Integra LifeSciences Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 6, 2024

There are 13 speakers on the call.

Operator

Good day, and welcome to the Integra Life Sciences First Quarter 2024 Financial Results Conference Call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Mr. Chris Ward, Senior Director, Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, Sherry. Good morning and thank you for joining the Integra Life Sciences' Q1 2024 earnings conference call. With me on the call are Jan DeWitt, President and Chief Executive Officer and Leah Knight, Chief Financial Officer. Earlier this morning, we issued a press release announcing our Q1 2024 financial results. The release and corresponding earnings presentation, which we will reference during the call, are available at integralife.com under Investors, Events and Presentations and a file named Q1 2024 Earnings Call Presentation.

Speaker 1

Before we begin, I want to remind you that many of the statements made during this call may be considered forward looking. Factors that could cause actual results to differ materially are discussed in the company's Exchange Act reports filed with the SEC and in the release. Also in our prepared remarks, we will reference reported and organic revenue growth and organic revenue growth excluding Boston. Organic revenue growth excludes the effects of foreign currency, acquisitions and divestitures. Organic revenue growth excluding Boston, excludes revenues from products manufactured in our Boston facility in both periods.

Speaker 1

Management believes that excluding revenue from all products manufactured at Boston plant provides useful information when evaluating the company's organic growth because of the unusual nature of the manufacturing stoppage and voluntary global recall. Unless otherwise stated, all disaggregated and franchise level revenue growth rates are based on organic performance. And lastly, our comments today will include certain non GAAP financial measures. Reconciliations of non GAAP financial measures can be found in today's press release, which is an exhibit to Integra's current Form 8 ks filed with the SEC. And with that, I will now turn the call over to you.

Speaker 2

Thank you, Chris, and good morning, everyone. It's a pleasure to be here together with Leah to update you on our Q1 results and guidance for the year. Let me start by saying the performance during this period reflected robust market demands, the contribution of having a broad and diversified product portfolio and solid execution by Integra colleagues around the world to deliver our 2024 key priorities and progress our strategy. If we move to Slide number 4, our first quarter revenues finished at $369,000,000 above our February guidance range, partially driven by orders that closed earlier and forecasted. Organic revenue was down 2.5 percent compared to the prior year, primarily due to the Boston revenue included in the Q1 of 2023.

Speaker 2

Excluding Boston, organic growth was 1.6%. We delivered adjusted EPS of $0.55 within our guidance range. Our Codman Specialty Surgical business saw a strong start to the year, growing 4.1% and in line with our growth expectations for this business. This performance was driven by several of our leading products and brands in CSF Management, Dural Access and Repair and Neuro Monitoring. In addition, we saw continued strength in our international markets, which have delivered consistent high single to low double digit growth.

Speaker 2

We expect to continue to build on this momentum in our international markets as we expand access to our products in new markets and broaden our commercial reach and capabilities. We also completed the global relaunch of CERELINK in the quarter We're pleased with the strong market uptake demonstrating resilience and differentiation of our intracranial pressure monitoring portfolio. Furthering our legacy of strategic M and A to broaden our impact, we recently closed our acquisition of Clarence, a pioneer in ear, nose and throat surgical interventions. This deal positions Entegra as a leader in the ENT segment, expands our addressable markets and provides immediate scale and accretive growth to our portfolio. McLaren's strong commercial capabilities, R and D expertise, advanced portfolio and deep clinical knowledge will be important synergistic assets for Integra, enabling us to deliver transformative technologies to restore patients' lives.

Speaker 2

We're excited to welcome our new Aclaris colleagues. Together, we will make a profound impact on ENT and neurosurgical care. Within our Tissue Technologies business, we continue to see healthy demand for our broth portfolio of wound reconstruction products. We delivered triple digit growth in Durosorb and we're tracking ahead of our deal model. Leveraging another recent acquisition, we further expanded our UBM Wound Care platform with the launch of Micromatrix Flex, a Dural syringe system enabling the convenient mixing and precise delivery of MicroMatrix based in complex ones.

