Integra Lifesciences Holdings Corp (IART) 2002 Q3 法說會逐字稿

Good morning ladies and gentlemen and welcome to the Integra LifeSciences quarter three earnings release.

At this time, all participants have been placed on a listen-only mode and the floor will be open for your questions following the presentation.

It is now my pleasure to hand this over to your host, Mr. Stuart Essig. Sir, the floor is yours.

Thank you.

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 third quarter 2002, and update our forward-looking guidance for the rest of this year and for 2003, like the expected impact of our recent acquisitions of Novus Monitoring and Padgett Instruments.

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 after the conclusion of the live event. Access to the replay is available through November 18, 2002 by dialing 973-341-3080 or through the Web cast accessible on our home page.

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

Because the content of this call is time sensitive, the information provided as accurate only as of the date of this live broadcast, November 4, 2002, unless otherwise posted or announced by Integra the information on this call should not be relied upon beyond November 18th, 2002, the last date 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 involve risks and uncertainties that could cause actual results to different materially from predicted results.

For discussion of such risks and uncertainties, please refer to the information set forth under risk factors included the business section of Integra's annual report on Form 10-K for the year ended December 31st, 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.

Thank you Jack. 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, a leading provider of implants, devices and monitors used in neurosurgery, neurotrauma and related critical care, and Integra LifeSciences, a developer and manufacturer of a variety of medical products and devices used to treat soft tissues and orthopedic conditions, including products based on our proprietary tissue regeneration technology.

In the third quarter of 2002, we reported record revenues of $30.2 million, an adjusted net income of 13 cents per share. Adjusted earnings per share excluded certain acquisition-related charges, including a $2.3 million in-process research and development charge and cost associated with the termination of distribution agreements during the third quarter of 2002.

Revenue growth was lead by $6.8 million increase in product sales to 29.2 million, a 31 percent increase over the prior year quarter that included $3.8 million in sales of products acquired since the end of the third quarter of 2001.

Excluding acquired product lines sales, third quarter product sales grew 14 percent over the prior year quarter. Net income reported under GAAP was 1.6 million or five cents per share.

Product sales growth was primarily related to a $5.8 million increase in Integra NeuroSciences division product sales, a 34 percent increase over the third quarter of 2001. Sales of NeuroSciences capital in the Untied States improved from the second quarter, in particular, quarterly sales of neuromonitoring monitors and neurosurgical instruments both increased on a year-over-year and a quarter-to-quarter sequential basis.

Consolidated gross margin on product sales in the third quarter of 2002 was 57 percent, after giving effect to $225,0000 of inventory fair value purchase accounting adjustments for acquired inventories sold during the quarter and the write-off of $350,000 of inventory related to a terminated distribution agreement.

Excluding the effect of these items, the consolidated gross margin on product sales was 59 percent, one percentage point lower than our previously stated target for 2002, and equal to the 59 percent reported for the full year 2001.

Gross margins for the period were also negatively affected by decreased capacity utilization and from the inclusion of sales of lower margin products acquired since the third quarter of 2001, offset in part by the continued improvement in the sales mix of Integra's existing products.

Other revenue, which consists of development funding from strategic partners and government grants, royalty income and licenses and distribution revenues decreased by $400,000 from the prior year quarter to $1 million in the third quarter of 2002.

Consolidate total other operating expenses, which exclude cost of product sales, but include amortization, increased 5.1 million to $16 million in the third quarter or 2002, as compared to 10.9 million in the third quarter of 2001.

Sales and marketing expenses increased 1.6 million to $6.7 million as we concluded the expansion of our domestic sales forces to 63 sales reps during the quarter, and increased our European direct sales and marketing infrastructure with the NMT acquisition.

Research and development expenses increased $2.3 million to $4.5 million in the third quarter of 2002. As a result, though, the $2.3 million in-process research and development charge taken in connection with the acquisitions of Signature Technologies and certain assets from Novus Monitoring Limited.

Increased product development activities in the Integra NeuroSciences division were offset by a reduction in spending on programs with strategic alliance partners in the Integra LifeScience division.

General and administrative expenses increased $1.6 million to $4.4 million in the quarter. Reflecting among other things increases related to ongoing general and administrative activities and operations acquired since the third quarter of 2001.

Increased legal and insurance costs and charges related to the termination of distribution agreements also affected the numbers.

In July we acquired the assets of Signature Technologies Inc, a specialty contract manufacturer of titanium and stainless steel implants to the Neurosurgical and spinal markets for $2.8 million in cash, paid at the closing and certain other consideration to be paid upon the release of new products to be sold through the Integra NeuroSciences sales force.

