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

Good morning, everyone, and welcome to Day 3 of the Morgan Stanley Global Healthcare Conference. Thanks so much, everyone, for joining. Patrick Wood, I run the U.S. Medtech team, most importantly and excitedly disclaimers, morganstanley.com/researchdisclosures. It's a great website. I really recommend everyone go for fun. What is fun though is obviously having the Integra team here. So thanks Mojdeh and Lea for joining.

Thank you for having us.

Really appreciate it. I guess maybe starting with like it's been, what, a little over a year?

No. No. It's been -- I'm in my 9th month now -- 9 months. Yes.

So yes, that's right. So it's the start of the year. And have how you felt things have gone? I mean everyone has the perception of what something will be before they get inside. Like how has it been relative to your expectations?

Yes. Yes. So many of the things that to begin with that got me attracted to the company in terms of the strength, I get to experience it firsthand in my interactions with the with the customers. And quite frankly, the demand that's out there continues to be out there for our products. So the fact that we have leadership position in attractive markets, we have strong brand equity and commercial execution. And we have a team that really lives every day the purpose that we're all about, which is restoring patients' lives. But more importantly, I see tremendous opportunity for us for continued growth across any of the platforms of neurosurgery and Tissue Technologies and ENT, both within the U.S. and internationally, and both through organic growth and innovation. And ultimately, when we're ready in the future, potential additional inorganic opportunities for us. So those are all on the positive side, the things that I'm getting to experience. Now on the other side, what I realized early on in the role is that the operational and execution challenges that we have are deeper than I had anticipated. So the good news is that they're fixable. So we have been very focused throughout 2025 on 3 key priorities, which is to drive implementation of our compliance master plan to continue to drive operational and execution excellence and also to deliver on our financial commitments. Some of the work that we've completed actually in that regard is we obviously strengthened the leadership teams in quality and operations. We stood up the transformation program management office to help us with prioritization and execution excellence. And we also put up the -- setup supply chain control power in order to be able to get the visibility on the key operational metrics and then also be able to drive into the future, a culture of accountability and continuous improvement. So and last but not least, we are making great progress on the compliance master plan. We finished the site assessments that we had planned ahead of time. And we're kind of gearing up to get into '20 -- well, we're not done in 2025, but we're laying the foundation to also get into gear with 2026.

To be fair, I think I've never heard an incoming executive say that the compliance things were easier than they expected. There's always -- I mean it's always more of a challenge in that way. Yes. I mean on that side, like a lot of our companies have challenges on that side. The FDA is a tough task master, if you like. How do you find the right people to get into place? Because looking for a lot of quality and supply chain people, how do you find that experience in filling those roles?

Yes. We have actually had pretty good track record in being able to attract really strong talent from strong backgrounds within the medical device and also some pharma industry, with some of the changes within the FDA, we've been able to get some folks, that used to be former FDA folks. So we actually have had a pretty good opportunities, bringing talent on board. So that hasn't been an issue for us. And we've been investing a lot, especially on the side of the quality and compliance.

You both had different backgrounds. I'd love to say how you both would characterize the overall culture of Integra relative to prior experience and what it's like as a place to work and what you think is the defining attributes of the company are.

Yes. So I would say what I mentioned earlier on, people really are committed to the purpose of the company. It drives them. The purpose there is to restore patients' lives. It speaks to them. That's what they come to work every day about, very resilient team. They're very proud of working with their counterparts with their colleagues. I've never had people say, I actually enjoy working with my colleague because they're talented. They're going in the same direction that I'm going. So I would say it's a great culture in terms of the team being committed to driving the priorities forward. Now we have needed to do a lot of prioritization to make sure that people are aligned in the same direction. Because when you get cultures like that, people tend to want to help everyone. People want to take on everything. So we have been very focused on driving prioritization across the enterprise to align the efforts on the most important things for the company, short and long term.

Does that resonate with you, Lea?