Speaker 2

As we outlined during our February call, production of Integra Skin was not able to keep up with strong demand, leading to a 4.4% sales decline in Tissue Technologies excluding Boston. Moving on to Boston. We completed the external audit of the Boston plant and received a final report from the 3rd party auditor in March. You will recall that this audit was required by the FDA as part of our process to address the warning letter observations and resume production. While we anticipated this audit would yield findings and that there would be work left to complete, The audit report contained more findings than we anticipated.

Speaker 2

We're still determining the full scope of the work required to address these findings and to resume commercial distribution. Based on our preliminary assessment, we no longer expect to resume commercial distribution in 2024. We remain fully committed to resolving the issues in Boston and bringing the products back to the market for our customers and patients. Now turning to guidance. We are updating our revenue guidance for the year to a range of 1.67 dollars to $1,690,000,000 reflecting the contribution of 3 quarters of revenue from McLaren and the removal of all 2024 revenues for Surgimant and Primatrix.

Speaker 2

We are also updating our full year adjusted earnings per share to a range of $3.01 to 3 point $1.1 per share to reflect supply chain challenges and the removal of the Boston revenues. Lia will provide more color on our updated guidance for the Q2 and full year. Now before I turn the call over to Olivier, let me assure you we're deeply focused on fixing our supply issues and returning Boston portfolio to the market. We remain committed to realizing Entegra's full potential by serving our robust markets through the strength of our broad and diversified portfolio and making strategic investments in inorganic opportunities like Acclarents to broaden our portfolio and our reach. Our first quarter results and full year mid single digit organic growth guidance reflects the progress we are making.

Speaker 2

Now over to Lia.

Speaker 3

Thank you, Jan. Let's take a more detailed look at our Q1 financial highlights and I'll start on Slide 5. Adnan mentioned, 1st quarter total revenues were approximately $369,000,000 representing a decrease of 3.1% on a reported basis and 2.5% on an organic basis. Total revenues were approximately $4,000,000 above the high end of the guidance range communicated back in February, primarily driven by favorable order timing. 1st quarter revenue growth was strong across many parts of our business with organic growth of 4.4 percent in common specialty surgical and 8.7% in our international business.

Speaker 3

Tissue Technologies was down 15.3 percent driven by approximately $15,000,000 of Boston revenues in Q1 2023. Our adjusted EPS for the quarter was $0.55 down 25.7% compared to 2023. Looking at the middle of the P and L, gross margins were 64.4% for the Q1, down 290 basis points versus 2023. Gross margins were impacted by approximately 170 basis points in unfavorable revenue mix from lower Integra Skin and stronger international sales and approximately 130 basis points from lower utilization and higher scrap in the quarter. Our adjusted EBITDA margins were 0.5%, down 4 70 basis points compared to 2023.

Speaker 3

Our decline in adjusted EBITDA margins primarily reflects the decrease in gross margins. Operating cash flow for the Q1 was $16,000,000 If you turn to slide 6, we'll take a deeper dive into our CSS revenue highlights for the Q1. Reported Q1 revenues in CSS were $256,000,000 up 3.4% on a reported basis and 4.4% on an organic basis from the prior year. Global sales in neurosurgery grew 6.3% on an organic basis as a result of low double digit growth in neuromonitoring, driven by the relaunch of SERALINK, mid single digit growth in CSF Management, driven by Service Plus Valves and mid single digit growth in Dural Access and Repair, driven by DuraGen. The growth across these franchises was partially offset by an expected low single digit decline in Advanced Energy, which is driven by a tough comp of CUSA Capital in the quarter of last year.

Speaker 3

As we move past the Q1 comp, we expect to see positive growth for the Blue Coosa Capital and disposable portfolio in 2024. For the Q1, our capital sales were up low double digit, driven by the relaunch of Sirlinq, which has delivered results in line with our expectations. Turning to instruments, we saw an approximate 2% decline, driven by a challenging comp versus the Q1 of 2023. On a full year basis, we expect that business to return to a mid single digit growth trajectory. Shifting to our international business, we saw another strong quarter in CSS with high single digit growth.

Speaker 3

Strength in the quarter was driven by double digit growth in China, Latin America, Middle East and Africa and mid single digit growth in the rest of Asia Pacific and Europe. Moving to our Tissue Technologies segment on Slide 7. Tissue Technologies was down 15.3% on a reported and organic basis compared to the prior year. Excluding Boston, organic growth was down 4.4%. 1st quarter sales in the Wound Reconstruction franchise decreased by 19.9%.