The acquired product lines generated approximately $700,000 in sales this quarter, primarily from the manufacture of cranial fixation systems for sale under a contract manufacturing agreement.

For modeling purposes, we expect that ongoing sales from existing relationships will be approximately $600,000 per quarter. The financial results of Integra's Signature Technologies will continue to be included in the Integra LifeSciences segment, until the new products under development are launched through the Integra NeuroSciences sales force.

In August, we acquired the NeuroSciences division of NMT Medical Incorporated for $5.4 million in cash. Through this acquisition we added a range of leading differential pressure valves, including the , and horizontal, vertical lumbar valves and external ventricular drainage products through our Neurosurgical product line.

The acquired product lines generated sales were approximately 1.8 million in the last two months of this quarter. Going forward we estimate that the net effect of the NMT NeuroSciences acquisition and certain product line rationalizations that we're examining will be to increase product sales by approximately $2.5 million per quarter compared to the periods before the NMT NeuroSciences acquisition.

The acquired operations include an owned facility in France that manufactures packages and distributed shunt and catheter and drainage products and a leased distribution facility in Atlanta. The plant has already become an important part of Integra's continental European manufacturing and distribution activities. The Atlanta facility was closed and it's operations were consolidated in Integra's Cranberry, New Jersey national distribution center during the third quarter.

I will now turn to the divisional performance of our business in the third quarter.

Revenues in both the Integra NeuroSciences and Integra LifeSciences divisions increased in the third quarter of 2002. Sales in the Integra NeuroSciences division drove the top-line growth with a $5.8 million increase to sales, in sales to $23 million, a 34 percent increase over the third quarter of 2001. This increase reflected $3.1 million in sales of products acquired since the end of the third quarter of 2001.

Excluding the acquired product line sales, third quarter product sales grew 16 percent over the prior year quarter, lead by sales growth in the DuraGen and NeuraGen product lines and products used in the neurointensive care unit, including Licox.

Sales of neurointensive care unit products increased $1.4 million to 8.4 million in the third quarter of 2002 and included 600,000 of acquired product sales. Licox sales were strong this quarter with 14 monitors sold in the United States.

Sales of neuro operating room product sales increased $2.9 million to $12.2 million lead by strong growth in sales of the DuraGen, matrix and $1.2 million in sales of acquired product lines. Sales of the NuraGen nerve guide exceeded our expectations this quarter as well.

The $1.4 million increase in other NeuroSciences products to 2.4 million was primarily related to acquired product lines. The $250,000 decrease in other revenues was the results of decreased royalty revenues from an agreement that expired at the end of the third quarter of 2001.

Integra NeuroSciences division gross margin on product sales decreased to 59 percent in the third quarter of 2002 from 62 percent in the third quarter of 2001. Excluding the effect of inventory fair value purchase accounting adjustments and the write-off of inventory in connection with the termination of a distribution agreement, the growth margin on product sales would have been 61 percent for the third quarter of 2002.

The positive effects increased sales of higher gross margins were offset by lower gross margins from the Integra Neurosupplies business acquired in the fourth quarter of 2001.

Total other operating expenses in the Integra neurosciences division increased 5.4 million to $11.9 million in the third quarter of 2002. Research and development expense increased 2.8 million to $3.6 million in the third quarter of 2002 with 2.3 million of such increase related to in-process research and development charges taken in connection with the Signature and Novus acquisitions.

The remaining increase related to continuing research and development activities from acquired business and increases in existing product development programs. A $1.7 million increase in sales and marketing expense for the Integra NeuroSciences division to $6.5 million reflected the continued expansion in the domestic and international Integra NeuroSciences direct sales force.

Sales and marketing expenses remain consistent at approximately 28 percent of product sales in the third quarter of 2002 and 2001.

General and administrative expenses of the Integra NeuroSciences division increased by $840,000 to 1.8 million in the third quarter of 2002, and included $600,000 of ongoing general and administrative expenses related to acquired operations.

Also included in Integra NeuroSciences total other operating expenses were $355,000 of redundant operating costs associated with the acquired Atlanta distribution facility that was shut down during the quarter.

The Integra NeuroSciences division reported an operating profit of $1.7 million for the third quarter of 2002. This compares to an operating profit of 4.4 million in the third quarter of 2001.

