Integra Lifesciences Holdings Corp (IART) 2002 Q4 法說會逐字稿

Good morning and welcome to your Integra LifeSciences fourth quarter 2002 earnings conference call. All lines have been placed on a listen-only mode. The floor will be open for questions and comments following the presentation.

At this time it is my pleasure to turn the floor over to your host, Mr. Stuart Essig. Sir, you may begin.

Good morning, everybody. Thank you for joining us for the Integra LifeSciences investors' conference call. As many of you know, I'm Stuart Essig, president and chief executive officer of Integra LifeSciences Holdings Corporation. Joining me today are David Holtz, senior vice president and finance, and Jack Henneman, our senior vice president and chief administrative officer.

During the call we will review the financial results for the fourth quarter of 2002 which we released this morning, the expected impact of our recent acquisition of Radionics (ph), epilepsy and (inaudible) product lines from Tyco Health Care Group, and our forward looking guidance for the years 2003 and 2004. At the conclusion of our prepared remarks, we will take questions from members of our telephonic audience.

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

This presentation is open to the general public and can be heard through telephone access or via live webcast. The replay of the conference call will be accessible starting one hour after the conclusion of the live event. Access is available through March 13, 2003 by dialing 973-341-3080, access code 3609010, or through the webcast accessible on our home page. Today's call is a proprietary presentation of the Integra LifeSciences Holdings Corporation and is being recorded by Integra. No recording, reproduction, transmission or distribution of today's call is permitted without Integra's consent. Because the content of this call is time sensitive, the information provided is accurate only as of the date of this live broadcast, February 27, 2003. Unless otherwise posted or announced by Integra, the information in this call should not be relied upon beyond March 13, 2003, 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 involve 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 risk factors included in the business section of Integra's annual report on form 10K for the year ended December 31, 2001 and the information contained in our subsequent filings with the Securities & Exchange Commission. Those forward-looking statements are made based upon our current expectations and we take no duty to update information provided during this call.

For those of you not familiar with Integra's operations, we develop, manufacture and market medical devices, implants and biomaterials for use in the diagnosis and treatment of neurosurgical, soft tissue and orthopedic conditions. The business consists of two units -- the Integra Neurosciences segment and the Integra LifeSciences segment.

The Integra Neurosciences segment comprises our businesses that primarily sell directly to health care providers. Integra Neurosciences is a leader - is a leading provider of implants, devices and systems used in neurosurgery, neurotrauma and related critical care. A marketer of instruments and other devices used in surgeries and a distributor of disposables and supplies used in the diagnosis and monitoring of neurological disorders.

The Integra LifeSciences segment includes the businesses that primarily sell through intermediaries such as strategic partners or OEM customers. The Integra LifeSciences segment develops and manufactures a variety of medical products and devices, includes products based on our proprietary tissue regeneration technology that are used to treat soft tissue and orthopedic conditions. We have partnered with market leaders for the development and marketing of most of our Integra LifeSciences products.

In the fourth quarter of 2002, we achieved record income, revenues and operating cash flow. We reported GAAP net income of $25.4 million, or 83 cents per share for the fourth quarter of 2002 compared to GAAP net income of $17.6 million or 56 cents per share in the fourth quarter of 2001. For the full year 2002, we reported net income of $35.3 million, or $1.14 cents per share compared to net income of $26.2 million, or 94 cents per share for the full year 2001.

As we will discuss in greater detail later, our GAAP net income for 2002 and 2001 reflects the recognition of deferred tax benefits of $20.5 million in the fourth quarter of 2002, and $11.5 million in the fourth quarter of 2001. For ease of comparison, we also report our 2002 and 2001 financial results on a fully taxed basis which reflects a 35% effective tax rate in all periods. Fully taxed net income for the fourth quarter of 2002 would have been $4.9 million or 16 cents per share compared to fully taxed net income of $3.7 million or 12 cents per share for the fourth quarter of 2001.