Yes, absolutely. So I've been with Integra for about 2 years now and absolutely agree with how Mojdeh characterized her experiences from a culture perspective. I think for my own, I've seen all of those things. I've also been able to witness kind of in this moment, right, where we're dealing with a number of challenges across the business, how individuals and teams have stepped up to help fill the void and drive us forward. I think to Mojdeh's point, what's happening now is we're prioritizing kind of the highest priority things first, the things that are going to have the most impact. I think that's what's going to make the difference in terms of us getting to where we need to be.

Obviously, you guys have a lot of internal focus, but you're also a large company that's externally focused. So I'd love to hear like what are you hearing from your customers? How do you think the health of the health care system is at the moment, patient volumes, just the broader ecosystem with when you operate, how would you characterize it?

One of the things that has struck me since I've joined the company, is the resilience of the demand that's out there for our product, which really speaks to the clinical value that our products bring to the physicians. And in the cases where we have been out of the market for a short period of time due to some ship holds and all that, we see the adoption and retention come right back. So -- and obviously, our sales organization, they have a broad portfolio that's still relevant to the customers. We're constantly in front of them. We help them out through some of those internal supply challenges, and that continues to build trust and confidence with the customers. On the neurosurgery side, obviously, we're supported by some of the demographic shifts, whether it's aging population or increasing neurological conditions. And also, obviously, the technology and the surgical advancements continue to make available more options for treatment. So that's also a tailwind. The -- on the side of the Tissue Technologies, we have demand. We see the demand as being stable, and we have really a lot of opportunity for growth, both through innovation as well as advancing clinical evidence that gets us beyond even the acute care setting into the broader sites of care. And then on the ENT side, we see procedure demand improvements, both on the adult side as well as pediatric side. But the nature of the fact that these are minimally invasive procedures, the more attractive anyway, so they increase access and improve adoption. So the dynamics are pretty positive. And moving forward, for the longer-term growth, we have just completed a portfolio prioritization, a full thorough portfolio assessment of our portfolio in the process of strategic planning and long-range planning process. And moving forward, our capital allocation decisions are going to be made based on that prior position. It's going to guide where we're going to put our resources in order to ultimately, over a period of time, we shift the mix of our portfolio that's in high-growth spaces to a higher degree. And that would provide us the opportunity to have sustainable growth into the future and create value for the shareholders.

We all love our children equally. Apart from me, I despise them all equally. Other than that, you must have preconceptions about neuro and ENT and things like that before joining. Was one of the 3 or were any of them different versus what you were expecting as end markets as -- were there things that surprised you in the neuro portfolio, that kind of thing?

No, no, honestly, as I said, I'm just amazed. I mean several of our products have been in the market for a while, but it's amazing to me the loyalty of the surgeons in every interaction that I have, people talk about the quality of the products, the difference that they make in terms of addressing specific patient needs for them. So in many of the markets that we're in to take newer surgery in any of the categories you look at, you're #1 or 2 position. So nothing that I would say has surprised me except that I have never seen such strong loyalty across the portfolio, which is great. And that's one of the reasons why I'm doing it because I think we have the platform to build upon. And I'd say in terms of the portfolio prioritization and the portfolio assessment that we've done, what we want to do moving into the -- as we move into 2026 and beyond, we want to make sure that we make our portfolio, we set up our portfolio to work for us, right, both in terms of optimization of it for growth, and optimization of it and along the other work that we're doing on the margin side, profitability of it. So the first step for us is let's optimize the way that our portfolio is working for us which is really look at the capital allocation decisions we've been making to support it. And then beyond that, it's going to be, yes, maybe there's opportunities for us to exit some parts of the portfolio later on or bring tuck-in acquisitions at the time we're ready for it, but the first phase is, let's get it to work for us to optimize it.

Yes. Okay. Just to put a finer point on it, the work that we've done with respect to the portfolio prioritization, has actually confirmed in a lot of respects that there are products in each of these 3 markets, right, tissue, neurosurgery as well as AMT that will deliver kind of those high growth outcomes. So to your point on loving your children equally, maybe not totally across the board, but certainly within the absolutely our assets across each of those 3 that will help drive our future.