The Integra LifeSciences division reported an operating profit of $2.6 million in the third quarter of 2002 on product sales of $6.1 million, and other revenue of $1 million. This compares to an operating profit at 1.5 million in the third quarter of 2001, on $5.1 million of product sales and $1.1 million of other revenues. Product sales of the Integra LifeSciences division increased by $1 million in the third quarter of 2002 over the third quarter of 2001. This increase in primarily attributable to approximately $700,000 in sales of products acquired from Signature Technologies and increases sales to of our absorbable college and sponges that are used as a component in recently approved infused bone graft.

The Integra LifeSciences division gross margin on product sales was 49 percent, the same as the third quarter of last year. Total other operating expenses in the Integra LifeSciences division decreased $740,000 to $1.4 million. Sales an marketing expenses decreased $170,000 in the third quarter of 2002 to $200,000, and general and administrative expenses decreased $94,000 to approximately $300,000. Research and development expenses decreased $470,000 to $880,000 in the third quarter of 2002 from a reduction of spending on programs with strategic alliance partners.

Integra's combined divisional operating profit of $4.3 million excludes administrative--excuse me, excludes amortization of goodwill and intangible assets, and corporate, general and administrative costs. Corporate, general and administrative costs increased $870,000 in the third quarter of 2002, to $2.3 million, primarily as the result of increased head counts, higher legal and insurance costs, and charges associated with the termination of certain distribution agreements. Amortization expense decreased $360,000 in the third quarter of 2002, to $425,000 as the result of the adoption of FASB statement 142 in January, slightly offset by amortization of recently acquired intangible assets. Under FASB statement 142, goodwill is no longer amortized, but is subject to an annual impairment review, which the Company concluded in the second quarter of 2002.

As of September 30th, we had cash and investments of approximately $136 million, and we reported net interest income for the quarter of $822,000. Given the current low-interest rate environment, and the use of $21.7 million in cash for the four acquisitions closed since the end of the second quarter, we expect net interest income to approximate $800,000 in the fourth quarter of 2002. We generated $6.4 million of adjusted operating earnings before interest, taxes, depreciation and amortization in the third quarter of 2002.

I will now turn the presentation over to David Holtz, our Senior Vice President of Finance, who will provide more information regarding adjusted net income, income taxes, and earnings per share.

Thank you Stuart.

This quarter, Integra incurred $3.5 million of special charges, which reduced Integra's earnings per share from .13 to .05 per share. These special charges included $2.3 million charge for in-process research and development acquired for and technology. $600,000 of charges related to the termination of distribution agreements including a $350,000 write off of related inventory. $225,000 of inventory fair-value purchase accounting adjustments related to acquired inventory, and $350,000 of employee severance and other acquisition-related charges.

Our effective tax rate increased from the 8 percent in the third quarter of 2001 to 35 percent in the third quarter of 2002. The effective rate for the third quarter of 2001 reflects the utilization of the Company's net operating loss carry-forwards during the period. In the fourth quarter of 2001, the Company reversed a portion of the valuation allowance recorded against the deferred tax assets related to these net operating loss carry-forwards, which has resulted in an ongoing effective tax rate of 35 percent. The Company's actual cash tax rate is expected to be in the 6 to 8-percent range in 2002 and in 2003.

Given the Company's sustained profitability, we expect to reverse all or a portion of the valuation allowance recorded against the remaining $34.4 million deferred tax assets relating to these net operating loss carry-forwards in the near term. The Company is currently assessing the impact, if any, that the recent acquisitions will have on our effective and actual cash tax rate.

The weighted average common shares outstanding used for the calculation of diluted earnings per share in the third quarter of 2002 was approximately 30.7 million shares. I would also like to highlight Integra's adjusted cash earnings per share, which is computed by adding back amortization, deferred income taxes, and any non-cash adjustments to our reported net income. For the third quarter of 2002, by adding back the $2.3 million in-process research and development charges and the $225,000 of inventory fair value purchased accounting adjustments, our adjusted cash earnings per share was .17 per share as compared to cash earnings per share of .16 per share in the third quarter of 2001.

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

Thank you, David.

As I have stated on previous calls, our management team is constantly seeking out external opportunities for growth, and any such opportunities that we consummate would affect our results going forward. I would now like to discuss briefly the acquisitions that we have completed since our last conference call.

We acquired the rights to the NeuroSensor Monitoring system, and rights to related intellectual property from Novus Monitoring Limited of the United Kingdom in September for $3.5 million in cash, and a commitment to make further payments as product development and sales goals are attained. The NeuroSensor system will measure both intercranial pressure and cerebral blood flow using a single combined probe and an electric monitor for display data, and we should have combined probe--excuse me, combined applications in neurotrauma, cerebrovascular disease and postoperative surgical treatment. We displayed the NeuroSensor at the Congress of Neurological Surgeons in September, and we're very encouraged by the interest it attracted. We expect to begin clinical trials on the sensor in 2003. Upon the achievement of certain product development goals, the Company will pay the seller an additional $1.5 million, of which a substantial portion is expected to be recorded as an additional in-process research and development charge.