For the full year 2002, fully taxed net income would have been $14.8 million or 48 cents per share as compared to fully taxed net income of $9.9 million or 34 cents per share in 2001.

Please see the table at the end of this morning's press release for a reconciliation of GAAP net income and earnings per share to fully taxed net income and earnings per share for all periods. Total revenues in the fourth quarter of 2002 increased to $35.3 million, a 41% increase over the fourth quarter of 2001. All of this increase is attributable to growth and product revenues which increased by 43% over the prior year quarter. Sales of recently acquired product lines and increased sales of existing products contributed to the growth in product revenues.

Sales of product lines acquired in 2002 accounted for $5.1 million of the company's product revenue growth. Excluding sales of product lines acquired in 2002, fourth quarter product revenues grew $5.2 million or 22% over the prior year quarter. Both our Neurosciences and LifeSciences segments experienced revenue growth in the past quarter. Our Neurosciences segment led our overall revenue growth in the quarter as its product revenues increased by 52% over the fourth quarter of 2001.

Excluding sales of neurosciences product lines acquired in 2002, the neurosciences segments fourth quarter product revenues increased by $5 million or 28% over the prior year period. Sales growth in the DuraGen Duragraph (ph) matrix, the NeuroGen (ph) Nerve Guide, and the selector and dissector on ultrasonic surgical aspirators accounted for most of this increase.

Product revenues in our LifeSciences segment increased 16% over the fourth quarter of 2001. Excluding sales of LifeSciences product lines acquired in 2002, the segment's fourth quarter product revenues increased by $200,000 or 4% as an increase in tissue repair product revenues was offset by a decrease in other product revenues. Consolidated gross margin on product revenues in the fourth quarter of 2002 was 58%, and included $200,000 of inventory fair value purchase accounting adjustments for acquired inventory sold during the quarter. Excluding the affect of this judgment, the consolidated gross margin on product revenues was 59%. For the full year 2002, consolidated gross margin on product revenues was also 59%, one percentage point lower than our previously stated target for 2002 and equal to the rate reported for the full year of 2001.

Other revenue, which consists of development funding from strategic partners and government grants, licenses and distribution revenues and royalties earned from the licensing of technology decreased by $144,000 from the prior year quarter to $1.2 million in the fourth quarter of 2002. Consistent with the growth in product revenues, consolidated total other operating expenses, which exclude cost of product revenues but include amortization, increased 37% to $14.3 million in the fourth quarter of 2002 compared to $10.4 million in the fourth quarter of 2001. Sales and marketing expenses increased 32% to $6.8 million, as we completed the expansion of our domestic sales force to 63 sales reps in 2002 and increased our European direct sales and marketing infrastructure after the acquisition of NNT Neurosciences last summer.

Research and development spending increased 18% to $2.3 million in the fourth quarter of 2002 as an increase in research and development expenditures in the neurosciences segment offset a decline in research and development in the LifeSciences segment. General and administrative expenses increased 72% to $4.8 million in the quarter reflecting among other things, ongoing general administrative expenses in businesses acquired during 2002.

In late October 2002, we acquired Paget (ph) Instruments, a marketer of instruments and other devices used in reconstructive, plastic and burn surgery for $9.6 million and cash. Paget generated $1.1 million of product revenue during the remainder of the fourth quarter. In December we launched a project to consolidate Paget's operations from its Kansas City facility into our New Jersey distribution center. We expect to complete this consolidation before the end of March. Paget's gross margins are similar to those we realize on our neurosciences products. The acquisition broadens our existing customer base and gives us access to new market segments in which the market or other products such as the NeuroGen Nerve Guide.

The Paget sales force which will grow to eight by the end of this year is already trained in selling the NuraGen product in addition to Paget's established product lines. In December, we acquired the epilepsy electrode and neuro-shunting (ph) product lines of the Radionics division of Tyco Health Care Group for $3.6 million in cash. Through this acquisition, we added epilepsy electrode products to our neurosurgical product lines, as well as several differential pressure valves to treat hydrocephalous, including the equaflow (ph) and contour flex valves. The acquired product lines generated sales of approximately $75,000 in the last two weeks of the quarter.

