Integra Lifesciences Holdings Corp (IART) 2002 Q1 法說會逐字稿

Good morning. My name is Jeff, and I will be your conference facilitator today.

At this time I would like to welcome everyone to the Integra LifeSciences Corporation's first quarter 2002 earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. If you would like to ask a question during that time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key.

Thank you.

Mr. Essig, you may begin your conference.

Good morning everybody, and thank you for joining us for the Integra LifeSciences conference call.

I am Stuart Essig, president and chief executive officer of Integra LifeSciences Holdings Corporation. Joining me today are David Holtz, senior vice president, finance; and Jack Henneman, our senior vice president and chief administrative officer.

During this call we will discuss our financial results for the first quarter of 2002, which were released this morning, and discuss our forward-looking guidance for the years 2002 and 2003. There will be a question and answer session following this call that can be heard by all participants. However, only those participants listening via telephonic access will be able to ask questions.

Before we begin Jack Henneman will make some remarks regarding the content of this conference call.

This presentation is open to the general public and can be heard through telephone access or via a Live Webcast. A replay of the conference call will be accessible starting one hour following the live event. Access to the replay is available through May 22, 2002 by dialing 706 645 9291, access code 3757274 or through the webcast accessible on our home page.

Today's call is a proprietary presentation of Integra LifeSciences Holdings Corporation and it's being recorded by Integra. No recording, reproduction, transmission or distribution of today's presentation is permitted without Integra's consent.

Because of the content of this call is time-sensitive, the information provided is accurate only as of the date of this live broadcast, May 8, 2002. Unless otherwise posted or announced by Integra, the information in this call should not be relied upon beyond May 22, 2002, the last day that an archive replay of the call authorized by Integra will be available.

Certain statements made during this call are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Among others, statements concerning management's expectations of future financial results, new product launches and market acceptance of these new products, future product development programs and potential business acquisitions are forward-looking, forward-looking statements risks and uncertainties that could cause actual results to differ materially from predicted results.

For a discussion of such risks and uncertainties, please refer to the information set forth under "Risk Factors" included in the Business section of Integra's Annual Report on Form 10-K for the year ended December 31, 2001 and information contained in subsequent filings with the Securities and Exchange Commission. These forward-looking statements are made based upon our current expectations and we undertake no duty to update information provided during this call.

Integra develops, manufactures and markets medical devices, implants and biomaterials primarily for use in neurosurgery, orthopedics and soft tissue repair. Our business is divided into two divisions: Integra NeuroSciences, which is a leading provider of implants, devices and monitors used in neurosurgery, neurotrauma and related critical care; and Integra LifeSciences, which develops and manufactures a variety of medical products and devices, including products based on our proprietary tissue regeneration technology, which is used to treat soft tissue and orthopedic conditions.

In the first quarter of 2002, we reported record revenues of $25.9 million and net income of $0.13 per share. Revenue growth was led by a $4.1 million increase in product sales to $24.4 million, a 20 percent increase over the prior year quarter. The growth in product sales was in line with our stated product sales growth objectives of approximately 18 to 20 percent per annum through 2003.

Our earnings of $0.13 per share were at the high end of our expectations and a penny above the analyst's consensus estimate. Product sales growth was primarily related to a $4 million increase in Integra NeuroSciences division product sales, a 25 percent increase over the first quarter of 2001. This increase reflected $2 million of products acquired since the end of the first quarter of 2001 and continued strength in the DuraGen(R) product line.

Other revenues for the first quarter of 2002 include a $500,000 event payment from the Ethicon division of Johnson & Johnson for the achievement of a clinical and regulatory objective for INTEGRA(R) Dermal Regeneration Template, which we previously discussed in our February conference call.

Consolidated gross margin on product sales improved by 3 percentage points to 61 percent in the first quarter of 2002, which is ahead of our stated target of 60 percent for the full year of 2002 and 2 percentage points better than the 59 percent reported for the full year of 2001. Our target for year 2003 gross margin remains 63 percent. The improvement in gross margins in the first quarter of 2002 reflect an improved sales mix of higher margin products and a significant increase in capacity utilization as compared to the first quarter of 2001.

Other revenue, which consists of development funding from strategic partners and government grants, royalty income and a license and distribution revenues, increased by $100,000 to $1.5 million in the first quarter of 2002. A decrease in grant and royalty income was more than offset by the $500,000 event payment from the Ethicon division of Johnson & Johnson.

Consolidated total other operating expenses, which exclude cost of product sales but include amortization, increased $350,000 to $11.1 million in the first quarter of 2002, as compared to $10.7 million in the first quarter of 2001. Sales and marketing expenses, which increased $900,000 to $5.7 million, remain consistent at 23 percent of sales in both the first quarter of 2002 and 2001.

During the quarter, we increased a number of neurospecialists in our domestic sales force to 52, which puts us on track that meet our goal of reaching a total of 63 neurospecialists in 2002. Offsetting the increase in sales and marketing expenses was a $250,000 decrease in research and development expenses that was primarily related to the completion of a grant program in the first quarter of 2001, as well as a $330,000 decrease in amortization expense related to the full adoption of FASB Statement 142 in January.

Under FASB Statement 142, goodwill is no longer amortized, but is subject to an impairment review at least once a year. The full implementation of FASB Statement 142 had a favorable impact on earnings of approximately $0.01 per share in the first quarter.