In October, we acquired Padgett Instruments, a marketer of instruments used in reconstructive, plastic and burn surgery for $9.7 million in cash. In 2001, Padgett had revenues of $4.9 million, and generated EBITDA, excluding surgeon expenses that will not be incurred under Integra's ownership, of $1.1 million. Padgett's gross margins are similar to those we realized on our NeuroSciences products. In addition, the acquisition broadens our existing customer base, and gives us access to new market segments in which to market our other products such as the NeuraGen Nerve Guide. We also expect that Padgett will distribute the surgical plating and screw products now under development at Integra Signature. It is a top priority of our management team to complete significant accretive transactions this year and next, and to reach a $200 million run rate in our revenues in the next 18 months, through an internal growth program, and our acquisition strategy. The forward-looking guidance that we have provided and will now update does not reflect any such future business acquisitions or additional strategic partnerships.

The Company's guidance for the fourth quarter of 2002 is for total revenues in the range of $32.5 million to $33.5 million. We expect that sales of existing Integra products will increase to approximately $32 million in the fourth quarter of 2002. Other revenues, which include research grants and other development funding, royalties and distribution and licensing fees, are expected to be approximately $1 million in the fourth quarter.

The Company expects total revenues in 2003 to increase to between $140 million and $145 million. This guidance includes the sales of recently acquired product lines, and the acquisition of Padgett Instruments in October 2002. Consolidated gross margin is expected to increase from a projected 60 percent of product sales in the fourth quarter of 2002 to 62 percent of product sales for the year 2003. Accordingly, excluding this quarter's special charges associated with the recent acquisitions and the termination of certain distribution agreements, 2002 earnings are expected to be 55 cents per share. Earnings per share for year 2003, excluding the potential for any additional in-process research and development charges related to completed acquisitions are expected to be within a range of 73 cents to 76 cents per share. Fourth quarter 2002 earnings are expected to be 15 cents per share, excluding any further special charges and the impact of the reversal of all or a portion of the valuation allowance recorded against the remaining deferred tax asset.

I'd like to remind everyone that I'll be presenting at the CIBC Healthcare Conference in New York today at 4 pm. You can listen to the live presentation or a replay via Webcast at the--that can be accessed from the Investor Relations 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.

Thank you. The floor is now open for questions. If you have a question or a comment, you may press 1, followed by 4, on your touchtone telephone at this time. If at any point your question has been answered, you may remove yourself form the queue by pressing the pound key. We do ask all participants to please pick up their handsets while posing their question. Again, that's 1, followed by 4, for questions or comments at this time.

Our first question is coming from Ryan of Adams Harkness and . Please state your question.

Hi, guys, congratulations on a solid quarter. Just a handful of quick questions. Can you walk us through just the main neuro products. You didn't give as much detail as you have in the past with respect to LICOX disposables, NeuraGen, maybe new accounts, the reorder rate for DuraGen, whatever you really feel comfortable there on the neuro side.

Sure, Ryan. A couple things. First of all, as you know, the--or as I stated--the neuro sciences division was particularly strong this quarter. We were up 34 percent from prior year and if you back out the impact of the acquisitions, 16 percent. In terms of NeuraGen, to begin with, as you know, we haven't given specific dollar revenue numbers for any of our products for, I guess, over a year, year and a half, but I can give you some statistics on some of the performance of the product. NeuraGen year-to-date we've sold over 700 units of the nerve guide. We have 125 accounts that have purchased NeuraGen through the month of October and, as we stated, NeuraGen was officially launched in the fourth quarter of 2001. We're quite pleased with the pickup of NeuraGen. An example is a particular orthopedic surgeon in Atlanta who's used NeuraGen now in 12 cases in four months, so we are finding that those surgeons who have converted to the procedure using NeuraGen have been sticking with it. Calculating a reorder rate is a little hard, but our guess is it's about 70 percent. But it's early in the launch to give a specific reorder rate.

In terms of DuraGen, number of domestic accounts is around eleven hundred active accounts. We estimate there's 40 distributors overseas selling the product. Sequential growth was quite strong again, as was growth from prior year. In fact, I think we've started to see this quarter the impact of those additional sales territories on DuraGen, so our strategy of adding the additional 20-plus reps over the last six months I think is paying off in DuraGen, as we expected it to.