Speaker 3

Excluding Boston, we experienced an organic decline of 6.3%, driven by the supply constraint on Integra Skin that we discussed in February. Excluding Boston, 1st quarter revenues in tissue technologies were driven by a low double digit decline in Integra Skin, Micromatrix and Phytol, partially offset by greater than 100% growth in Durosorb and mid double digit growth in Gentryx. Although our revenues were down for the quarter, we continue to see strong demand for our wound care portfolio, which continues to provide us with confidence in the long term growth potential of our complex wound reconstruction business. As our supply recovers, we are well positioned to return to a steady growth trajectory. In private label, sales were down 0.6% versus last year, up 0.7% excluding Boston products.

Speaker 3

Private label performance in Q1 was slightly below historic performance for the business due to the timing benefit from our Q4 over performance and a strong Q1 2020 3 comp. Finally, international sales in tissue technologies were down low double digits primarily due to the Boston recall and Integra Skin Supply, partially offset by low double digit growth in Micromatrix, Scisal and Benehany. If you turn to Slide 8, I will briefly update our balance sheet, capital structure and cash flow. During the quarter, operating cash flow was $15,700,000 and free cash flow was $300,000 reflecting continued spend on EU MDR, CapEx and increased working capital, primarily from investments in inventory. Free cash flow conversion was 26.4 percent on a trailing 12 month basis.

Speaker 3

Our balance sheet remains strong with ample liquidity support our short and long term plans. As of March 31, net debt was $1,200,000,000 and our consolidated total leverage ratio was 3.2 times. The company had total liquidity of $1,500,000,000 including $663,000,000 in cash and short term investments and the remainder available under our revolving credit facility. Our balance sheet flexibility enabled us to complete the Aclaren acquisition at the beginning of Q2. If you turn to Slide 9, I will provide our consolidated revenue and adjusted earnings per share guidance for the Q2 and full year 2024.

Speaker 3

2nd quarter revenues are forecasted to be between $411,000,000 $416,000,000 representing reported growth in the range of approximately 7.8 percent to 9.1 percent and organic growth in the range of approximately 1.3% to 2.6%. Our forecast reflects the diverse portfolio and strong global demand for our products, favorable comp from ballast and returns in Q2 of 2023 and the impact in the Q2 from favorable order timing in the Q1. Our second quarter guidance also includes approximately $25,000,000 at the midpoint in parent sales beginning on April 1. For the full year, revenues are forecasted to be in the range of 1.67 to $1,690,000,000 Our updated full year guidance removes revenues of approximately $10,000,000 previously forecasted in the returns of the Boston portfolio beginning in the 3rd quarter. Forward guidance also includes approximately $80,000,000 in the clearance sales beginning in the 2nd quarter.

Speaker 3

We expect our reported growth to be in a range of 8 point 4% to 9.4% and organic growth to be 3.3% to 4.3% for the full year 2024. Turning to adjusted earnings per share guidance. For the Q2, we expect adjusted EPS to be $0.60 to 0 point 6 $5 Our second quarter EPS reflects higher supply chain costs due to ongoing remediation efforts, scrap and lower plant utilization. For the full year, we are updating our adjusted EPS to be in the range of $3.01 to $3.11 per share, reflecting the delay of the relaunch of Surgimen and Primetrix, the full year impact of the higher supply chain costs and the inclusion of the Aclaren acquisition, which we still expect to remain EPS neutral for the year. Before I turn the call back to Jan, I'd like to take you through key considerations for our full year revenue outlook on Slide 10.

Speaker 3

As we move past the Q1 comp of Luca Capital, catch up the demand levels on Integra Skin and resolve back orders in our CSS business, we have a clear path to mid single digit growth or better in most franchises in our portfolio. We remain committed to confronting our supply challenges and are determined to resolve them. At the same time, we are focused on maintaining the growth momentum we have today and fully activating our growth potential across the balance of the portfolio. Let me turn it back to Jan.

Speaker 2

Thank you, Lia. And please turn to Slide 11 to conclude prepared remarks. In the Q1, we saw a healthy demand for our portfolio of differentiated products across several parts of our business despite supply headwinds. With our first quarter performance, our first half is on track to meet our expectations. And we anticipate returning to more reliable cadence of mid single digit growth in the second half of the year.