On divisional basis, revenues and profitability in both the Integra NeuroSciences and Integra LifeSciences divisions increased in the first quarter of 2002, while corporate general administrative expenses decreased.

Sales in the Integra NeuroSciences Division drove the top-line growth with a $4 million increase in sales to $19.8 million, a 25 percent increase over the first quarter of 2001. This increase included $2 million in sales of products acquired since the end of the first quarter of 2001.

Within the Integra LifeSciences Division sales increased $140,000 to $4.6 million, a 3 percent increase over the first quarter of 2001. Integra LifeSciences Division product sales for the quarter were negatively effected by reduced orders for the VitaCuff infection control product from one of the company's OEM customers, which were approximately $400,000 less in the first quarter of 2002, as compared to the customer's average quarterly orders over the last two years.

While we expect this shortfall will also effect the second quarter of 2002, we're optimistic that sales of the VitaCuff product will increase in the second half of this year.

For a regulatory perspective, we were very pleased to receive FDA 510(k) clearance in March to market the LICOX tunneling catheter in the United States. The low-profile catheter, which is tunneled under the patient's scalp, provides the neurosurgeon with an alternative to the bolted LICOX catheter.

Unlike the bolted LICOX catheter, the LICOX tunneling catheter may be implanted through an opening in the skull made during cranial surgery, avoiding the need for a second insertion site. Now, our neurosurgeon and neuro customers can choose between the more traditional tunneling technique or the multi-parameter capability of the bolted system for measuring intracranial oxygen, using our LICOX Camino and Ventrix systems.

Additionally in April, the FDA approved our pre-market approval application supplement to market the Integra Dermal Regeneration Template for the repair of scar contractors in patients who have already recovered from the original injury.

This new indication is the first of the device outside of the treatment of severe burns, and it allows Integra and our marketing partner, Johnson and Johnson Management, to train physicians who are not primarily burn surgeons in the use of the product. We hope that as a result, many more patients will benefit from the Integra product, even if they were not treated with it at the time of their original injury.

We estimate that the worldwide market opportunity for this new indication is approximately $200 million.

I will now turn the presentation over to David Holtz, our senior vice president of finance, who will provide more information regarding divisional financial results, income taxes and earnings per share.

Thank you, Stuart.

The Integra NeuroSciences Division reported an operating profits of $5.2 million for the first quarter of 2002 on product sales and total revenues of $19.8 million. This compares to an operating profit of $4.2 million in the first quarter of 2001 on $15.8 million of product sales and other revenues of $278,000.

The $4 million sales increase included $2 million in sales of products acquired since the end of the first quarter of 2001. Sales of neuro intensive care unit products increased $660,000 to $7.2 million, including $300,000 in sales of products acquired since the end of the first quarter of 2001.

Neuro operating room product sales increased $1.9 million to $10.1 million, and included $400,000 in sales of acquired products. The sales growth in neuro operating room products was led by increased sales of the DuraGen product line, offset by a decline in sales of hydrocephalus management shunt products. The weak comparison to prior year in our hydrocephalus line is due primarily to a large international tender that occurred in the first quarter of 2001.

Sales of other neuro products increased $1.5 million primarily as a result of acquired products. The decrease in other revenues was the result of decreased royalty revenues from an agreement that expired at the end of the third quarter of 2001. Gross marginal products sales increased one percentage point to 63 percent in the first quarter of 2002, primarily as a result of a continued improvement in sales mix.

Total other operating expenses in the Integra NeuroSciences Division increased $1.6 million to $7.4 million in the first quarter of 2002. Sales and marketing spending increased $1.2 million to $5.5 million related to the continued increase in Integra NeuroSciences sales force. Sales and marketing expenses remain consistent at 27 percent of product sales in both the first quarter of 2002 and 2001. Research and Development expense increased $900,000 and general and administrative expenses increased to $1 million in the first quarter of 2002.

The Integra LifeSciences Division reported an operating profit of $2.4 million in the first quarter of 2002 on product sales of $4.6 million and other revenues of $1.5 million. This compares to an operating profit of $920,000 in the first quarter of 2001 on $4.5 million of product sales and $1.1 million of other revenues.

Sales of tissue repair products increased $330,000 to $2.1 million, a 19 percent increase over the first quarter of 2001, while sales of other medical devices decreased $200,000 to $2.5 million as a result of a decline in the VitaCuff product sales.

Gross marginal product sales increased seven percentage points to 50 percent in the first quarter, primarily as a result of a significant increase in capacity utilization and increased sales of higher margin orthopedic products.

Total other operating expenses in the Integra LifeSciences Division decreased $800,000 to $1.4 million. Research and Development expenses decreased $450,000 to $940,000, primarily as a result of the completion of a grant program in the first quarter of 2001, while sales and marketing expenses decreased $250,000 to $200,000, due to the elimination of distributor commissions. General administrative expenses decreased to $230,000 in the first quarter of 2002.

Integra's combined divisional operating profit at $7.6 million excludes amortization of goodwill and intangible assets and corporate, general and administrative costs. Corporate, general and administrative costs decreased $90,000 in the first quarter of 2002 to $2 million, while amortization decreased $330,000 in the first quarter of 2002 to $350,000 as a result of the full adoption of FASB Statement 142 in January.

