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

Thank you. All right, great. We're going to get started here. First of all, I'd like to welcome Integra Life Sciences and Stuart Essig to the stage here. We're going to unpack the story. There's been a lot of developments in the company, and so I'm looking forward to the conversation. Thank you. 1 thing, there is the disclaimer readout that I have to do. Go to the Morgan Stanley website. You'll find it there. So, you know, maybe to start us off, Stuart, since returning as CEO, where have you focused your attention and what progress gives you the most confidence today that Integra will be successful over the long term?

So I've been in the role now 5 months. It's been very interesting. I've focused most of my time on working with our quality and operations people to make sure we continue to develop supply. We had a long period of time with quite a number of supply challenges because of some of the quality issues in 1 of our sites, but we've been in the last 3 quarters bringing most of our products back, and I probably spend 70%, 80% of the time with the ops group.

Okay, great. And what are the biggest changes you've seen across the company that allows you to The consistency of the business is coming back and you feel like you have that predictability rebuilding.

So we had close to 25 years of really quite extraordinary growth both organically and from acquisitions. But in the last 4 or 5 years, we've struggled with some of our quality system issues. What I'm really happy to see is that a lot of the work that we set out to do 3 years ago has been completed. So we have been working with a compliance master plan to basically harmonize the manufacturing sites. We have 17 manufacturing sites as a company. And so we've been putting in place common quality metrics and initiatives across all our sites. To the extent that we had out of compliance activities, we've been working very hard to repair them. We've literally gone to the bottom of every 1 of our sites, brought in external consultants, former FDAers, and in the last 2 or 3 years, we've had a number of very successful FDA audits. We've had our Notified Body in all of our sites every year. And so we're just making good traction. We've said that on our warning letters will have by the end of this year, all of our responses submitted. We began producing Surgimend, which is the third product that we wanted to bring back to market in our new Braintree site, and we've got manufacturing in the second quarter, and we expect to launch that in the fourth quarter. So lots of operational progress, still plenty more to go. But the reality is I haven't spent particularly that much time with our commercial team because they've done great. They've held the business together through a period of great turmoil. And what I did say when I returned is we have a really nice opportunity to go back on the offensive.

Yes. Yes, okay, great, I mean that's very helpful.

A couple of our leaders into divisional president roles. We've put both of our divisions under 1 common Chief Commercial Officer. And so we're in the process of getting synergies across our businesses as opposed to just within our 2 divisions. So lots of change, but I think mostly change for the good.

Table set, folks, but I also think what's also investors are looking for important indicators, right, whether it's KPIs or milestones. So what should they look out for over the next few quarters that you think are some of those leading indicators on the progress being made?

So we've had 3 quarters in a row now where we haven't had any major upsets in our manufacturing or inability to supply product.

Yeah.

We have also reduced dramatically our spending on compliance. We've reduced dramatically our spending on European Union program, and we have completed or nearly completed the construction of our Braintree facility. What that means is our cash flow has increased significantly throughout the year, and when you think about the #1 financial, the financial metric I'd look at over the next 4 quarters is the growth in our operating cash flow and our free cash flow.

Okay, great. Well, look, I want to dive into the portfolio opportunities and competitive positioning. You touched a little bit about the strength of the commercial sales force keeping the business, you know, as intact. I guess on the supply reliability and product availability, as that improves, what do you think are the biggest opportunities to translate those commercial relationships that the commercial team has done such a great job of holding on to into growth across the portfolio?

Sure. So our portfolio is roughly 2.

Two-thirds neurosurgery and related products, and 1-third the tissue reconstruction products. And the dynamics are different in the 2 parts of the business. So on the neurosurgery side, although we have had, throughout the last 2 or 3 years, periods of inability to supply product, they've generally been only a few months at a time, which meant we really did not have a significant impact on our market share. We're now in the process of having most of those products back in stock. We've really starved our international business, so we have a nice opportunity to bring some of those products back internationally that we unfortunately didn't have inventory for. And so it is, to some extent, just executing on our commercial strategy and having enough product to deliver, but in our segments, excuse me, our different components of our neurosurgery business, we're #1 or #2 in each of the categories, and they're products that have been used by neurosurgeons for years, and so to the extent we've gotten product back in the market, we've taken our market. We have a number of new products that we're in the process of launching or will be launching in 2027 in the neuro side of the business. We launched our Aurora Surgiscope, which is a very interesting product for use in minimally invasive neurosurgery. And we have in 2020 a product that we call Liberties, which is essentially an anti-clog that can be used both in external ventricular drainage as well as in hydrocephalus devices. In both of those areas, we're the market leader, but these are new products that can have a major impact on limiting clogging and therefore limiting explants. A lot of hydrocephaluses in children, typically they have their shunts exchanged every 2 or 3 years. So the longer you can have a child avoid the surgery, the better the outcome for the patient. So on the neuro side, there's both new products as well as simply driving market share internationally that can seriously impact the business. On the tissue side, we've had a number of challenges with product of unavailability. In prior years, we had challenges with our Integra Skin, which is our leading product in terms of availability. By the second quarter of last year, we had, for the most part, product back in stock, and we've been able to return to market with that product to market shares previously roughly in line with where we were before some of these product shortages. We also relaunched a product called Primatrix, which was out of the market for 2 years, and we believe we've taken back roughly 50% of our pre-quality system revenue. So, again, we have the broadest range of tissue repair, skin substitutes. The sales force is trained to sell across the range, and we're now back for the first time in, you know, 2 and a half years having all of the products available for the reps. But we have to earn our share back, and it's a really competitive market, a little bit different than neuro. You know, there's 10, 20, 30 companies with skin substitutes. I think we have the broadest range, but, you know, we've got places where we've lost business and we've got to go earn it back. Okay. And you started touching on that.