Yes. Yes. Every part of the portfolio has a role to play. So you can't expect the same thing from every piece of the portfolio and you have to make choices. Nobody likes the delay program, somebody likes the cost programs, but you have to do it in order to be able to make a meaningful impact in the direction of the portfolio in the company.

And to allocate attention and resources.

Exactly.

I mean on the high level update, maybe for the remediation in the CMP side of things, reminder, there's obviously a lot going on, but where are we at today? And how far through that process?

Yes. Compliance master plan has been a top priority for us. And we have been making great progress. The compliance master plan work streams are on track. We're continuing with them. The site assessments that we had conducted in all of our facilities were supposed to be done by the end of Q3, we completed them by the end of Q2, which really provided us more visibility to the work streams and the remediation that we have ahead of us. And we've taken that -- those filings a very thorough prioritization of that remediation work, and we've begun execution under the program management office oversight and rhythm. And that prioritization and oversight on execution is something that we bringing new. We didn't have that before. So I think that's going to help us to continue to make progress. The remediation work is critical for us, not just in terms of regulatory compliance. Obviously, that's a big piece of it. But it's also critical as we try to drive consistency and sustainability in our quality systems across our network of sites and then also to be able to build in place manufacturing and reliability. Some of this remediation is going to go into 2026, but the work that we're doing is going to set us up well for continuing to improve in terms of our visibility ahead. as well as continuing to, in the future, deliver more predictable, reliable performance.

People are always critical in these kind of things. I know Valerie joined you guys relatively recently. What went into the selection of her and like how to she fit into this plan?

Yes. Early on, we were looking to fill the position, it was very evident that we needed a seasoned executive that had deep experience in operations and also would be good at driving cultural change and also bringing accelerate progress into what we're trying to accomplish here at Integra. And also, we were looking for somebody that had worked for in large organizations that have had complex global supply chain. So she brings with her -- Valerie brings with her a track record of having led supply chain transformations over the years and bring operational excellence and put it in place which are exactly the things that we need at Integra. As I told you, she initiated early on in her role, supply chain control tower. And so we're seeing the culture change that's coming along with it in terms of accountability and continuous improvement. I have known her for years and I have seen what she can do and what she can deliver and I'm confident in her ability to be able to make significant impact in Integra, moving into the future.

I mean supply chain and operations is a partner with finance in a very real way. Lea, how are you thinking about COGS and OpEx savings and the cost base of the business ultimately going forward?

Yes. So as you would have heard in our Q2 call, we announced an initial cost reduction initiative that's kind of the first phase of a longer-term margin expansion program. And this first phase is targeting about $25 million to $30 million to be identified over the next 12 to 18 months aimed at, again, addressing -- moving us back from a profitability perspective to where we need to be and also mitigating some of the headwinds that we know will be happening in terms of first full year of tariffs full year impact of tariff implications as well as inflationary pressures that we're seeing on the business. So to your point, as we look at this, yes, we're targeting areas within COGS because we know there's opportunities to go after productivity improvements, yield improvements, targeting areas in terms of OpEx that will address third-party spend. It will address operating model efficiencies, right? And how are we structured and whether or not it's optimized to drive the growth and profitability that we ultimately want to deliver. And along the way, we're embedding a very strong discipline around OpEx management to help ensure that we not only drive it, but we maintain it going forward.

It sounds like it's a COGS efficiency and like an external agent supplier efficiency kind of a measure rather than big internal cuts. Is that a fair assumption?

Well, so as part of the focus, it's -- yes, the initial focus in this first 12 to 18 months period will be primarily in COGS as well as third-party spend. But there will -- we are also looking at operating model efficiencies and whether or not we're structured to execute on the kind of portfolio prioritization work that we're doing.