This quarter we reported net interest income of $1 million. Given the current low-interest rate environment, we expect net interest income to approximate $1 million per quarter on our $132 million cash in investment balances as of March 31, 2002.

Our effective tax rate increased from 11 percent in the first quarter of 2001 to 35 percent in the first quarter of '02. The effective rate for the first quarter of 2001 reflects our effective tax increase from 11 percent in the first quarter of 2001 to 35 percent in the first quarter of 2002. The effective tax rate for the first quarter of 2001 reflects utilization of the company's net operating loss carried forward during the period.

In the fourth quarter of 2001, the company reversed a portion of the valuation allowance recorded against the deferred tax asset related to the net operating loss carried forward, which is expected to result in an ongoing effective tax rate of 35 percent. The company's actual tax rate is expected to be in the 6 to 8 percent range in 2002.

Had the company's effective tax rate been 35 percent in 2001, reported earnings would have been five cents per share in the first quarter of 2001. The 35 percent effective tax rate for 2002 is slightly higher than our previously estimated rate of 34 percent. Because of a larger percentage of projected 2002 taxable earnings are expected to be generated in territories with higher effective tax rates as compared to our previous estimates.

The weighted average common shares outstanding used for the calculation of diluted earnings per share in the first quarter of 2002 was approximately $30.7 million. The noncash preferred stock dividend deducted from that income to compute earnings per share was $135,000 for the quarter, reflecting the noncash dividend on the Series C convertible preferred stock. On April 16 all of the holders of the Series C preferred stock converted their shares into 600,000 shares of common stock.

I would also like to highlight Integra's pro forma cash earnings per share, which was computed by adding back amortization and deferred income taxes to our reported diluted earnings per share. Pro forma cash earnings per share for the first quarter of 2002 was $0.20 per share as compared to $0.10 per share in the first quarter of 2001.

And now, let me turn the presentation back over to Stuart.

Thank you, David.

Our forward-looking sales and earnings guidance remains unchanged. We continue to expect total product sales to grow at approximately 18 to 20 percent per annum through 2003. Other revenues, which include research grants and other development funding, royalties and distribution and licensing fees are expected to average $900,000 per quarter through 2003.

In addition to these quarterly amounts, we may also earn additional one-time event payments upon the achievement of certain clinical and regulatory objectives for INTEGRA(R) Dermal Regeneration Template and certain of our other Integra LifeSciences products.

We anticipate full-year 2002 earnings per share to be within a range of $0.56 to $0.59 and 2003 earnings per share to be within a range of $0.72 to $0.75. Second quarter 2002 earnings are expected to be even with the first quarter at $0.13 per share, as continued top-line growth and the improved growth margins are offset by the significant investments we are making in the growth of our sales and marketing organization. Our $0.13 per share estimate is in line with the current analyst's consensus estimate.

As I have stated on previous calls, our management team is constantly seeking out external opportunities for growth and in each opportunity that we consummate would affect our results going forward. It is a top priority of our management team to complete significant and accretive transactions this year and next and to double our revenue base in the next 18 months through internal growth and our acquisition strategy. The forward-looking guidance that we have provided does not reflect growth from any such future business acquisitions or additional strategic partnerships.

I'd like to remind everyone that I'll be presenting tomorrow at the Deutsche Health Care Conference in Baltimore at 12 noon. You can listen to the live presentation or a replay via webcast that can be accessed from the Investor Relation section of our web site.

This concludes our prepared remarks. I'll be happy to answer all of your questions.

Operator, you may turn the call over to our participants.

At this time I would like to remind everyone, in order to ask a question, please press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster.

Your first question comes from with CIBC World Markets.

Good morning, guys.

Hi, Dave.

Yes, just a couple quick modeling-type questions. I was trying to write all this down pretty quickly. I think I missed a few things.

Did you say the tax rate for the year would be around 35 percent?

Yes, which we got from the 34 percent, which was the prior guidance we've given.

OK.

Keep in mind, Dave -- it's not obvious -- we don't pay significant federal taxes because of our large NOL. And, in fact, our cash tax rate is probably in the range of 6 to 8 percent. But because we're becoming very profitable, in particular in the United States, under the accounting rules, we have to book an "as if" accounting rate for tax.

Right.

And so, at least in the first quarter it was 34 percent. Although, again, we're not paying any significant federal income taxes.

OK. And then on the sales by product line. I know you guys broke out neuro-OR and ICU. What was the neuro other number, and can you tell us what neuro supplies was for the quarter?

OK. In terms of the neuro OR -- sorry neuro intensive care, we broke out at approximately $7.2 million. Neuro OR was approximately $10.1 million.

Right.

And then other neuro was approximately $2.5 million...

OK.

...for a total in neurosciences of $19.8 million. And those may not add up just because of rounding, but it's $19.8.

Excellent, OK.

And neuro supplies was approximately $1.3 million. Now we historically are not breaking out our separate product lines, but given that we just acquired that last quarter, just to be helpful for you.

Yes, I'm just...

It was $1.3 million in neuro supplies.

And that business you expect to track up throughout the year, is that correct?

Yes. In terms of revenues, we've -- the guidance we've given which we haven't changed with that product line, when we acquired it, was growing in the 10 to 15 percent range.

OK. And then just one last one. On the S/G/A line, as we model that going forward through this year, sequentially do you expect there to be a higher dollar amount every quarter of the year, throughout 2002? Or should we think about it like 34 or 35 percent of sales, or how should we look at that?