Going forward, we estimate that the net effect of the acquisition will be to increase product sales by approximately $350,000 per quarter, compared to periods before the acquisition. We assumed no facilities or employees in connection with this acquisition and are in the process of transferring manufacturing of the acquired product lines to our facility in Biat (ph), France. The Biat plant, which was acquired as part of the NNT Neurosciences acquisition, manufactures and distributes shunting, catheter and drainage products, and is an important part of our continental European operations.

In January, 2003, Premier, a strategic alliance of the nation's leading hospital and health care systems selected Integra as a national supplier for Premier's neurosurgical products contract. We believe this contract award represents a significant opportunity for us to offer our broad neurosurgical product line to a larger audience.

I will now turn the presentation over to David Holtz, our senior vice president of finance, who will provide more information regarding recognition of our income tax benefit and our cash flow from operations.

Thank you, Stuart.

In the fourth quarter of 2002, Integra recorded a $20.5 million income tax benefit which primarily reflected the estimate of the additional tax benefits we expect to realize through the future use of our remaining net operating loss carried forward. This is in addition to the $11.5 million income tax benefit we recognized in the fourth quarter of 2001. We reduced our 2001 consolidated tax liability by $2.9 million through the utilization of the net operating loss carry forwards and expect to reduce our 2002 consolidated tax liability by $6.4 million.

At the end of -- at year end, we have a remaining deferred tax asset of $25.2 million, which will allow us to continue to reduce significantly our future income tax liability through the utilization of these assets. Because we have already recognized their value, the actual use of these tax benefits will not affect our current and future tax rate for financial reporting purposes. Excluding these deferred tax benefits recognized in 2002, our effective tax rate would have been 35% for the full year. In 2003, we expect to report an effective tax rate of 35% to 36%. As of December 31, 2002, we had cash and marketable securities of approximately $132 million, and we reported net interest income for the quarter of $700,000.

For the full year, 2002, we generated cash flows from operations of $32 million, more than double the prior year. Our operating cash flows reflect strong operating results, improved working capital management, and the utilization of our deferred tax assets. In 2002, the company used $25 million of cash in business and strategic acquisitions, and in the fourth quarter, we used $1.8 million of cash in the repurchase of common stock.

In the fourth quarter of 2002, we generated $11.5 million in cash flow from operations. We reduced our inventories to 183 days on hand and our receivables improved to 53 days of sales outstanding. The weighted average common shares outstanding use for the calculation of diluted earnings per share in the fourth quarter of 2002 was approximately 30.7 million shares.

Now let me turn the call back over to Stuart.

Thank you, David.

As I have stated on previous calls, our management team regularly seeks external opportunities for growth. And any such opportunities that we consummate would affect our results going forward. It is the top priority of our management team to complete significant and accretive transactions this year and next. However, the forward-looking guidance that we have provided and will now update does not reflect the impact of any such future business acquisitions or additional strategic partnerships.

We expect that product revenues will total approximately $33.5 million in the first quarter of 2003. Other revenues are expected to be approximately $1.5 million in the first quarter. The company's guidance for the first quarter of 2003 is for total revenues in the range of 35 to 35.5 million dollars. The company expects total revenues in 2003 to increase to between $142 and $147 million. We are also introducing our preliminary guidance for 2004.

Total revenues for 2004 are expected to be in the range of $160 to $170 million. Consolidated gross margin is expected to increase from 59% of product revenues in the fourth quarter of 2002 to 62% of product revenues for the year 2003 and to 64% of product revenues for the year 2004. Earnings per share for the full year of 2003 excluding the potential for an in process research and development charge related to a future milestone payment are expected to be within a range of 73 to 77 cents per share.