I would say workflow efficiencies, how the functions do handoffs in terms of our -- also processes, the processes and procedures, not just in operations, bets in every function. So how do we become more efficient in terms of the way that we conduct the work every day and how do we increase agility and speed in decision-making. And so it's as Lea said, it's phases and there's opportunities everywhere that we will be going after as we come upon them.

I guess those savings also then help you reinvest internally in the control of the supply wagon. So it's like a good flywheel to kind of keep running.

Absolutely.

I mean in relation, you mentioned earlier the customer retention side. Have you noticed a difference between the products that have been off the market longer versus those who have been like off the market for a shorter period time? Is there any kind of difference?

Yes. So the ones that are on the market for a short period of time, as I said, we see a pretty good bounce back. We see the demand being there even afterwards. On the products that have been off the market like SurgiMend and PriMatrix, obviously, it's going to be more challenging for us. It's going to require for us to be very focused in execution and it's going to take time to get some of that share back. But what we're also hearing from the clinicians every day is that they have used these products in the past, they know these products, and they still to this day prefer these products to the alternatives that they're having to go back to. You take SurgiMend, for example, it's been known for -- first of all, it was growing faster than the category before it went off the market. And we -- it has -- it plays a critical role in procedures and the physicians are saying, you know what, not -- it's not in the market, we actually -- it reinforces our preference for the product because we know we're missing it. The same thing goes with PriMatrix. We hear the similar kind of feedback. So these products are not only just -- not only differentiated, but they also serve a purpose, a certain purpose in certain patient settings. And I think as we bring them back to the market, we're going to continue to be focused on supply reliability, making sure that we launch them with adequate and healthy supply and continue to drive clinical support as well as drive commercial excellence in order to be able to gain our share back, and we're confident that we'll be able to over a period of time.

I guess you've got the base business, but then there's also your pipeline. How are you guys thinking things like DuraSorb and how are you thinking about the balance of bringing new PMAs and things like that to market relative to the work that's going and getting back to the market?

Yes. So both are obviously priorities for us. So we're a compliance master plan and the regulatory efforts that go towards the PMAs are both important, and we're not trading off one for the other. One of the things that I would say, the PMAs are critically important for us strategically, especially in the implant-based breast reconstruction market, $800 million market growing in high single digits. And along our strategy has been a dual approach where we have SurgiMend, which is a biologic matrix as well as DurSorb, which is synthetic -- and we are pursuing PMAs for both of them. And to this date, no other company has the indication -- PMA indication. For SurgiMend, we have obtained an approvable status, which means that the clinical safety and efficacy have already been established for the product. So all we have to complete is going to be the GMP inspection, which is closely tied to bringing Braintree online. And so we would be ready for a PAI, preapproval inspection in 2026. We can't speak to when FDA is going to show up for that, but we should be ready for that inspection post -- for that inspection post readiness in operations. We also are pursuing the permit, obviously, and it's going on track for the result. And those are both important PMAs for us, and nobody has the indication so.

Obviously, when you joined your R&D team would have given you some insight into what the broader pipeline looks like. Obviously, no company will ever say what's in there for competitive reasons and what's in the pipeline coming up. But is it relatively well distributed between the divisions? Is there anything you can tell us about the forward look of where the R&D dollars are being disproportionately spending?

Yes. So I would say that right now, a lot of our efforts are on the remediation side as well. So we have that third leg that's going on. So I would say the investments in terms of capital and future growth, partly is the life cycle management, which is the remediation work, which needs to be done, but then you have the R&D investment, and you have clinical evidence. Because, for example, when you look at Tissue Technologies, our mix of investment is higher on the clinical evidence than it is on actual products versus, say, new surgery. But I would say it's fair to say the innovation and new product opportunities we're looking at are going to be in category-leading part of our portfolio because we want to continue to build on that leadership and that's both in the neurosurgery side as well as the ENT side as well. And in the future, obviously, we have opportunities with tuck-in acquisitions. We will be ready. Right now, our focus is on execution and bringing down our leverage. Yes.