There's two parts to that answer. If you recall, we guided people for this quarter and next quarter, so into the second quarter -- this quarter, excuse me -- first quarter and second quarter to slightly higher G&A costs begun of the ongoing litigation we have against Merck KGaA, which is going to trial in September plus or minus.

And so there's an elevated cost this year of about $300,000 a quarter until that trial is complete. And we've guided people for Q1 and Q2 to higher numbers. We expect it to come back down sometime around the middle of Q3.

In absolute dollar amount, you'd expect it to come down a little bit?

The absolute dollar amount should come down.

OK.

So in the first quarter, we were up reasonably significantly versus fourth quarter.

Right.

And then we expected to stay at that level in the second quarter, and then probably back down a little bit, as that litigation is complete. And then, of course, as the business grows, it'll start to go up again.

Excellent. Thanks. Great quarter. You guys managed to beat my number by a penny. So I'll let somebody else jump in now.

OK. Thanks, Dave.

Your next question comes from with Adams, Harkness, and Hill.

Good morning, guys.

Hi, Ryan. How are you?

Fine. Just a handful of quick questions. Can you just give us a little more insight with respect to your gross margin, because that's been an area the last couple of quarters that came in a little bit light? And you really showed strength at that line. Can we expect sequential improvement at the growth margin line, and can you just give us a little more behind that strength?

Sure. A couple of things. As we pointed out on previous calls, there is a significant difference in gross margins between our older product lines and our newer product lines, and that's simply because in particular in the endocranial pressure monitoring line, there's significant component cost to our product.

So there's monitors and catheters with significant component costs, and obviously, as we introduce new products, they're designed to be to a much greater extent manufacturable, and to utilize off-the-shelf parts so that as we move the new products such as LICOX and as we move to new products such as DuraGen and in the life sciences division our ACS and Neurogens, we have been telling people that you should expect a continued improvement in gross margin.

Our guidance for gross margin has not changed, and we've guided people for the year to 60 percent. Now, I guess there's a slight inconsistency there since we've beat that number already. I would not like anybody to use this increase in gross margin to change their numbers, because we have the opportunity to extend that we are able to sustain a 61 percent gross margin this year to reinvest that in sales and marketing and R&D line.

So, the answer is we haven't changed our guidance from 60 percent. I sure would like to keep beating it at 61, but to the extent that we have an opportunity to beat it, and to continue to meet our earnings guidance, we'll probably take those numbers and reinvest it in R&D.

OK, and second can you walk us through your recent expanded indication as far as the number of J&J sales people that will now be selling the new indicated products versus the old, how many potential sites and market opportunities, and when do you think you'll get your first order there?

OK. Couple of thoughts. First of all, we've estimated the market about $200 million, as compared to the burn market which we've previously estimated at about $60 million. We're in the process of putting together a fact sheet on this information, which we'll post on the web site. Because we are getting a lot of questions from investors on this, but a couple points.

First, where we've gone with the indication allows us to call on plastic surgeons and call on trauma surgeons. And that was the most important part of the indication. Prior to this, Johnson & Johnson would not allow their reps to call on areas outside of burns. Because we didn't have any non-burn indication.

Our product is sold through Johnson & Johnson's Ethicon division in what's known as Johnson & Johnson wound management, and that's a group of sales people which include, I believe, eight to ten people who are focused on the burn unit. And those are the people who have focused traditionally on our product in the burn units, and then somewhere between 40 and 50 reps that call on trauma, plastic surgery, and general surgery, in particular selling a number of J&J's product lines including their chemostasis product line.

So these are reps that are very comfortable in surgery. Right now, prior to this, only a small group of those 40 to 50 reps were actually trained on Integra skin. And now this gives me big opportunity to train those reps so that they call on plastic, reconstructive, and trauma. Couple of different phenomenon: first of all, it's an identical product to the burn product. So there's no change in the product, so when you talk about first commercial sale, it's happened already.

Now, the size will change. In other words, burns typically get anywhere from 10 to 25 eight-by-ten sheets, and our sheets sell for approximately $2,500. So burns tend to be very big ticket, but you can't predict when there's going to be a case. Because they're far less frequent. The size that's likely to be used for plastic and reconstructive surgery is our four-by-ten size, which sells for somewhere around $1200 to $1500 a piece.

So there'll be many more cases, but of slightly smaller sizes, and slightly fewer uses. The good news is it'll be a lot more predictable, because there's many, many more plastic and reconstructive surgeries. In terms of timing, there's been a significant amount of training.

Actually, in the last year, J&J has trained more people in the burn community than we trained in, I think, the four years prior to giving the product to J&J to sell in market. So they've made a substantial commitment to train it.

They've also, at the American Burn Association about three or four weeks ago, provided for a significant number of clinical studies that have gone on by surgeons, and in fact plastic surgeons outside the United States showing how effective the product can be in wounds such as scar contractures and reconstruction. So -- and of course, we have now papers that have been published in peer review journals that are available for use as well by the sales force which show how effective the product is in plastic surgery.

So we have been handicapped for quite a few years without papers and without an indication, and I'm very excited about the opportunity now to sell this product through J&J. I tried to answer each of your questions there, Ryan, but if I missed one ask it again.