First quarter 2003 earnings are expected to be 16 cents per share. We currently anticipate making a one-and-a-half million dollar milestone payment in the third quarter of 2003 in connection with the neurosensor monitoring technology for cerebral blood flow. We expect to classify a significant portion of this milestone payment as an in-process research and development charge. Earnings per share for 2004 are expected to be within the range of 93 to 97 cents per share.

I would like to remind everyone that I will be presenting at the Lehman Brothers health care conference in Miami next Tuesday, March 4 at 10:45 a.m. You can listen to the live presentation or replay via webcast that can be accessed from the presentations page of the investor relations section of our website.

This concludes our prepared remarks. I will 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 and comments. If you do have a question or comment, please press the numbers 1, followed by 4 on your touch tone telephone at this time. Again, that's 1, followed by 4 on your touch tone telephone. Please hold while we wait for questions.

The first question comes from Mr. Davidson (ph) of Piper and Jaffray. Please state your question.

Hi. Good morning.

Hey, Scott.

Stuart, in the press release, you reference some things that caused some negative margin variances in the LifeSciences business during the quarter. Can you go into more detail as to what happened and what we should expect going forward?

Yeah. These were truly one time events. In particular, keeping it very simple, we lost a valve on one of our freeze driers and couldn't make one of our products for about eight weeks. The impact of that is we could not absorb any overhead into inventory and we ran the inventories down of that particular product through the end of the year. Since the beginning of the year, we have actually run ten batches and have built the inventories back up, we will likely over absorb in the first quarter. It's not a trend.

Were there any lost product sales, or were you able to manage it with the inventory.

There was no lost product sales.

Thanks. One brief follow-up, but also on the gross margin side. Looking ahead to '03, it looks like you're not looking for tremendously large increases in gross margin, can you talk about maybe what's going to keep that from being, you know, a larger increase and relative to the guidance for '04, what are the key drivers that would result in the increase that you are looking for there? Thank you.

Okay. Just to clarify and make sure we were clear, we are expecting to grow our gross margin from this year which came in at 59% to 62% in 2003. So, I just want to be clear, we're expecting a 3 percentage point increase in the gross margins. Into 2004, it's an additional two percentage points. We're expecting reasonably significant gross margin expansion over the next two years.

For the most part, what's impacted the gross margins in the last year or two, was we have bought product lines with lower gross margins than the corporate gross margins. The way we then recover that is generally by closing down the plant and merging it into one of the existing plants. So, for example, the Radionics lines that we acquired, we are only able to book a gross margin at the moment of 40% to 50% on those product lines, but we picked up zero people and zero overhead. Once they're up in running in Biat, which we expect to be in early April, that's going to become absorption of overhead and incrementally a very high gross margin.

This quarter we are shutting three plants, and if you include that move from Radionics to Biat. We've also announced the shutdown of our Exton (ph) plant and the merger of the Exton facilities into for the most part our Puerto Rico plant and the shutdown of the Paget plant and the merger into our Cranberry (ph) facility.

By the end of the year, we'll be consolidating space, not shutting anything down, but consolidating space between the corporate research center, which sits about four blocks away from our Camino (ph) facility in San Diego. So, as you know, we have tended to buy smaller businesses and so there's a significant savings from consolidating those facilities into a common area.

Great. Thank you very much.

Our next question comes from Bill Plavenic (ph) from First Albany.

Good morning.

Good morning.

I was wondering if you could give us a little color. You said that DuraGen, selector and NuraGen did well in the quarter. Just a little color on what type of run rate we're up to in some of those product lines. Can you quantify the increase in the selector and dissector due to the new indications?

A couple of things, we are not and have not been for about a year now breaking down the individual products within our segments. The principal reason for that is competitively, we just as soon our competitors not know our run rate in particular of the fastest growing products. We do break out in the press release, as you know, the neurosciences and the LifeSciences segment. We will post a spreadsheet on the web site to give you a greater level of detail down to the neuroICU, neuroOR, and other neuroproducts.

