 2024 results and guidance. . But we also are taking a more comprehensive view in terms of how we communicate our earnings because we understand our value proposition to our investors goes well beyond revenue growth to include profitability, cash flow and so for that reason, our communication of earnings will coincide generally with our planned quarterly releases. And then I think the other final thing I'll note in terms of changes we're making is, we did this with Boston, we felt it worked well and we will continue to do it. When it comes to large strategic multiperiod initiatives, we're going to keep providing those time-based milestones so that it's a mechanism to measure our progress. And see how we're winning.

Maybe we could start with that since you pointed out. Boston, you had a slide, you detailed where you were, what you committed to. Maybe just speak to your confidence in hitting those time lines and your level of visibility to being able to restart selling in the second quarter of this year?

Yes. Let me cover that one, Robbie. Communicated before, right? We, over the summer, made a holistic plan, okay? It was the first step for making sure there's no surprises on things that we missed along the way. And we understood our critical path very early on. That's what we're managing very closely, which today is by validation of products. And that's why the, relaunching the factory before Thanksgiving was important because it gives us the time to validate process and products, to also test run, fine-tune processes and prep and prep our teams in that site, prep our organization for the couple of audits that we will be having in the first quarter of this year. Okay. We'll have a dress rehearsal later in January. And then near the end of Q1, we'll have a third-party auditor coming in to audit the entity, report when positive, we'll send to the FDA and that gives us the open door to start commercializing.

I believe the comment is that you're looking to recapture 100% of lost sales within 12 months. So 2 parts to the question here. This market is a fairly competitive market. So one, what have you seen in your market share during this time? And second part of the question is, 100% is a high number. What gives you the confidence to be able to recapture all of that within 1 year?

Yes. There's 2 sides to the question. Let me talk a bit about the commercial dynamics and then Lea can go into the numbers. But we've ensured that during this recall, our sales force has and remains in close contact to our customers, okay, which is not that difficult because we have a broad portfolio of products. And so maybe PriMatrix is not there anymore but we have Integra Skin, we have other products that we sell to customers. And some of these products also take the place of PriMatrix. So when we relaunch back in the market, we have customer relationships that are as warm as they were before. Okay. And then second and we've learned that during the recall is that our products, whether it's SurgiMend or PriMatrix, are great products, are differentiated products, which customers love and want back. And so we've also learned on why customers love it and we're using that to reposition, to get back in the market. So that drives the confidence of our sales force that they've got a relationship, they've got products that can win. And when we put it back in their hands, they'll drive us back to the volumes where we started from.

Yes. And then to the second part of your question because I do think it's important to clarify kind of what we're talking about here. So when we say 100% recapture, it's recapturing our sales run rate, right and within 12 months after relaunch. And so when you consider we exited in 2023 and we're talking specifically on our commercial business, the PriMatrix and SurgiMend. We exited in 2023 around the middle of the year. We anticipate coming back mid to late Q2 next year. So by mid- to late Q2 2025 is when we'll be back at the same sales run rate that we were when we exited the market in 2023. And so I think there's more there than maybe is appreciated when you think about just 100% recapture. I think it's also important to note that in the 2 years, effectively, that we're talking about, the market has continued to grow at mid- to high single-digit rates. And so we're not saying we're going to recoup all that growth, right? We're getting just back to where we were effectively 2 years prior.

But being off the market for as long as you have, doctors have had to look elsewhere and potentially try other products and contracts with other companies. So how do you get back in there and recapture the sales you've had when physicians just naturally would have to look somewhere else to fill the gap?

So again, yes, customers, where we could not substitute have had to use other products and multiple other products. And that's where the presence of our sales force is important because they hear every day why the surgeon does not like where they had to go through and why they would want to come back, right? So those arguments and those, let's say, preselling is happening. There is going to be a bit of a time lag in some cases, getting back on the shelf, you're going to have to go through some VAC approvals, some administration to get back up. That's why there is going to be a ramp over those 12 months to get us back on all the shelves that we vacated over there.

Maybe if we could shift gears and move to the Acclarent acquisition that you just did. It's an interesting adjacency, right? You talked anatomical adjacency. Let's talk both the strategic rationale on the top line and then also the financials on the bottom line. And if we start with the top line, anatomical adjacency, it makes sense from the body but how similar are the call points and how much leverage is there between your existing business and the new acquired Acclarent business today?

So the call points today between ENT and neurosurgery are different, okay? That's why it was important. Acclarent as a target is an [ SKL ] target with an [ SKL ] sales force that has critical mass to address those sales points. So it can be a platform not just for organic growth but for tuck-ins there. Over time, as you see some of the ENT practice and neurosurgery practices get closer together, okay, take the example of skill-based surgeries. You have more and more multi -- multiskilled teams that are working together, okay? So the call points will be getting closer. And we will be looking at innovation opportunities in that space to address those emerging anatomical adjacency. Overall, I think one of the attractive dimensions of Acclarent is that it is growth accretive to our neuro business, both the ENT segment as well as the Acclarent dynamic that they have in the business. So that, together with the scale gives us a really attractive strategic opportunity, size, scale, great portfolio, great brands and opportunities to drive innovation and collaboration between our neuro and ENT business.

On the acquisition call you hosted a couple of weeks ago, you talked about the potential for sales synergies and this was included in the deal model. One, what specific sales synergies are you looking at? And when we think about the time line, is this something that happens day 1? Or is this more a year 3, year 5 and beyond.