Release Date: July 29, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Integra Lifesciences Holdings Corp (IART, Financial) reported second-quarter revenues of $418 million, exceeding their May guidance range.
- The company saw strong demand across its entire portfolio, with organic revenue growth of 2.3% compared to the prior year.
- The acquisition of Acclarent has been successfully integrated, contributing approximately $30 million in revenue, which was $5 million ahead of expectations.
- The Tissue Technologies segment experienced high double-digit growth in DuraSorb and strong growth in other wound reconstruction products.
- The company received PMA approval notification from the FDA for SurgiMend, subject to an FDA inspection of the manufacturing facilities.
Negative Points
- The company identified operational and quality systems gaps, necessitating a compliance master plan that will increase spending and lower revenue and EPS expectations for the year.
- Temporary shipping holds and backorders in the Codman Specialty Surgical (CSS) business are expected to impact third-quarter revenue.
- Gross margins were down 250 basis points compared to the previous year, impacted by lower utilization, higher scrap, and unfavorable revenue mix.
- Adjusted EPS for the quarter was $0.63, down 11% compared to 2023.
- The company has revised its full-year revenue and adjusted EPS guidance downward, reflecting the impact of supply holds and increased spending on compliance.
Q & A Highlights
Q: Can you provide more color on the shipping hold in the third quarter and why it won't extend into 2025? Also, what specific products are under shiphold and their total revenue representation?
A: The temporary shipping hold impacts several SKUs across our CSS business segment. We expect most of these holds to be cleared by Q3. The holds primarily relate to compliance with labeling, packaging, and instructions for use requirements. We have already started clearing some products and will continue throughout Q3 and into Q4. We are confident that the majority of these issues will be resolved in 2024.
Q: Are you comfortable that these are the end of the quality issues for the company, and are they isolated only in CSS?
A: The compliance master plan is a systemic and holistic approach to improving our overall quality standards and GMP compliance. It includes workstreams that will look across our entire manufacturing and supply network, focusing on labeling compliance, documentation of controls, and processes. This plan will be concentrated over the next 18 months.
Q: Can you talk more about the anticipated step-up in the fourth quarter and your visibility on potential share loss due to the shipholds?
A: The ramp from Q3 to Q4 is about $80 million, with two-thirds driven by addressing the shipping holds. The remaining third is due to Integra skin returning to normalized run rates and some seasonality. We are working closely with our customers to manage through the temporary shipping holds and maintain our relationships.
Q: What are the specific investments being made to support the compliance master plan over the next 18 months?
A: The investments will include increasing internal and external resources with expertise in quality controls and standards. We will also see lower utilization at some sites as we implement corrective actions, impacting gross margins. Additionally, we will look at capacity requirements to ensure supply resilience, with capital spending remaining consistent with 2024 levels.
Q: Why has it taken so long to resolve the quality issues, and why will it take until 2026 to get SurgiMend back on the market?
A: The need for more effective standardization of our quality system across the company became clear through our Boston remediation activities and internal assessments. The Braintree facility, which will be operational in the first half of 2026, is part of our long-term manufacturing strategy to build a modern factory with significantly increased output capacity.
Q: Are there any concerns about sales force retention due to the shipping holds and broader supply issues?
A: We are committed to retaining our sales force, recognizing their value in driving growth. We will continue to support them through the temporary shipping holds and the compliance master plan, ensuring they remain a key asset for the business.
Q: How do you get comfortable giving guidance into 2025 and 2026 given the uncertainties?
A: We are not providing formal guidance for 2025 but have shared early thoughts based on the current baseline, which includes $70-$80 million of supply disruption in 2024. We expect mid-single-digit growth in 2025, considering potential additional supply disruptions as we execute the compliance master plan.
Q: How do you feel about the ability to regain share for products that have been off the market for over a year?
A: We are confident in the strong market demand and differentiation of our products like SurgiMend and PriMatrix. Our commercial force remains engaged, and we are actively selling other products like DuraSorb, maintaining relationships with customers. This foundation will support an impactful relaunch once the products are back on the market.
Q: Are there any covenants we need to be aware of given the current leverage ratio?
A: Our leverage ratio is currently at 3.8 times, above our target range due to the Acclarent acquisition. We do not have concerns about debt covenants at this point, as our projected EBITDA and allowable adjustments under our bank agreements provide sufficient flexibility.
Q: Are the shipping holds and the compliance master plan driven by FDA requirements or internal decisions?
A: The shipping holds were voluntarily initiated by Integra based on observations from both internal assessments and regulatory authorities. The compliance master plan is a proactive measure to address these observations and improve our quality management systems and GMP compliance.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