We continue to have significant growth in DuraGen, NeuroGen and the ultrasonic aspirators. Most of the growth in ultrasonic aspirators in the fourth quarter came from substantial capital sales. And as you know, on prior conference calls, we bemoaned the first half of the year lack of capital. We came back dramatically in the fourth quarter with in particular ultrasonic capital. One of the reasons we have given what I would describe as cautious first quarter numbers as opposed to another substantial growth off of the fourth quarter is we don't want to pre-anticipate a continuation of such strong capital sales. We will, however, get the benefit of the disposables from all of the ultrasonic aspirators that we have sold.

Okay. Then, if we look at NeuroGen, I was wondering if you could -- I know you don't want to give out revenues and what have you, but I think we got color on last fare on the number of units year to date and reorder rates. I'm trying to figure out what traction is for that product in the marketplace.

Traction is good. We have had 1200 implants of NeuroGen nerve guide since the launch in the United States. We got our CE mark just recently. We haven't started selling yet in Europe, but we have quite a bit of enthusiasm for the product in Europe. In the U.S. alone, 1200 implants. Best estimate, there are $140 -- 140 accounts who have purchased NeuroGen. We never give a reorder rate because it's too early to know, but I'm happy and we have not had significant falloffs of strong users.

Okay. That's it. I'll jump back into queue. Thanks a lot.

Thanks, Bill.

Our next question comes from Jason Bedford (ph)of Adams Harkness Hill state your question.

Hi, guys, I have a couple of quick questions. Stuart, when will you sell NeuroGen in Europe? Is that something that will come in the next month?

Yeah. I would say it should happen during the second quarter. There's about a six to eight week scale up that we have to get to have it available in our -- well, A, to have the labeling finished, now that we have the final labeling from Tuve (ph) and then have it in enough warehouses to launch it. I would say that you would see some impact in the second quarter. You wouldn't see any in the first quarter now.

On the Integra scanner, are you seeing any pickup from the expanded selling effort in J & J and the expanded labeling?

I will say this quarter similar to what we said in prior quarters. J & J continues to do a good job with the product. They have been able to grow consistently at about 20% a year. I don't think we see any change either upward or downward in that trend. Definitely the expanded labeling is helping. But as I cautioned on previous calls, you sell a lot more smaller cases. So, it takes a while for that to build up and hit the numbers significantly. That being said, expanded labels are helping. We see a lot of use in plastic and recon. There's an enormous interest in the product at burns now. Some interest outside of recon in other areas. So, I'm very positive on skin, but I wouldn't want to blow it out of proportion. I'm very confident in the 20-plus percent growth.

Super. Can you give us an update on R & D. Are the cranial plates still on track. Can you give us a flavor for what new product introductions we'll see in the next year or two years?

Absolutely. As you know, one of our objectives have been to have faster turn around on our 5-10K products. I think we have always been effective in launching tissue engineered products and products that the market is enthusiastic about.

We have only in the last 12 months really focused on first reorganizing and then improving efficiency of our R & D group as it relates to product lines and product line extensions of our products like Camino, Saventrix (ph) and the drainage products. What I would say, and I will encourage you all to come and visit our booth at the AA & S in April. We have been extremely effective in the last four months in launching quality products accepted by the market quickly. An example of that is the Homatic (ph) product that was launched after a delay of what I would describe as inefficient R & D management. That product is both now the fastest growing and if it is not quite yet but probably will be this quarter the largest drainage product.

We have taken substantial business from the competitors. It's a very high margin product. That's the example of the ability to grow our existing product lines not just the things like DuraGen and NeuroGen. So, in the pipeline, we -- I'll just rattle off some of the key objectives in the first and second half of this year. We expect a launch another generation of drainage products, perhaps at the AA & S, if not then during the summertime. Our new endoscopy balloon that we acquired from NNT that we're bringing through product development at Integra.