No, no. That's perfect. Two more quick ones. First, on the LifeSciences side, what's a fair place that we should be in a model for LifeSciences flat, because of the VitaCuff interruption is flat at around , a fair to be for the second quarter.

A couple of thoughts. First of all, there are two different dynamics going on in LifeSciences, and I want to try to use this opportunity to be clear. First of all, in our tissue regeneration products our performance has really been quite good.

Our guidance on LifeSciences historically was 15 to 18 percent admittingly across the whole LifeSciences Division, in terms of growth. In fact, the tissue engineered part of the business -- the skin, the orthopedic lines and the dental lines -- this quarter was up 18.5 percent compared to prior year, so very much in line. In fact, ahead of the guidance we've given for the LifeSciences Division. So I want to, I guess, reassure people that the tissue engineered side of the business, the growth side of the business actually performed quite well this quarter.

Now, that being said, we were disappointed in what we refer to as the medical product side of the business or the other medical side of the business. Many of those product lines have done well under our management, but we did get a surprise last quarter, in particular with the VitaCuff products line, which, as we said in our press releases, had historically just come in like clockwork and last quarter we, in fact, were surprised with about a $400,000 shortfall.

So what we've done is, we've had a dialogue with our OEM customer. They've given us assurances that they remain quite committed to the product and that the product itself is selling briskly within their own organization. But, in fact, due to some manufacturing changes they made they did not need to purchase the product, which is a component of their product, last quarter. And so the guidance we're giving on this call is to expect a similar shortfall in the second quarter and then a gradual return close to the original level beginning in the third and fourth quarters.

So in terms of specific guidance, we certainly would expect our LifeSciences Division to perform well in the tissue and generative component of the business next quarter, but perhaps similarly poorly in the medical product side of the business for the second quarter in a row, and then hopefully return to the growth trajectory we had in the third and fourth quarter. In terms of specific number for Q2 '02, as you know, we came in Q2 '01 about $4.6 million. And I think you should be either flat to, perhaps slightly down, but not significantly into the second.

So you had said $4.6, probably there or a little lower in the second quarter, and then returning to a growth trajectory sequentially beginning in the third quarter.

OK. And then, finally...

But again, I want to remind you the tissue engineered business is strong. And so as we pull back into the medical products business, returning to close to former levels, I expect we're going to return to that growth trajectory in the LifeSciences business.

OK. And then, finally, can you walk us through a handful of your clinical milestones that you see over the next six months to 18 months?

OK. In terms of milestones, let me just remind you that in the first quarter we got the approval for the tunnel LICOX from the FDA. We did, in fact, complete our sales expansion to 52 sales rep -- I shouldn't say complete -- we completed the first quarter with 52 sales reps. And we expect in the second quarter, this quarter, to be up to close to the 63.

I think our target is 60 territories full this quarter, and we're very much on track. And as you know, in the first quarter we received the $500,000 milestone event payment from Johnson and Johnson Ethicon.

In the second quarter, as you know, we received the plastic and reconstructive indication, this contractor indication, from the FDA. We expect to file our DuraGen in Japan this quarter.

We expect a number of, now, marketing oriented clinical trials to begin for Integra Dermal Regeneration Template -- they're marketing oriented, because we have the label that we want, but we'd like to provide additional prospective trials for Integra Regeneration template in additional plastic surgery cases. And we've already submitted for our CE mark for NeuraGen this quarter; and I would expect we would get that in either this quarter or in the third quarter.

Third quarter, we expect to introduce a low-cost neuro monitor outside the United States for our Camino product line. Our monitor is relatively expensive for the international market, while our catheters are very well used. So we've been working for about a year on a low-cost neuro monitor, which we expect to launch in the third quarter. I have no particular date set, but certainly we're expecting some time in the coming months the FDA response on the BMP products that we have our alliance with Genetics Institute and Sofamor Danek.

And then in the fourth quarter, we continue to expect to file with the FDA some type of an application, a 510(k) probably for a tyrosine polycarbonate line in conjunction with Bionx or one of our other at the moment non-disclosed partners. And then we're also waiting to have our final mark on our True-Tech catheter, so that's this year.

And then going into the coming years, we obviously have -- we await approval on DuraGen and Integra skin in Japan. We are looking for additional approvals in our tyrosine product. We hope to begin chronic wound trials for the Integra dermal regeneration template, and then a little further out, next generations of our neuro monitor and our selector ultrasonic aspirator for the U.S.

So we've got a lot of going on. And obviously in our tissue engineering program, we have quite a bit going on with both Johnson & Johnson and Medtronics Sofamor Danek and Genetics Institute which we don't disclose until we have the approvals.

OK, sounds good. Have a great day.

Thanks, Ryan.

Your next question comes from with US Bancorp Piper Jaffray.

Hi, Scott.

Good morning. It's for Scott. Great to see the strong DuraGen results in particular for the first quarter.

Thanks, Kelly.

If you could just talk a bit more about that, and what you're seeing in this market, especially side, that would be terrific. And just as a follow-up, there appears to be significant enthusiasm for NeuraGen at the AANS. If you could discuss how that's going on, the evaluation and new accounts front, that would be terrific.

OK. A couple of things. First of all, for those of you who didn't have an opportunity, we gave a presentation for all of our investors which was available on the web and by phone to listen in on at the AANS which took place a little more than a month ago or about a month ago. And we were extremely pleased with the response at the AANS to both our NeuraGen product and the LICOX product.