Speaker 2

We have advanced our organic and inorganic global growth strategy, successful global relaunch of Sirlink, ongoing international expansion of our portfolio of leading brands and commercial capability and continued execution of our M and A game board as demonstrated by the integration and outperformance of Sia, Durosorb products and the close of the Aclarant acquisition. We understand the frustration that our customers, investors and employees feel about the results of the audit in Boston. But I assure you, we are focused on the additional remediation work and other changes necessary to bring our products back and strengthen our supply chain execution. And this is achievable. I remain confident that Integra has a bright future ahead.

Speaker 2

We have markets with stable growth. We have strong commercial capabilities and we have a diversified portfolio of leading products to fuel our expansion. Our leadership team, our boards and our employees remain committed to achieving reliable long term business performance and to building robust capabilities to deliver life saving technologies to patients, while driving consistent mid single digit top line growth, strong profitability and cash flow for our shareholders. With that, I'd like to open the line for Q and A.

Operator

Thank you. And our first question will come from the line of Vik Chopra with Wells Fargo. Your line is open.

Speaker 4

Hey, good morning and thanks for taking the questions. So regarding your Boston facility recall and restart, I think the news came today as a surprise to a lot of people. So it sounds like you don't expect to resume commercial distribution in 2024. Can you maybe share some additional details around what the results of the audit revealed? And then does this mean you have to sort of revisit your LRP?

Speaker 4

And then I had a follow-up, please.

Speaker 2

Good morning, Vik. Thanks for that question. So look, when we communicated in February, we believed our timeline was achievable based on plans to satisfy the thresholds of the warning letter. Now despite how much we accomplished leading up to the dress rehearsal, we were not as far along as we thought. The final audit confirmed that there's more to be done.

Speaker 2

That's a result that we acknowledge and accept as a result of that final audit. Now, none of this should cloud the fact that we remain committed to bringing the products back to market for the benefit of our surgeons, our patients and shareholders. So we've made changes to the operations and quality leadership and structure to ensure the right focus and capabilities is applied to Boston, but also our broader quality system and the broader supply improvements there. In terms of your question updating LRP, at this point in time, we don't give any update on LRP. We are working to update the planning for Boston and we'll probably give updates later in the year as we get there.

Speaker 4

Okay. Thank you for the comprehensive update. And then my follow-up question. In late April, 7 MAX published a proposed LCD for the treatment of DFUs and BLUs. Can you just remind us what impact this has on Integra and what percent of products are exposed to this proposed LCD?

Speaker 4

Thank you very much.

Speaker 2

Yes. On the LCD, these new proposed LCDs regarding the coverage for skin substitutes are focused on the DFU and the VLUs, the diabetic foot ulcers and the venozilac ulcer space. The 2 products that Integra has that are indicated for these wound types are Omnigraft and Primatrix and they remain covered under those new proposed LCDs. So that's good news for Integra. It is however, still today a small part of our business.

Speaker 2

So on the one hand, we're happy our products remain covered. But for the short term, I would say that the impact to Integra is neutral, but it represents an opportunity for the future. Plus, we like the trends with these LCDs proposal, which seem to support products that deliver strong outcomes and have rich clinical evidence. And that's areas or products where Integra is positioned strongly.

Operator

Thank you. One moment for our next question. And that will come from the line of Steve Lichtman with Oppenheimer. Your line is open.

Speaker 5

Thank you. Good morning. I guess first, Jan, if you could talk about the next steps in Boston, what are the milestones that investors should be looking for as you go through the rest of this year?

Speaker 2

So at this point, we are, as I said, still determining the work plan. We're translating the observations from the latest audit into a work plan. That's going to determine the milestones. So at this point in time, there's no specific milestones yet, But we know enough yet to come to the conclusion that we are pushing out to Primatrix and Surgence revenues for this year.

Speaker 5

Okay. And then, Leo, can you talk about the gross and operating margin assumptions that are implied in the EPS guidance for 2Q and full year and any sort of considerations that we should be thinking about on both?

Speaker 3

Yes. So thank you, Steve. From a gross margin perspective, let me talk about full year first and then I'll step back and talk about Q2. On a full year basis, in February, we communicated gross margins that would be flat to modestly up. In light of the ongoing remediation costs that we'll incur based on the Boston timeline, you should now think about gross margins that will be moderately down year on year versus 2023.