In the second half of the year, we expect additional Lycox (ph) products. I'll say the research group that we acquired when we acquired GMS has proven to be very effective and enthusiastic. We see a nice pipeline of Lycox products both in Europe and in the States. We have I guess it was just this last quarter launched finally and effectively, the combined Camino/Lycox bolt that allows the users to now drive both a Camino catheter and a Lycox catheter through the same about your hole into the brain. We will launch what I think is the once and for all, improved True-Tac (ph), which as I think you know is an example of our significant turn around in the R&D efforts. We have had substantial pickup in True-Tac, but with the new version of True-Tac I think we will see the product take off, and that's in the second half of the year.

2004, the key launches are our Novis (ph) neurosensor blood flow monitor. You will see from the forward looking guidance we expect to achieve the milestones this second half of this year on track, which means a launch of the neurosensor in the first half of 2004. We're on track with our next generation selective ultrasonic aspirator and then in the second half of 2004 again on time, a cranial plate and screw system and some additional neuromonitoring technology. So I think we have a really nice pipeline of products, and if anything, we have tended to under promise and over deliver in this area.

Okay. Great. Sounds good. Thanks, guys.

Our next question comes from Gabor Wagner (ph) from Cheney (ph) Capital. Please state your question.

Hi. I'd like to get a sense of your cap ex plans for '03 and '04. Then I have a couple of other questions as well.

Our capital expenditures anticipated in 2003 and 2004 are somewhere between $4 million and $5 million a year.

And also in terms of the revenue guidance, could you perhaps indicate which products, if not individual products, which product areas are likely to be the main drivers of this growth?

Certainly in 2003, we'll continue to see the trend that the neurosciences product lines, so the group that we label neurosciences will drive the growth in our business. Last quarter we began a process of revitalizing the growth in our LifeSciences product. We talked about that on the last conference call. We brought on a vice president of business development, and we have a number of strategic alliances under way that we would hope to announce this year which will allow our LifeSciences business to begin to track with our growth of our other product lines.

If we can be faulted for anything in the last year or two we have been very, very focused on growing our position in neurosciences, and that has taken most of management's resources. I think the results are dramatic but on the other hand, we have not had as much effort in growing our LifeSciences business. We have gotten the size of a company where I think we can do both well. One of our significant goals for 2003 is building back our pipeline of alliances on the LifeSciences side.

Within neuro which product areas are the largest incremental revenue contractors, do you think?

Within the neuro, the neuroOR products DuraGen, NeuroGen and the acquired product lines will be the significant drivers of growth. I wouldn't underestimate, though the impact of Lycox. We didn't talk about it much on this call, but we're quite enthusiastic about the opportunities for Lycox. We sold 12 Lycox monitors last quarter. So, we continue to be on track. That's in the U.S. alone. So, we continue to be on track with expanding that technology and driving it into the neuroICU.

Shifting track a bit, you generated something like $30 million of free cash this year. If I'm calculating correctly. You are authorizing $15 million of incremental share repurchases. I'm wondering why you are not perhaps getting more aggressive on share repurchase in these valuations?

Several things. First of all, we generated $32 million of GAAP cash flow last year, and yes, we throw off a lot of cash. We have authorized a share repurchase program. Why is it not larger? We just -- I think we believe there's -- that was the right number to do, if we're successful in repurchasing those shares. We can always go back and consider more. The truth is, we see significant opportunities for acquisitions. We think the best thing for our stockholders will be to continue to do these acquisitions. We bought roughly $25 million worth of assets last year, and certainly hope to continue the trend of our significant acquisition activity.

The final thing is on Enfuse (ph), where your collagen sponge is a component, do you have any new color?