In LICOX, we sold approximately 90 monitors in the United States to date, and as I said, we've got 14 monitors sold this quarter compared to the prior quarter, which was seven. In terms of disposal, I don't happen to have that number in hand, but I know disposable revenues from the prior quarter sequentially was up, I'm going to guess, at least 30, 40 percent--I'm looking at David--30, 40 percent sequential growth in disposable revenues for LICOX.

So I'm real pleased with the performance in the first--of these three products this quarter and I will say the acceleration in growth that we've seen from the prior two quarters is clearly a function of these new product launches.

OK. And then a couple of other quick questions. You indicated you expanded your international distribution network. Where do you stand now internationally?

In Europe we're directing four markets, Belgium with one person, England and Scotland with three, Germany with four, and France with five. France is clearly our strongest direct market and also the location of our French developed products, the products came out of , the and the , so we're really trying to capitalize on our strength in France. Those are our only direct markets outside the United States and we have a European manager plus two clinical educators, one for England and one for Germany, repeating our strategy of trying to have a very significant level of clinical education in all the markets that we serve.

In terms of distributed markets, I would guess we sell now into somewhere between 80 and 90 countries regularly and we probably have about 150 distributors. We have distributor managers for Asia, Japan, Australia, Latin America and then some of the European distributed markets.

Did you see an uptick in Japan and Argentina because you were negatively impacted last quarter.

Japan was unchanged, in other words, it was not down anymore, but it was pretty much where it was in the prior quarter. And then Argentina, yes, we started to ship again into Argentina, but it's not nearly back to prior levels.

OK. And then finally, what's the implied organic growth rate assumption in the year '03 guidance of 140 to 145?

I don't--you know what, it's one thing we didn't calculate. I will say--oh, good, I thought of it as I was talking--I will say we haven't changed our forward-looking guidance, but we have given you a number for next year. It's certainly below our long-term guidance of 18 percent, but we haven't changed our 18 percent guidance.

OK. Thanks a lot.

Thank you. Our next question is coming from of Capital. Please state your question.

I'm wondering, you have a significant amount of cash on your balance sheet, whether this is intended purely for acquisitions looking-forward or whether you intend to implement a buy-back program, perhaps, given the recent share price weakness?

A couple of things. First of all, we are significantly cash flow positive. As we pointed out, this quarter we generated quite a bit of cash. That's been true for almost two years now. We do have a significant cash balance on our balance sheet. The main purpose of it is to continue our aggressive acquisition strategy. We do have an authorized share repurchase program, and we do intend, given the weakness in the stock price in the last few months to go into the market and buy stock. We can't do that until we've released our numbers, but having released the numbers, we do have an intention to go into the market and buy back stock, yes.

And we have a 0.5 million share authorized repurchase at this point.

Excellent.

Thank you. Our next question is coming from Bill of First Albany. Please state your question.

Great, thank you.

Hi, Bill.

First question is actually for David. I'm trying to get a handle on looking at the one time charges, where you have them in the press release, how exactly I'd fit that into the model to figure out what this would look like without the charges. You know, I get the 2.3 million in R&D, I get the $225,000 in would go into there, but how the other $600,000 and is really broken up, if you could help me out there, that would be great.

That's the first question, and second question, a little more detail on the LifeSciences. I don't think you gave us what the breakdown between tissue, other, and then license fee, royalty, and other was. And I was wondering if you could give us a little color there.

Sure, on the charges, the $300,000 was almost exclusively -- the employee severance and other acquisition related cost. I would say about 180 of that was actually in the division of neurosciences, and the rest was in corporate. And that was almost all in G&A. And then the $600,000 of terminations -- termination of the distribution agreement was 340,000 to , and the rest -- and that was in neurosiencies -- and the rest was in G&A in the corporate division.

Does that make sense, or ...

Yes, that helps me out.

OK.

And then in terms of the quarterly numbers, in LifeSciences, tissue repair was approximately 2.6 million, and other medical was approximately 3.5 million, for a total of 6.1 million.

OK, great. And then -- you know, we had talked in the past just on kind of the general strategic view as you brought all these products in house, made all these acquisitions. I was wondering if you could give us a bit of a look into the new product roll out, maybe upgrade cycle that we could expect in the next six to 12 months.

Sure, couople things. First of all, this year, 2002, to date has been an extraordinarily productive year in terms of new product approvals, and I'll reiterate some of them. We also restructured our non-tissue engineering product development group to be a lot more focused on performance in the short term and introducing consistently new product in each of our subsegments, whether it be shunting, drainage, ICP, or ultrasonic aspiration in the other side -- in the OR side of the business.