How should we -- this is really to you, Lea, but how should we think about the growth algorithm, I guess, midterm maybe potentially in '26? You're in an unenviable position because there's so many moving parts. I mean, it's true for every business, but it's always challenging. If you're in our shoes, are there any key puts and takes or things that you think we should keep it online as we think about next year and midterm in general?

Yes. So point well taken, there are very many moving parts certainly if we look ahead to 2026. And we are still very much early in our planning process for 2026. So I can't get into a lot of specifics, but certainly can share some directional thinking. So on the top line, we certainly expect to see growth in '26 over '25 as we continue to do the work to strengthen our quality management system as we continue to put ourselves in a position to reestablish supply reliability and, quite frankly, give our commercial teams an opportunity there to get back on offense. We also fully expect to see a benefit in '26 versus '25 from a comparison perspective due to ship holds, right? '25 representing a peak year impact from ship holds, we would expect to see, again, a benefit in '26 versus that. On the bottom line, to my point earlier around the work we're doing around margin expansion, right? And that work being a profitability initiative that will help us not on drive profit but also mitigate some of that we know will happen in 2026. So as I mentioned earlier, full year impact of tariffs as well as other inflationary pressures. So those are some of the puts and takes that we're evaluating. In general, though, we are encouraged by the momentum that we're seeing in the business, and we look forward to coming back in our normal course to share our 2026 guide, which would be part of our Q4 call.

Yes, of course. You touched on capital allocation in general. How should we think about the convertible note leverage and the leverage structure of the business?

Yes. So our converts actually matured in the middle of August of this year, and we did satisfy that maturity, leveraging our revolver, which was our plan. And if we didn't have any other instruments in place, that would have meant the additional debt on our revolver would have incurred an interest rate of about 6% to 7%, somewhere in that range. Fortunately, at the same time that we entered into the converts in 2020, we also entered into interest rate swap agreements that also became effective when we convert matured and what that allows us to do is to take up to $900 million of our debt and fix it at a rate of 3.5% through 2027. So we're mitigating some of that otherwise potential headwind. So we'll continue to look to construct our balance sheet in a very strong and flexible way as we move forward. And certainly, as we look forward to getting into kind of longer-term financial instruments that will be consistent with that objective. In the interim, we remain compliant with our debt covenants, and we expect to do so. And then as it relates to capital allocation and priorities, our focus is in the near term, get reduction.

Makes some sense. Maybe flipping back on the some of the product side. Thinking of Integra Skin, how are you thinking about getting the production levels up and supplying the market and working your way through that? And from a production standpoint, how do you think that applies to other lines and priorities within the portfolio?

Yes. Yes. There's a lot of efforts that are going on, on the production side. In general, I would say the buckets of investments that we've been making, and it goes back to really middle of last year, it's about capacity, the CapEx they were investing more. And we are building where needed redundancies and resilience into our supply chain and value streams and also operational efficiencies and yield improvements and so on and so forth. So I think the poster child for that is actually Integra Skin plays a critical role in our portfolio, $200 million -- almost a $200 million business with very attractive gross margins. And that -- we have been on a journey on improving the production of that product since the last year. And we're pretty pleased with where we are. Over the last couple of quarters, we've been -- production has been able to meet demand. We've been able to deliver strong growth but it hasn't been just by chance. We have been very deliberate in terms of building redundancies in that supply chain, expanding capacity and improving yields. And that work is going on across the entire operation, and it's an opportunity that you can -- we are taking and replicating. It could be different elements of it, for different product lines. But nonetheless, when we talk about building operational discipline, improving efficiencies in the operations and investing in our operations to make ourselves the operations more stable and provide more steady supplier products to the customers. That's a great example. And we're going to -- we're replicating across the operations.