Speaker 3

And again, that's a combination of the additional remediation cost in Boston and then some of the lower utilization and higher scrap that we called out as well. From a Q2 perspective, you'll see a little bit of that same dynamic, right? So we do expect to be up modestly sequentially from Q1, but we will see the impact year over year from lower utilization, higher scrap, some of the remediation costs that characterize what we saw year over year in Q1.

Speaker 5

Okay. Thanks, Lee. I'll jump back in queue.

Speaker 2

Yes.

Operator

Thank you. One moment for our next question. And that will come from the line of Kristen Stewart with C. L. King.

Operator

Your line is open.

Speaker 6

Hi, thanks for taking the question. I was wondering if you could just provide an update with Entegrisen, the supply constraints and when we should see those start to ease?

Speaker 3

Yes. Thank you, Kristen. Yes, so from an Integra Skin perspective, our production is running, but we are not at full capacity yet. We have continued throughout Q1 and Q2 to ship to customers and demand does remain very strong. We'll be working to catch back up to full demand in the second half and that's what's contemplated in the guide that I provided.

Speaker 3

I think on the whole, we are really happy with the demand that we're seeing in Entegriscan and it gives us confidence to continue to make some of the CapEx investments that we've been making to build out capacity to support the long term growth on that brand.

Speaker 6

Okay. And then, just on Aclaren, can you just remind us what your assumptions are in terms of the growth profile of that business going forward under your leadership?

Speaker 3

Happy to. First, I'd like to say we are absolutely thrilled at completing the acquisition of Aclara in April 1 and welcoming that team as part of our Integra family. Just as a general reminder, part of our excitement is the fact that, that acquisition gives us immediate commercial leverage and scale in the ENT specialty device space, which is a natural adjacency to our CSS business. It's a category that's growing at 5% to 6%. It's over $1,000,000,000 and we're happy about the product portfolio that comes with it in assets like the TrevyNav offering system as well as the expanded indication that we've gotten in the ERA Eustachian tube dilation system.

Speaker 3

So overall, just again really happy to have that as part of our product portfolio. From a guidance perspective, we have assumed for the 3 quarters that we'll have Aclaris on board revenue of $80,000,000 That guidance approach does reflect the understanding that with integrations of this sort, there is some uncertainty and so that has been factored into that assumption. That said, we still believe that this acquisition will be growth accretive to our base business and so is capable of operating at high single digit levels on a full year basis.

Operator

And one moment for our next question. And that will come from the line of Robbie Marcus with JPMorgan. Your line is open.

Speaker 7

Great. Thanks a lot for taking the questions. 2 for me. Maybe to start on full year organic sales growth guidance. The Q1 was negative.

Speaker 7

We see the guidance for Q2. To me, it implies either something at the high end of mid single digits or the low end of high single digits. So given the big step up both in growth rates and in dollars, I realize there's easier comps from last year. How do you think about your ability to not only just hit those targets, but exceed those targets given it does require a pretty good step up each quarter? Thanks.

Speaker 3

Thanks, Robbie. Yes, from a percentage perspective, you're absolutely right. I think part of the reasons we provided the view that we did on our slide 10 is to demonstrate that across the portfolio, we are operating or have the ability to operate at mid single digit growth or better across many parts of the portfolio. So, Robbie, as I look at the second half, what does that mean? It means the international portfolio that whose performance we saw on Q1 has to continue the way it's been continuing.

Speaker 3

From a skin perspective, as I mentioned, we expect to catch up to demand in the second half, and so that will help accelerate the growth from a percentage perspective that you talked about. And then again from a across the other parts of the portfolio, we are seeing growth in Durzura, Gentryx and there's no reason why those assets won't continue to perform at those levels along with kind of main parts of our CSS business. So I think there's a lot of growth potential that is overshadowed to some degree by some of the challenges that we saw and comp issues that we saw in Q1 that will naturally alleviate themselves as we get into the second half of this year.