I actually just got back today from the National Training Institute which is a big critical care meeting, and we were overwhelmed with interest. And there were a significant number of clinical sessions on the LICOX product in particular. I continue to be very enthusiastic about what's going on with each of our major new products. In DuraGen, we had continued growth, continued record growth. And even into April, we had another record month for DuraGen sales.

Now for competitive reasons, we're not breaking out that number, the DuraGen number specifically. But obviously, you can see to some extent the impact on our product lines. And as we pointed out in Q1 in particular, we had a relatively weak comparison in our shunt business simply because of a huge tender we had in the prior year in that comparable quarter.

So we're really excited about DuraGen. Just a couple of statistics. We continue to have roughly an 85 percent reorder rate, so people use the product, will reorder it. I think the statistic we use is within six months to know that we haven't lost an account. So we've got a very significant reorder rate. We now have 1100 active accounts, which I think is up about 100 since the last time we reported this calculation six months ago or three to six months ago.

Internationally, we're up to 40 distributors selling the product. We're starting to see significant sales of DuraGen through our direct sales force in Germany, which is very encouraging. They've only been up and running really since the end of the fourth quarter. And so we've got now significant direct accounts in Germany and England with this product, through our direct sales force.

We're converting a lot of autograft or homologous users, so we're very excited about where DuraGen is going. In terms of NeuraGen, we gave a lot of statistics just three weeks ago, but just to remind you all, we've had now -- and this may have increased since then -- we've had 50 surgeons who've evaluated or used NeuraGen as an implant for peripheral nerve repair.

We have 40 accounts in the United States that have purchased . As I said, we submitted for the mark approval last week, and April sales were clearly a record compared to any of the prior months. Keep in mind we've guided our investors to be somewhat cautious on how quickly this product line will grow. I'm not being any more cautious than I was before, but this product line obviously is used in a number of different areas. And neurosurgeons only represent about 30 percent of the opportunity.

But we are focused on the neurosurgeons. We're only letting our reps call on two hand surgery groups in each of the territories, because our overall strategy is to remain very focused on neuro. And we don't want our reps going off call point, so unlike DuraGen where we really expected and guided people toward significant ramp over the last couple of years, NeuraGen again we are seeing a significant ramp. But I don't want people to get ahead of our guidance.

Great. Thanks very much.

Your next question comes from with .

Hey, Alex.

Hi, Stuart. Nice quarter. Just two quick questions. On LICOX, your new approval for the tunneling version of the LICOX monitor, can you tell us how significant a change is that? I'm trying to figure out if that's a minor difference compared to the existing LICOX or whether that's really going to turn around a lot of accounts.

I understand what it means to tunnel in the probe as opposed to a direct burrow approach, but on a practical basis, how big a deal is that?

It is important; I wouldn't want to portray it as somehow revolutionary for the product line. The product line is very useful in trauma, but has a great opportunity for subarachnoid hemorrhage, and stroke. And there are a number of cases where you would not want to put a bolt into the patient's bone, into the cranial bone, but rather you'd want to take the catheter and put it either through a burr hole or simply lay it down in an opening that has already been made to do some kind of an operative procedure.

This product can be used in both the neuron unit and the neuro OR. And so having a product that can be tunneled that doesn't require the bolt will very valuable in the OR, will be very valuable for subarachnoid hemorrhage and stroke, and will also be very valuable in pediatrics.

Up until now, LICOX could only be installed in the OR, and the new approval allows it to be put in the ICU.

The other way around. It was typically used in the ICU. You could use it in the OR, but it was more cumbersome. And having a device that can be tunneled and introduced the way it is with this tunneling catheter just makes it a lot easier to use both interoperatively and if you're not a .

OK.

So the way I would think about it is in our Camino line, we had clearly the broadest range of catheters available to customers. And there are a lot of different schools of thought amongst neurosurgeons as to how to introduce the catheters into the brain, and so what we want to have is a full way so there's no objection that a customer could come up to using the product.

Remember, we were surprised in that we had expected this product to be dominated by neurotrauma. So very similar in that regard to our Camino product line, but in fact, even though about 60 percent of the uses -- and we've had about a thousand to a little more than that now clinical uses of the product -- surprisingly, about 40 percent have been for subarachnoid, hemorrhage or stroke cases, which is really a market equal in size or larger than our traditional trauma customer.

And so we are clearly changing our strategy to try to give ourselves as much as access as we can to this other additional and larger market same surgeons, same call point, but a different mode of marketing. So we clearly have an opportunity here in stroke, which we're very clear about and want to capitalize on.

OK. Thanks. Other question is on Ethicon. In the last year, year and a half, Ethicon has undergone some major reorganization in changing business units. Are there any implications for their selling of Integra dermal regeneration template?

What I told you on this call is in fact a result of many of those changes. In fact, I would say one of our strengths has been as Ethicon continues to change and grow and redirect itself, we've been able to work with them to make sure that we increasingly get the right sales people calling on our -- calling our customers with our product.

In fact, if you recall, the original alliance we had done was with Johnson & Johnson Medical which was predominantly a wound care business that didn't go into surgery.

And that no longer exists if I understand correctly.