So I'd say we're about 2/3 of the way through what I would call a successful restructuring of our product development effort. Year to date, we have approval of the catheter, which has had a nice uptick in the market. We have significant new indications for our Integra Dermal Regeneration template. We received the CE mark for a Catheter. We're still waiting on the CE mark for , but it should be literally any week now in the EU.

We have launched our low-cost neuromonitor, the SPM, into Europe direct markets. We received approval for the combined ICP catheter. We received approval for our new EVD system, our drainage system, which includes a filter, and we received expanded indications for the ultrasonic aspirator.

Here in the fourth quarter, we're looking to see our CE mark on , and we're awaiting some information on the European approval of the GI BMP product. In the first half of 2003, we expect to launch a new generation of drainage systems: A hermetic plus, which was introduced middle of this year has grown quite substantially and has really changed the competitive dynamic in the drainage part of our neuro ICU business, hence the substantial growth you've seen in that segment.

Capitalizing on that, we expect to introduce yet another series of improvements early next year. I believe hermetic is now coming upon becoming one of our largest product lines in the neuro ICU on a run rate basis on the drainage side.

We expect, coming out of the acquisition, a very new, innovative neuroendoscopy balloon, launched in the first half of next year, and we expect in the second half of next year two new additional products, a next generation , and then into the first quarter of 2004, we expect the Novus Neurocenter blood monitor to be launched, our next generation ultrasonic aspirator to be launched, and in the second half of 2004, a new cranial plating system from our signature acquisition, a next generation neuromonitoring device, a next generation version of , and I think those are the highlights.

Great, thanks a lot.

Thank you. Our next question is coming from of Vector Securities. Please state your question.

Thank you. Stuart, it looks like your strategy is evolving into the development of neuro, spine, and plastic and reconstructive surgery group. Can you tell us in particular about what you're planning with the spine group and signature acquisition?

Sure. The original reason for the Signature acquisition was we saw in neurosurgery a significant opportunity in our call for cranial plates and screws. Literally, if you perform an ultrasonic aspirator procedure, you close with , and then you need to close the bone with a cranial plate and screw system, and our reps saw significant opportunities given that segment and the relationships we have to introduce our own product lines.

So consistent with our historical strategy, we would have loved to have acquired a product line with existing revenues, but did not successfully identify such a product line, so we found a contract manufacturer of cranial plates and screws and other implants who could develop a product line for us, and that's why we acquired that business, a profitable acquisition for us, an accretive acquisition, and a way to introduce a new product.

We expect to do that program and the truth is, as we looked at the cranial plate and screw market, while neurosurgery is a big part of that, a bigger part of it is plastic and reconstructive surgery. And you look at the competitors in that segment, they include both neuro companies and orthopedic and reconstructive companies, and we significant opportunity to -- looking at that product and the potential for it, to sell it outside of neuro.

We've stated our acquisitions priorities and criteria, with the number one being neurosurgery and the related field of neurology, and then in addition to that, spine, ENT, and now, reconstructive surgery. The acquisition gives us once again an accretive acquisition that we can sell this cranial plate and screw system through, and probably most importantly now, give us additional lift with . We've seen what our reps can do outside of their call point, we have the plastic and reconstructive and orthopedic hand surgeon, but it is off call point.

So, in addition to them selling this product, we saw an opportunity in to launch the product directly to another class of surgeons, including plastic. In terms of spine, we've stated a significant in spine. We've looked at some significant acquisitions in spine. We don't want to compete with the big guys in spine, but we would like to compete around the niche areas of spine. So certainly, the Signature acquisition and the OEM capabilities they have, for example, in cervical plating, for example, in instruments, we see an opportunity for in spine. I would like, if we were to get into spine in any significant way, to find an acquisition to do it with an existing base of revenues.

for spine provides a huge opportunity. It's one of the fastest growing segments of our business, it's up significantly, but again, it's off call point for our neuro reps, so having reps call on spine would be a valuable thing.

OK, and can you just -- I don't know if you said it already, tell us how many direct sales people you have in the U.S. right now, and how many you've added this quarter, and whether that was -- and how many you got through the acquisitions that you made.

In the neuro business, so calling on neurosurgeons, we have a national sales manager, seven regions, and 63 territories. We consider the 63 territories full. What I mean by that is, there is some turnover -- we probably have two open territories now, but the expansion is complete. That's up from 44 at the end of the year. We have -- in Europe, as I mentioned, I think it's 15 direct reps, including the management and then we have approximately 12 clinical educators, 10 in the U.S., two in Europe.