No. We had a significant contribution from our absorbable collagen sponge in the fourth quarter. It is part of our reported segment that is tissue repair in the LifeSciences segment. That performed well last quarter. And it was offset to some extent by our older other medical products in terms of performance in the LifeSciences division. Remember, we have given guidance to have a modest 2003 in the ACS sponge, not because of the performance of that product in Medtronics' (ph) hands, but because of a significant pipeline we did before the launch. So, at the moment, I don't have anything more to say. We really don't have much input into the end marketing of that product, nor much knowledge of how Medtronic is doing with it. I would actually refer your questions to Medtronic or Wyeth on the actual performance of the product. We expect it to be a significant prosecutor, and after --contributor, and after working down some of the inventory in 2003, we expect it to be a significant contributor in 2004.

Thank you.

Our next question comes from David Ansom (ph) of Vector (ph) Securities. Please state your question.

Good morning. I'm just wondering if you could comment qualitatively on some of the neuroICU monitoring products. If you could talk about sort of the reaction in Europe to the Camino SPM. I guess you elaborated a little bit on Lycox and maybe if you could elaborate more on what you see for '03 and '04 in Lycox and Camino SPM as well.

A couple of things. First of all, Lycox again in Europe, Lycox is extremely strong already. So, there it's driving a leading market share. In the United States, as you know, it continues to be a missionary sell, but if you talk to our accounts, there's a high degree of accounts that use it as a regular part of their protocol. We have had published protocols that make it easier for a new hospital to actually know how to use the information that comes out of the Lycox monitor. So, the catheter sales continue to be extremely robust. And as we grow both the monitor and the catheter sales, we just continue to see penetration.

The other big advantage of Lycox and if we continue to see strong growth in our ICP monitoring business, as you recall last quarter, we had a significant pickup -- sorry, third quarter and continued into fourth quarter. We had a significant pickup in catheter usage. We think to a great extent, we think that has to do with the renewed interest in advance monitor in the salespeople talking about Lycox. It's driving not just Lycox sales but conventional pressure monitoring sales as it relates to the SPM.

We launched the SPM as you know last quarter. There's been quite a bit of interest in the product both in Europe and in Asia. I don't believe it's yet been introduced into Latin America. But the main advantage of the SPM, is going to come in catheter sales. Remember, the point of the SPM is to introduce a monitor at a much lower price point, typically around $2500, than our MPM monitor, which is about $10,000. That's not a product at the moment for sale in the U.S., but rather for sale outside the United States. So, as we shift SPM's into market, we get a small capital impact on the numbers, but no matter how much we shift, $2500 is not going to impact the numbers. What it is going to impact on a run rate basis, the 15 to 20 catheters a year that that general rates at $300 a catheter. But the pickup in SPM qualitatively has been good. I say between that and the Saventrix monitor overseas we have relatively low priced monitors that should grow the business.

I just want to be clear that I understand sort of the strategy on building the pipeline on the LifeSciences business. Are you going to look to build the pipeline through acquisitions or combination of acquisitions, and leverages off of the partners to -- leveraging off of your partners to continue R & D expenditures to add indications. I'm wondering if you could elaborate on what's the strategy to bolster the pipeline there?

To be clear about what the LifeSciences business is. We have been aggressively acquiring companies in the neuro area. These are small companies. Typically, some proportion of what they do is outside of neuro. That is important business, not because it's strategically important, but in a small company, absorbing overhead in a plant, and therefore helping to drive the gross margin is important. We report those non-core revenues in the LifeSciences segment under other medical. So, it's not surprising that that other medical product line has tended to be flat to down because we don't honestly invest in it. Now, why don't we divest it?

Well, it's absorbing overhead. We make money selling those products. But it does hurt to some extent our growth rate in the LifeSciences segment. Now, in the tissue engineering segment, that has been growing strongly. And in fact, year over year, the growth in the tissue repair segment was roughly 15%. That is because our strategic partners are driving products like the Integra regeneration, the absorbable collagen sponge. We are looking to do strategic alliances to help facilitate the growth of that tissue engineering business. So, all of the energy in business development is going into finding partners whether they be in orthopedics, spine, cardiovascular, other areas, general surgery, to sell more tissue engineered high margin come general products.