Correct. That division was merged into Ethicon about a year and a half ago, and so we've now -- I guess I would describe it -- survived those mergers, and in fact have what I view as a really excellent call point, which is Ethicon reps who actually go into surgery are very comfortable scrubbing up. And remember, our product is not a wound dressing. It is a surgical implant, and you need to have people who are comfortable getting into the OR and educating surgeons on how to use this product.

So there have been a significant set of reorganizations at ETHICON over the last year and a half, and where we're placed right now I think actually places us very well with the right group of sales people. And you can take away from what they've been doing with the product from a marketing perspective in the last three months.

We've just had an enormous turnout at the American Burn Association. They've put a lot of effort into training and education, including of their own sales people. The marketing materials that they have...

So it's now being carried by the same reps that are carrying surgical staplers and clips and endoscopic tools?

No, Alex. It's the group that covers their hemostasis products.

OK.

So it's the group that goes into surgery, and it's called wound management.

Interoperative wound management?

That's not what they call it, but that's a good description.

OK.

You might, you know, you can talk to them about how they've organized themselves, but inside of ETHICON they've reorganized it, and this is a dedicated group that's focused on wound management -- the surgical wound management, including their hemostatis products, such as and and others.

OK. Great. Thanks a lot.

Your next question comes from with SunTrust Robinson Humphrey.

Hey, Robin.

Hi, Stuart. I had a quick question. If you would just refresh our memory on the hiring on reps in '02, what your goal is. You said 52 goes to 63 for the second quarter. What after that? And what about the expenses associated with that, does it abate in the second half or is it a steady ramp to a new level which you're going to leverage later with increased sales?

OK. You know what I'm going to do? I'm going to start a little bit from scratch on this, because I seem to consistent manage to confuse people on this. Let me just describe, for you and for the call, how our sales organization is currently configured.

We went from 44 U.S. territories to 63 U.S. territories as of January 1 of this year. So when I talk about number of reps, we have 63 territories as of today, of which 52 are filled with sales persons. So there are now 11 territories which are being covered by existing reps, but into which I plan to hire full-time reps.

So, in other words, we divided the country so as to anticipate about 50 percent increase in sales people, but because you couldn't do that all in one day, we told our existing sales people -- for example, a particular guy -- "You may have Washington and Baltimore for the next six months, but then, you know, in the third question, you're going to be giving up your Baltimore territory to a new rep."

So we have now 63 territories, of which 52 are full. We also have in place our full management team, which is seven regional managers and one national sales manager. So each region will have nine reps, but has today somewhere between seven and eight reps. And a big priority in the first quarter into this quarter for the regional managers has been to out both hiring and training.

So we actually have, in terms of U.S. sales organization today, 52 plus seven plus one, which is 60, which will go, by the end of the second quarter, we expect to be almost done hiring into those territories. My own guess is we'll hire about another eight or nine people in the second quarter.

At that point, we'll be almost done in the U.S. "Done" would be defined as 63 plus seven plus one, which would be 71 people in the U.S., and then we would not expect a significant new sales force expansion for 18 months to two years. You can't keep changing that quickly. We've done two significant sales increases in the past. We've been able to keep our best reps because we've shown how we'll help them earn more every year by growing their product lines. And so, we would hope, by the end of the second quarter, to have filled probably 60 of the 63 territories, with the final three territories likely to be filled by the end of the third quarter.

Now, in Europe we now have four people in the UK. So that's done. Three people in France, so that's done. And by the end of May, we'll have our fourth in Germany, and that'll be done. Plus we have our European sales manager.

So if you look at cost in the first quarter, you can expect that we're about halfway to what you describe as the new peak. We went from about -- what was it, Dave? -- from about $5.2, I think, in the fourth quarter, to $5.7 million in the first quarter, and by the end of the second quarter, we would expect that to peak at somewhere around $6 million.

That would be the end of the step ramp on a quarterly basis for sales and marketing. Then it will simply grow, with revenues in line with the increased commission. As you know, we have a very straightforward commission structure, but an uncapped commission structure for our reps. So, at that point you wouldn't expect dramatic increases, but it certainly will grow with the sales growth.

Great.

I hope that was comprehensible, because I know I used a lot of statistics and I think I've confused a number of people.

No, that was great. That's really clear. Thanks a lot.

OK.

Your next question comes from Bob Hopkins with Credit Suisse First Boston.

Hey, Bob.

Hey, good morning, Stuart. Quick question on LICOX. I thought it was an interesting statistic you just let out. About 40 percent of the use of the product in hemmorhoids or stroke. I was wondering if you could articulate a little bit more the sales and marketing strategy that you have for LICOX. Because obviously this is, you know, appears like it's an educational process to get the word out about this product.

And now that you're selling into some different markets, I was wondering if you could just, you know, kind of quickly and in a little bit more detail lay out the sales and marketing strategy for this product.

OK. First of all, just a little history. This product was introduced in Europe three or four years ago. It has an installed base in Europe of about 300 to 400 monitors, which we are now in the process of growing through our direct sales organization.

What we learned in Europe is this product is actually very useful in quite a few different areas in terms of measuring oxygen. Interestingly, in Europe -- and, by the way, don't expect this to be our strategy in the States -- but interestingly, in Europe, a significant number of the users,

I would say about a third, are outside of neuro entirely. And in fact, use the product to measure oxygen in transplants -- organ transplants, skin grafting. Because the product is able to measure oxygen in the tissue rather than global oxygen in the blood, and so you know whether your graft or your organ is surviving in a way you never could before.