With the acquisition of , we have five direct sales reps. We certainly expect to expand that over the coming several quarters, probably initially to eight and then going higher depending upon their performance.

OK great, and in terms of the growth margin trend line for 2003, can you give us an idea of what your expectations are there right now?

Yes, we expect Q4 of this year to come in at about 60 percent, and we expect the year next year to be about 62 percent for the year, so it'll obviously trend from 60 and then to slightly over 62 to get an average of 62.

OK, great. Thanks.

I mean slightly. It shouldn't grow in the first two quarters pretty significantl8y.

OK, great. Thanks a lot.

Thank you, our next question is coming from of UBS Warburg. Please state your question .

Good morning, just a couple of follow up questions. As you've integrated all the acquisitions that you've made over the course of this year, what issues have you run into so far, if any?

I would say integration is one of our strong points. We've not had any significant integration issues this year at all. We said we'd close the Atlanta facility in Q3, and we closed it exactly on the thirty-first of the month. We transferred one of their sales people to our sales force and have retained no other personnel in the United States.

In Europe, we're managing well the French organization. There are some integration activities still underway between the U.K. and the French operations and I would say having owned Padgett now for just a couple weeks, we're quite satisfied with the performance of our team - or beginning the integration of Padgett.

And can you talk a little bit about Padgett specifically as you look at expanding both cranial plates and screws as well as the impact on , how quickly can they ramp up in terms of targeting the plastic and reconstructive surgery segment?

Well, in terms of , it really is just as quick as we can train them. We certainly would expect by second quarter next year them to be selling . We probably only built a couple hundred thousand dollars into the model, but if keeps growing in the neuro business, we'd expect them to outperform that.

In terms of cranial plate and screw systems, we don't plan to launch the system until the middle of 2004, so nothing can happen until we've launched the system. And then, I view that as a 2004 initiative again to the second quarter.

Would you expect your current reps to still sell or not as much?

Yes. If you're talking about , absolutely. We're not taking away from them, and in fact we'll figure out a way to make sure their commissioned and the plastic sales force is commissioned so that everybody has a incentive to drive the product line. But you might our sales reps were worried about losing it, as well, and they shouldn't be.

OK. And can you talk a little bit about the ICU monitoring specifically in the sense that that's been a challenge in the second quarter of the year?

And looking more for some color in terms of the core business lines - , et cetera, in terms of two aspects - one, what your thought is on how they did, and secondly, your thought on the environment for capital equipment spending.

Sure. First of all, as I stated on the last call, in the second quarter, we were soft in capital. I apparently conveyed a confusing message there that I somehow expected to continue to be soft, which was not the case. But I was trying to be clear that it was soft in the second quarter.

The third quarter, that was not the case. We were strong in both Monitors and in our monitoring line. And in fact, the progression in ICU monitoring which had no acquisitions in it was quite substantial. The sequential progression was above and beyond any sequential - I'm just staring at the numbers here - progression we've seen in 12 months. So, I'm quite pleased with that business both in terms of monitors sold and, frankly, the disposables sold this quarter. Again, while I'm seeing significant increases in , the core business as well was doing quite nicely.

OK. And then lastly with regards to infuse coming out of the meeting, it definitely looked as though and the adoption of it was quite strong across a lot of different areas. As you look forward to Q4, will the royalty that you receive from Medtronic be classified as product revenue? And then secondly, as you look at the order flow from Wyeth, what's your expectation given the inventory that they currently hold?

OK. Couple things - first of all, the fourth quarter royalty is probably going to be somewhat confusing because it will be the first quarter of reporting, and so we've not budgeted any significant amount at this time. I would say we don't really know what they're going to be able to report to us.

That being said, we will determine during the fourth quarter whether the appropriate accounting treatment is as product sales or as royalty payments, and I'm not sure it's something we get a choice on. It'll be whatever the accounting pronouncements drive us to. So, those of sort of two non-answers for you.

In terms of the actual performance, as we stated on the prior call, they do have about a year of inventory based on roughly a 30,000 to 40,000 procedures a year basis. We don't actually have any insight into how many procedures a year they will do, so we can't tell you whether it's growing so quickly that we would expect a ramp in our revenues or whether we'll really only see a ramp in our revenues toward the middle to end of next year. So, we are not at the moment forecasting any significant increase in our revenues from GI into next year, and the reason for that is our lack of certainty as to where they will be in terms of inventory position.