Speaker 7

Great. Maybe if I move down the P and L on margins, maybe you could walk us through exactly what you're thinking for the composition of margins, gross and operating margin in Q2 and what you assume in the guidance there in the full year? And maybe a higher level, how you're thinking about the company's ability to expand margins on a go forward basis given I know you've been cutting for a while and now you have a pullback and probably higher quality spend on manufacturing? Thanks a lot.

Speaker 3

Yes. So as I mentioned to Kristin, from a gross margin perspective on a full year basis, we were forecasting flat to modestly up year on year, 2024 versus 23. We're now closer to moderately down year on year. And again, that has to do with the higher remediation costs from Boston along with some of the lower utilization and higher scrap that we've seen. So that's impacting the full year.

Speaker 3

It's also impacting, as I mentioned, Q2. So similar dynamics from a Q2 stand alone basis. We will be up modestly Q2 from Q1, but again some of the same themes will impact our Q2 results. But addressing your the second half of your question in terms of kind of things that we are doing to drive different outcomes. As I mentioned previously in our last call, we are investing in activities to help drive productivity improvements, efficiency improvements, yield improvements across our network and to strengthen overall supply and efficiencies as we interact with kind of our external supplier network as well.

Speaker 3

That work is still ongoing. And at the time as of now, while we've identified some improvement areas, we do have to start to implement them and we expect to realize them beginning in 2025 with more impact beyond that as well.

Operator

Thank you. And one moment for our next question. That will come from the line of Matt Taylor with Jefferies. Your line is open.

Speaker 8

Hi, thanks for taking the question. I wanted to follow-up on Boston and maybe I could just ask how you would frame the worst case scenario now for investors? And I guess when you do get product back, assuming that happens, do you still think you can regain a lot of the share that you've lost?

Speaker 3

So I'll take the first part of that. In terms of and just to give you kind of from a grounding perspective, based on the recall, the returns that we accrued for in 2023, we exited 2020 3 with Boston essentially in and around kind of low single $1,000,000 like $1,000,000 or $2,000,000 So from a year on year perspective, there is it's neutralized from a growth perspective. So in 2024, what you'll see is organic growth that forecasting of 3.3 to 4.3, which essentially relates to the performance across the rest of our portfolio. As we take our time to evaluate what next steps are required to bring Surgimant and Primatrix back into the market. 1, we are committed to do just that.

Speaker 3

But from a growth perspective, those reentry of those products are not impacting our 2024 guidance as of now. And so from our perspective, it does represent upside as we reintroduce those products back into the market. I'll let Jan address from a relaunch perspective we think the prospects are.

Speaker 2

Yes. Just briefly on that, right. Sergiment and Primatrix are differentiated products. They're chosen for specific reasons and not easily replaced. So we believe customer preference will fundamentally remain and also continue to have access and relationships with those customers to our broader portfolio.

Speaker 2

So the elements to at one point get back in the market are still going to be there.

Speaker 8

Got it. I'm just trying to understand what is the worst case scenario? Is it just a further delay? You still have confidence these will be back, but it may be another 6 months or something? I mean, it's just difficult with it being so open ended.

Speaker 2

Yes. Well, like I said, at this point, we don't give any further guidance on the bolt on the return.

Speaker 8

Okay. All right. Thank you very much.

Operator

Thank you. One moment for our next question. And that will come from the line of Ryan Zimmerman with BTIG.

Speaker 9

Good morning. Thanks for taking the question. I want to I mean, there's a lot going on here and there's a lot, I think, for investors to interpret in terms of moving parts. Number 1, Jan, you were asked about the LCDs and I appreciate that Omnigraft and Primatrix are on the list of approved products. But there's a number of other products that Integra has, including the whole Acell portfolio that were not on the LCD list.

Speaker 9

And so what considerations do you have built in for that? Or are they just not used in the chronic wound market? I'm talking like Cytol and the Meridderm products and so forth.

Speaker 2

Yes. So it's the second part of your question, Ryan. These are products that are not applied in the VLU and DFU areas. So it's almost by definition that they are not on the list and it does not impact any of our current business or potential.

Speaker 9

Okay. And then, Lia, on margins, I think, Ravi was trying to get at this, but I recognize the full year margins are going down. And sequentially, they're holding steady. What's driving the second half step up in margins though, if there is one? Because it can still I mean, it can still step up in the second half from some improvement, but still be down year on year.