Now, that is not our strategy in the United States. And frankly, it's not our strategy in Europe, although in Europe we'll continue to supply those markets.

OK.

In the United States, because of our narrow focus sales force, our indications are all surrounding neurosurgery and we're driving it into neurosurgery.

Now, in terms of the sales strategy. Let me start first of all with the sales strategy. There is a significant training component necessary to introduce this product. Both in terms of our own sales force. And we've grown our sales force significantly.

The first thing they need to understand is integrating a pressure monitor. And what is currently the standard of care for measuring pressure and other brain parameters.

So we have done a significant amount of training and continue to do almost monthly training with our salespeople through our clinical educator group, to make sure that they are up to speed on advance monitoring, drainage, and now oxygen monitoring.

I would expect by the end of the second quarter, all the reps in the first quarter who've been hired will be very much up to speed on LICOX. And by the end of the third quarter the rest of the organization. Of our nine clinical educators, the bulk of their time is spent training and educating our salespeople and our customers on neurointensive care unit products, and, in particular nowadays, LICOX.

There is a significant nursing component to LICOX. Having just come back from the national training institute, we literally trained in three-hour sessions something on the order of 500 to 600 nurses, who sat through sessions in predominantly discussions on LICOX. And getting them to understand both how the product can be used, and also what the information content of the LICOX number is, is a significant training effort

And our nine clinical educators probably trained 200 to 300 people every month, each one of them in these two to three hours sessions in hospitals around the country. So there is a significant training component to raise awareness and educate on LICOX.

We also have a speaker's bureau that we've just, I would say last quarter just initiated, where we have centers of excellence who are now using LICOX regularly, who are traveling to other centers in their region. And, again, if they're nurses, training and educating the nurses. If they're neurosurgeons, during peer-to-peer training on the importance of LICOX.

Another important component is algorithms. Several of the hospitals have begun to develop or have now published their algorithms for what to do with the LICOX number. And, in fact, the sessions that I sat through in the last couple of days were very informative in that, the nurses are very much changing the way in which they treat the patient, whether it's managing their cerebral profusion pressure, managing their overall blood pressure...

You're talking about trauma now, right?

We're talking about trauma.

Right.

Whether it's managing their ICP. So that kind of education activity is a very significant component of what we're doing.

The turnaround of a new account is anywhere from three to six months. And so what we've done is ask each of our reps to have at a minimum one account, preferably two accounts, trained and up and running on an evaluation.

We'll either sell them the monitor immediately or we'll put it in on loan for three to five months, at the end of which they have to decide whether they're going to buy the monitor. They will be purchasing catheters throughout the whole process. And if they don't buy the monitor, we pull it out. And as I mentioned on a couple of other calls, we do pull out monitors, but I would say it's happening in less than 20 to 30 percent of the cases.

Now, when you talk about going to stroke, it is a bit of a new universe for us and it's very much to a greater extent dominated by the neurosurgeons. We have only just begun to show up at stroke meetings. We've only just begun to get surgeons who are using the product to start to talk about it.

And so, I'd say it's a little bit early to give you much guidance as to how we're going to drive this product into stroke. Right now the focus is on users who use it in conjunction with aneurism surgery and in particular the tunneling catheter, which can be laid right into the brain rather than through, a burr hole will be useful in that area.

OK. That's very helpful. Thank you, sir.

Your next question comes from with SunTrust Robinson Humphrey.

Hi, Stuart. Congratulations on the quarter.

Hey, Kim.

We have a couple of follow-up questions, and they're actually both on the ICU business. Number one, I was wondering if you could tell us how many new LICOX accounts there were in the quarter? And number two, on the Camino Ventrix lines, what are you seeing competitively out there, and is there any change to the ASPs on these monitors?

OK. In terms of new accounts, the last time we did this calculation was about three weeks ago at the AANS. We have 85 accounts, including current evaluations. We had 60 monitors sold or placed, and 50 units, in evaluation, for a total of 110 monitors in use. And through the end of the first quarter we had just under 1,000 kits -- devices sold, you know, disposables sold.

In terms of ASP, we're not really discounting these things, so $12,000 is the guidance we've given for the ASP. As I think we made aware at the AANS, some of the original clinical sites got their monitors for free, and so that effected the ASP in the first -- last year's numbers. But right now, you know, our strategy is to sell these at list, and that's about $12,000.

In terms of the ICU business, it should be clear to you, we're up significantly from prior year, but sequentially off of the fourth quarter we were relatively flat. And that is to a great extent to do with the way sales occur, in particular for capital. We had a lot of capital sold in the fourth quarter of last year, both LICOX and boxes, which is the end of the capital cycle, the end of the fiscal year.

But in terms of the dynamic, we believe we're taking share significantly from our competitors, particularly in the high end. I think we believe we're taking share from . We're holding our own in drainage, with a number of new product lines either having been introduced or expected to be introduced, which will allow us to go on the offensive against our competitors. And LICOX, as you know, is meeting our expectations in terms of its quarterly run rate.

OK, that's really helpful. Thanks, Stuart.

At this time, there are no further questions.

Mr. Essig, are there any closing remarks?

No.

Thank you all for your interest, and we look forward to continuing to talk with you as the quarters roll along and continue our very positive performance.

This concludes today's conference call. You may now disconnect.