And in fact, if you look at our guidance for next year, we have significant growth planned in our Neurosciences Division, but we've projected in the numbers that we've provided in our forward-looking guidance rather conservative estimates on Life Sciences because we are expecting the most significant impact on our ramp going forward would be GI. But we cannot predict any significant increase next year until we know the performance of in the market.

Wonderful. Thank you.

Thank you. For any further questions or comments, you may one, followed by four on your touch-tone telephone at this time.

Our next question is a follow-up coming from of . Please state your question.

Excuse me. , your line is live. Do you have a follow-up question?

Yes, sorry. I'd like you to elaborate a bit on your working capital this development this quarter, both receivables and inventory.

OK. Thank you. Yes, let me respond on that because I'm quite pleased with our working capital this quarter.

This quarter, including currently available for sale marketable securities classified as non-current assets because of immaturity, working capital increased $11.5 million from December 31, 2001 to $164.6 million at September 30. This includes a $4.9 million increase in cash and marketable securities, a $3.7 million increase in accounts receivable, and a $2.2 million increase in inventory and the pay-down of $3.6 million in short-term debt.

Accounts receivable days sales outstanding increased slightly to 60 days at September 30, 2002 as compared to 57 days at year-end, but less than the high of 65 days at the end of June 2001. The increase in the days sales outstanding is primarily related to increased international receivables which carry longer terms. The $2.2 million increase in the inventories from December 31, 2001 to $26.6 million at September 30 represents approximately 187 days of inventory on hand. This is consistent with our target of 180 days, so we're down significantly in terms of the number of days of inventories we're holding. And that was really one of our objectives this year was to improve that. Consistent with our own product rationalization plans we'll continue to target reduction in inventory levels in the future.

Thank you.

Thank you. Our next question is also a follow up, coming from of Vector Securities. Please state your question.

Yes, just a quick question on . I was wondering, is there any specific procedure that's being used in more often than others right now?

Yes, it's targeted at the median nerve procedure, as well as digital nerves. Digital nerves is probably the -- quantitatively, the most significant procedure out there, but it's being used in a whole host of procedures, including cranial, facial, , and even prostate nerve repair. But clearly the hand surgeon is the surgeon using it the most at the moment.

And the CE mark approval that you're expecting in Europe, is that going to be for essentially all the same indications then?

Yes.

OK, and just one quick question on your LifeSciences business. Are there any other projects underway with any partners there that we should look for in the coming months?

Yes. I don't know if it's coming months or coming year, but yes, I mean, our focus for the last year has been to drive that neurosciences business, and we've expected, and continue to expect, the greatest impact on LifeSciences going forward to be the impact of Infuse, as well as the impact of our Integra Dermal Regeneration template.

That being said, we've probably been less active than we would have liked to have been in alliance activity. And actually, toward that end, early this quarter, we brought on a new Vice President of Business Development to grow that side of the business. As you know, Integra does a lot of things, and we're very aggressive. We've probably been more aggressive on our acquisition strategy on the last 12 months than we have in our alliance activity, and I think we've gotten to the size as an organization that we want to -- and can do both.

So yes, I would be disappointed if we did not in the coming 12 months announce an additional one or two significant strategic alliances to get the growth in that division more in line with our overall corporate objectives.

Great. Thanks a lot.

Thank you. Our next question is also a follow up coming of Adams, and Hill. Please state your question.

Yes, Stuart, one quick follow up. Did you see -- and it probably is not evident in your numbers yet, but any pick up from the recent indication expansion for your Dermal Reneration Template in the plastic and reconstructive surgery, and if not -- where do you kind of -- where does J&J stand there and how do you see that rolling out in '03?

OK, I think you said pick up -- to the extent that there was a pick up, it was not significant. That business is growing, we're pleased with the performance. I think it's grown over the last three years at about 20 percent per year in J&J's hands. We certainly are seeing a lot more activity, but again, the unit sales per procedure are typically $1000 or $2000 compared to burns which are $20,000 to $30,000. So it simply takes a while to see the impact of the new indication.

We're certainly expecting the similar growth to the past in the 18 to 20 percent range for that business going forward into 2003. That's certainly roughly what we've modeled, and perhaps they can outperform that, but I'd say it's early to know whether they can or not.

OK, sounds good, have a great day.

Thank you. For any final questions, ladies and gentlemen, please press one, followed by four, on your touchtone telephone at this time.

Gentlemen, we are showing no further questions in queue.

Thank you, everybody, and we'll look forward to our next earnings call in three months.

Thank you for your participation, ladies and gentlemen. This does conclude today's teleconference. You may disconnect your lines at this time and we hope you have a wonderful day.