Speaker 9

And so I'm just trying to understand with Primatrix and Omnigraft removed or SurgiMend and Primatrix removed, excuse me, what allows you to drive that step up in margins? And the flip side of it is, how are you managing your costs from a Clarin acquisition? Just help us understand kind of some of these moving parts a little further.

Speaker 3

Yes. So Ryan, from a again from a full year basis, right, but we'll be down moderately. So there is a little bit of a step up required in the second half, but not significant. And a lot of that has to do with skin being back at meeting full demand. We will see an improvement in margins.

Speaker 3

That's a high margin product for us. So that's a key contributing factor. And then from an Aclaret, I think the other part of your question was on Aclaret. As I mentioned, we still expect that business to be EPS neutral in 2024 for us. So and that's reflected in the guide as well.

Speaker 3

And overall, that portfolio, again, if we just talk gross margins, that portfolio is in and around our kind of base business gross margins. So that's not having a factor per se.

Operator

Thank you. One moment for our next question. And that will come from the line of Joanne Wuensch with Citi. Your line is open.

Speaker 6

Good morning and thank you for taking the questions. I have 2. When you start reporting a clearance, will that be called out as a separate subdivision under neuro or where will that be tucked into?

Speaker 3

Yes. So as part of our disaggregated revenues, we will see a separate segment for Aclarant or for ENT, I should say specifically ENT. Okay. So that will

Speaker 6

be called out separately. And where are you As ENT. I'm sorry, what?

Speaker 3

As ENT, as a category of ENT.

Speaker 6

Thank you. And where are you in terms of a CEO search?

Speaker 3

Yes. So the Board remains on track with our original plans to identify as well as hire a new CEO by year end, if not sooner. So that is progressing.

Operator

Thank you. One moment for our next question. And that will come from the line of Rich Newitter with Truist. Your line is open.

Speaker 10

Hi. Thanks for taking my questions. Maybe just first, are you comfortable with consensus including Boston contribution in 2025?

Speaker 3

Are we Are we comfortable with consensus including what contribution? Boston?

Speaker 10

Boston restart, incremental contribution from a Boston restart. I guess right now there's that contemplation. Appreciate you've guided to 24, but just to level set, I mean is this something that we should just take out of 'twenty five or the first half of 'twenty five? Anything you can comment on there so that numbers can get right?

Speaker 3

Yes, I understand the question. Unfortunately, we are not providing guidance with respect to 2025. As Jan mentioned, our work is ongoing to digest fully the findings coming out of the most recent audit to determine what the appropriate timeline is to bring back Surgimen and Primatrix. So we can't provide more additional information beyond that other than the fact that we are committed to bringing those products back to the market.

Speaker 10

Okay. And then just wondering what why are you so confident that skin capacity will be back or fully back online in the second half? And then if I could just one more, have you contemplated going down not going down the PMA pathway with SurgiMend? And if not, would you be comfortable restarting the Boston facility if you chose not to go down that pathway?

Speaker 3

So let me take the PMA question first, because obtaining the SurgiMend PMA absolutely remains a key priority for us and it is absolutely consistent with our IBVR strategy. We have not yet determined at this point whether or not the Boston timeline if or how it will implicate the PMA timeline for Surgimen. So that piece is still out there. But what is absolutely clear is that the need for SurgiMEN and IVBR has not diminished. And so for us that means our opportunities to capitalize remain robust in that space.

Speaker 3

From a I think your other part of your question was related to skin and our assumptions in the back half. Again, because our production lines are up and running and we're not but we're not at capacity, the work that we have underway has a plan that will allow us to get back to meeting demand. And so that's what's assumed in our guide.

Operator

Thank you. One moment for our next question. That will come from the line of Craig Bijou with Bank of America. Your line is open.

Speaker 11

Good morning. Thanks for taking the questions. So I want to start with Boston. I know you've gotten a lot of questions on it. I know you guys aren't providing a ton of information here.

Speaker 11

But is there any way you can talk about, if you've had discussions with the FDA or the external auditor that did the review. And I mean, I know you're not providing what's happening, but I think it'd be helpful to understand at least from that perspective, if you are working with the FDA at this point on moving forward.

Speaker 2

So look like I said, I mean, there's little we can update further. Definitely can't speak on behalf of the FDA. We are working the plan and that's where we're focused on at this point in time, but no further updates that we can get on BOS.