This a little bit, but where do you believe Integra has its strongest competitive advantages, and how do those competitive advantages support the company's long-term growth potential?

Okay.

So, we have such a broad product line and such a balanced product line that it's unusual if we don't have some business in any major hospital in the U.S. But there are big chunks of our portfolio that are not in some of these hospitals. And because of the way we've been structured with these 2 divisions, we've really gotten minimal leverage between the 2 divisions. We have plus or minus 25 individuals who focus on enterprise, which means selling directly to IDNs and GPOs. And we really have not leveraged the sheer breadth of our portfolio in those big accounts. And so that's a big focus for us in the next 12 to 24 months which is just leveraging our presence in a number of really significant accounts and making sure we're selling across the portfolio. The other strength we have as a company from a technology perspective is our tissue reconstruction products. So we have, again, the broadest array of technologies. We have a synthetic product that we're bring that we've brought to market in the in the hernia repair area and it has the potential to with the PMA that we're working on, to go into breast reconstruction. I would say, and we take those tissue products also into our neuro division. So our Duragen product, our durografting product, we're the market leader. It's sold through our neuro sales force, but it's manufactured in the same facilities as our wound care care products. So I think leveraging across the 2 divisions, leveraging in our customers, and then and driving international. We've gone from about 20% to 30% international as a company. And, you know, some of the better, larger companies are 40%, 50%. And it's just about penetration. It's just about being present in the market and having the sales and marketing infrastructure to drive. And we've grown a lot, but there's still plenty of room to grow.

Okay. And in there, you talked a little bit about leveraging existing hospital relationships across the portfolio. You know, as you think about the combination of neurosurgery and tissue reconstruction, what is the biggest opportunity to create value from that combination?

Sure. I think it's just the ability to negotiate hospital-wide deals across our portfolio. And in some hospitals where the major player in tissue recon and we have no presence in surgical instruments. It's really just about selling across the portfolio.

Yeah, across. Yes, using that mind share that you already have within the hospital. Okay. So as you think about, you know, investors are always concerned around top line growth trajectory and understanding that. How should investors think about the tissue reconstruction portfolio in particular and the growth trajectory that it's on over the near term and midterm?

So I would distinguish between our short-term where we've been relatively conservative because of the number of product companies availability issues that we've had as we go through this journey from a from a corporate quality system perspective. But if you go back before 2024, we were growing our overall business at 4% to 5%, our neuro and surgical business slightly below that, and our tissue business, I'm somewhat above that, mid-single digits. If you look at our competitors in tissue, they've grown a lot faster than that. And I really think it does have to do with the last 3 or 4 years of product availability. So, I think longer term, there's every reason to believe we can get back to, you know, at a minimum, our prior performance, which was, you know, mid to high single digits on tissue.

Okay, great. You know, there's been a lot of noise in the marketplace within the wound care market. The recent CMS reimbursement changes are shaping the way that the outpatient wound care market is operating. What opportunities does that create across your tissue reconstruction portfolio?

So, broadly speaking, plus or minus 90% of our tissue products are sold into acute. So, whether it's the hospital or the surgery center or wound care center, we never really had a big presence in the physician office, and therefore, we never had success. Reimbursement for our products. The issues with reimbursement that drove CMS to change the way in which products were priced principally had to do with the amniotic tissue products and from our perspective, those prices have been driven down 80%, 90%. And we've basically never raised our prices to those very high levels. That means that the physicians who were benefiting from these high prices really have no reason to do the procedures in their offices and we expect those to be driven back into the wound care centers, into the, you know, adjacent surgery centers to the hospital. The strongest. So, you know, we we priced our products essentially in line with what the new CMS ruling is. And again, 80%, 90% of our sales fall into a DRG, not a direct reimbursement from CMS.

Okay, great. That's helpful. You know, we talked about some of the products not being available, supply chain issues, et cetera. As you're preparing for Surgimend in particular to relaunch, what are the key priorities and what will define a successful return to the market?

So Surgimend is a surgical mesh that is approved as a surgical mesh without any specific label. We have completed a PMA, all the modules, except for the manufacturing module on Surgimend in order to get a breast reconstruction indication. We expect to have that that audit by the FDA sometime in 2027. And that will open up the ability for our sales force to sell into plastic and reconstructive surgery. The market now is dominated by a product sold by Allergan. It's an $800 million product. And we see a lot of potential to penetrate that market. Our data in our PMA demonstrates some real utility of the product when compared with others, and we have many loyal customers who would like to see the product back on the market. Similarly, our Durazor product, which is a resorbable polymer mesh, it is still on the market, it's been on the market for about 3 or 4 years, it's been growing at double digit, and we've also been doing a PMA clinical trial for that. We would expect to submit that data sometime in 2027. And so we're hoping to be the first company in breast reconstruction to have we have 2 PMA products available. There's a lot of interest in this at FDA. There's a lot of interest in the clinical community. You know, women's health is a big topic and breast reconstruction in oncology is a huge opportunity for us.

And you know, folks love analogs, and I'm sure you do as well, but there's lessons learned from relaunches. And as I think about PriMatrix and the proof points that you've seen through that relaunch, as well as the lessons learned, what data can you share with us so that we can think about appropriately categorizing?