I mean maybe sticking on wound care. I've looked at that industry for a long time, but it's been the volatility on the U.S. side for how it's being reimbursed, how it's been thought about. You get -- from us externally, get the feeling like there's not necessarily a clear vision maybe from CMS and it goes backwards and forwards. I'm not exactly sure what to do with it. How do you view the broad wound care landscape? Is there an idealized structure you think for how these products should be reimbursed? Do you think the proposals will then get delayed? Like how do you feel about the construct as a whole as it is?

Yes, certainly very dynamic and continuously evolving, but we see as positive because obviously, it's in the favor, it's going in the favor and the direction of products that have clinical evidence and cost-effectiveness evidence and it's also better for the patients. So I think what the payers and the providers -- the payers and the policymakers are doing, clearly, want to improve access, increase the access to care as well as the consistency of the care that's delivered across the different sites and also be able to reward those companies and those products that are backed by clinical evidence. We actually see that positive. And if the changes in terms of Medicare rules and LCDs go into affect indeed, it's going to be actually an opportunity for us, a growth opportunity for us because we have a broad portfolio of products that have evidence backing as well as cost effectiveness. And it allows us to -- right now, most of our business is obviously in the acute care setting, but this provides us an opportunity to grow our business in outpatient settings like ACs and wound clinics. And we're actually excited about that. And we're making investments in clinical evidence in order to be able to continue to demonstrate the effectiveness and clinical effectiveness as well as cost-effectiveness not just in the acute care setting where we have good established reimbursement, but also across the sites of care.

The fun thing about the market is there are a few larger players, but there's also a massive tail of companies who probably don't have the ability to invest in those trials and that evidence. And so you're kind of hitting at like -- do you see this like a broad consolidation across acute maybe even chronic and just like a consolidation of the players down towards a handful of winners including yourselves?

Yes. Well, I think there's definitely going to be shifts in the sites of care. So because the detected incentives, something is going to happen. So we're thinking there is going to be shifts remain to be seen. There's also going to be depending on where they all commit numbers and in terms of reimbursement and so on and so forth, it's going to also be different as to how many people are going to stay in the game, how many people are going to bow out. But there's a lot that remains to be seen in terms of the dynamics of the market. I don't know if Lea, you have any additional comments?

We were talking before we got up on stage. You guys do a lot of these meetings, meet with a lot of investors. And it's probably the same question over and over again. But I'm willing to bet there's a bunch of stuff for you internally that is a big focus, but doesn't get asked. Do you know what I mean, like it doesn't get the focus, that you feel like there's a mismatch between the focus externally and internally? Like what are you surprised you don't get asked about more? Or alternatively, are there things you get asked about constantly but they're just nowhere near the kind of priority that the external market seems to think that they are. Does the question make some sort of sense?

Good question.

Yes, I can start. Maybe just do a compare and contrast. Certainly, having been in this forum like a year ago, right? Clearly, everything is around operations and kind of that moment we're in strengthening our quality management is on the launch of the CMP, everything became operationally focused. And so you got away from talking about the exciting kind of the foundation of what we do, the impacts that we have on patients, where we see opportunities for growth that are still very much there, right? They're still very much the exciting part of who we are and what we have an opportunity to deliver on. But you kind of understood, right, in that moment, right, there's very real reasons why that was the topic of conversation. I think you flash forward a year, we're still talking about this stuff, but it's starting to move in that direction where we're now talking about those things that represent growth opportunities for the future. We're talking about the rich clinical evidence that we have on the wound construction parts of our portfolio. So it's starting to get energy off of that. It becomes an exciting conversation to be part of.

Yes. Yes. I would say a lot of the external focus is on the -- more of the challenges that we are facing, we have been facing not a lot of emphasis on the opportunity ahead of us for the company, which I think there's tremendous opportunity for us. As I said, the challenges we have in operations execution and quality, they're fixable. So we need to fix them and the opportunities that we have ahead of us is significant.

Potentially next year, an ability to go more on offense if you like, in terms of the story. Is that fair?

Yes. That's it. Yes. That's fair. That's it.

Well, we look forward to it. Thanks.

Thank you. Thank you.

Really appreciate it. Thanks for having us.