Speaker 11

Okay. Thanks, John. And then maybe in a follow-up to Rich's question on Surgimend and the PMA there. And I appreciate you're not changing timelines and it's still important to you guys. But I mean, is it fair to assume that that's pushed out, that timeline needs to be pushed out that you'd have to remediate the issues at Boston before you'll kind of move forward with that process?

Speaker 3

Yes. I'll take that. As I mentioned, we are still doing the evaluation coming out of the report that we got on BOSTON to understand if or how the Surgent PMA timeline will be implicated. And so that work is still ongoing. So again, when we know more, we'll share more, but that's where we stand right now.

Operator

Thank you. And one moment for our next question. And that will come from the line of Jayson Bedford with Raymond James. Your line is open.

Speaker 5

Good morning. So you've kind of stressed the commitment to getting SurgiMend and Primatrix back on the market. Have you started looking at manufacturing these products at another facility?

Speaker 2

Look, Jason, we are in our planning, not excluding any option. So that's where I want to leave it at this point.

Speaker 5

How long would it take to get up and running at a new facility or another facility?

Speaker 2

Again, we're looking at what our options are. We're committed to bring these products back to the market. There's a great market opportunity for us. So if there's options, we will take them into account.

Speaker 3

I think the only thing I would add to that is, I think as we've talked about in the past, we do have been building out capacity at another site in Boston called Braintree. And so to Jan's point, as we evaluate options, we're looking at options across the board from a RainTree and Lawson perspective.

Operator

Thank you. And we do have time for one final question and that will come from the line of Drew Ranieri with Morgan Stanley. Your line is open.

Speaker 12

Just on the clearance, it looks like your guidance is kind of implying the same revenue base for 2022, for 2024. I can understand some of there could be integration challenges. So maybe just talk about what investments you are making in the Claring today and what you have to make to get that business up to being a high single digit grower over the next year or 2? And second, just remind us on your deleveraging plans with leverage ticking up here post deal? Thanks.

Speaker 3

Yes. So thank you for the question. From a Clari perspective, as I mentioned, we absolutely believe that business can be growth accretive to our base. As it relates to 2024, we're continuing to invest behind the sales force again to tap into that commercial leverage as well as the R and D portfolio. Some of the new offerings, we believe represent great opportunity for us to deliver some of that high single digit growth.

Speaker 3

So offerings in their 2 d Nav system area, we have an expanded indication for eustachian tubes that will also help facilitate driving differentiated growth. And so those are the areas we're going to continue to build out during this course of this year as we're doing the integration that will set up position us well in 2025 to get to that point. I think your other question was with respect to leverage and how we what our outlook is there. So following the close of Aclaren and with all the upfront integration costs, we expect by the end of Q2 that our leverage will be slightly above our typical range of 2.5% to 3.5%, so it will be slightly above the 3.5% range. But over the course of the back half of the year as we again start realizing cash flows from McLaren and other parts of our business continue to come online, we'll be able to drive that back down below the 3.5 times.

Speaker 3

So we'll be within our normal range of 0.5 to 3.5 by year end.

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Key Takeaways

  • Q1 revenues of $369 million were above guidance, with reported organic revenue down 2.5% but organic growth excluding Boston up 1.6%, and adjusted EPS of $0.55 in line with expectations.
  • The Boston facility audit uncovered more issues than anticipated, and management now expects no commercial distribution resumption in 2024 while working on remediation.
  • Codman Specialty Surgical delivered a 4.1% growth led by CSF management, dural repair and neuro-monitoring, while international markets achieved high single- to low double-digit expansion and the CERELINK relaunch saw strong uptake.
  • In Tissue Technologies, demand remains healthy with triple-digit growth in Durosorb, but Integra Skin supply constraints drove a 4.4% revenue decline ex-Boston; full capacity is targeted in H2.
  • Full-year guidance is updated to $1.67–1.69 billion in revenue and $3.01–3.11 in adjusted EPS, reflecting three quarters of the Aclarent acquisition, higher supply-chain costs and removal of Boston revenues.
AI Generated. May Contain Errors.
Earnings Conference Call
Integra LifeSciences Q1 2024
00:00 / 00:00