If we're disappointed, it's not with the other medical products performance. Those are legacies of things that are wired that get reported someplace. It's tissue engineering that we have focused our effort on DuraGen and NeuroGen and pipe pipeline of tissue engineered products, we probably didn't do enough to have partners to drive the business. What we want to do is get the tissue engineered sector growing in the 20% north range. That will then get it at or above the levels that would be acceptable to keep the overall growth where it should be.

Okay. Thanks, Stuart.

Thanks.

The next question comes from Alex Arrow (ph) of Lazard. State your question.

Thanks. Hi, Stuart.

Hey, Alex.

You mentioned the combined Camino/Lycox bolt that was an addition to the neuro line. Can you help us what is the clinical indication? Why is it an advantage to have a combined Camino Lycox bolt? What is that going to do?

In its simplest form it allows the patient to be treated with only one hole drilled into their head rather than two. So, from an infection, from a trauma perspective, it's much better to go through one hole than two. It's kind of obvious. Now, why do they need both parameters? First, the accepted standard right now is to -- so that the trauma guidelines state clearly that the neurosurgeon should measure pressure in the brain. They can do that in one of a number of ways. They can do it with the Camino, the Saventrix, or external ventricular drainage technology. But we have been persuading him and the literature over 500 publications in Europe and now many coming in the U.S. say that it's also very important to measure oxygen in the brain.

So, one of the things that we felt was very significant was to not force the surgeon, to not make it impossible for them to do oxygen monitoring except through a second hole. So, our engineers have now provided a way to do it through the same bolt.

Lycox measures oxygen, Camino is a pressure measuring portal?

You can also measure temperature which is important for things like hypothermia, and you can drain fluid which means that you can treat the patient through the bolt as well.

Right. What is the -- between measuring and treating, if you are going to let off intra-cranial pressure in a trauma patient in the ICU, which I believe is the main market for this, wouldn't measuring it with the bolt to the brain simultaneously treat it anyway? Under what circumstances would you measure it and have to make another decision about treating it?

Well, sometimes what you want to do is measure the pressure to monitor whether the pressure has gotten too high or whether the oxygen has gotten too low, but you are not yet ready to remove the fluid.

Okay. Okay. What does this do for the competitive situation with the neurotrend. Lycox I understand goes head to head with neurotrend. Now that you have a combined unit is that something that neurotrend does not have?

I think the competitive position vis-a-vis neurotrend is exceptional. It's not our practice to talk about our competitors' product, but I would encourage you to talk to doctors about the relative utilization of our product versus theirs. I believe we have at least five or ten times the number of sites using Lycox versus neurotrend.

There's nobody -- there's nobody else out there besides you two?

Correct.

Okay.

There's in one else in the United States. In Europe, there are other people who have various monitoring technologies.

Okay. The last question, again, you know, it's kind of a competitive question, but I believe Gore-Tex is still holding onto the lead, maybe it's a narrowing lead for dural repair. Is DuraGen -- is there going to be an inflection paint where physicians will say it's not a good idea to believe a permanent non-absorbable device in the dural membrane. Anything that you can tell us. Is LifeCell (ph) an item or is that off the radar screen?

On the first question, there is only about 5% or 10% of the procedures that cannot be used -- that our product can't address. Those are certain places that are high pressure in the area around the brain. Other than that, we believe our product is useful in every one of those procedures as per our FDA labeling. So, we think we have great opportunity as people both learn about the product, and there's still not complete awareness of the product, and then is secondly as people get more and more comfortable using the product without sutures. I think we believe there's great opportunity to still take share from Gore (ph). LifeCell does continue to have sales, but we don't see them as a significant competitor.

Are you closing in on Gore, or is it still a long way to go?

There's no published data on the shares. We certainly see our numbers growing, so we must be closing in. Interestingly, the market appears to be getting bigger, too. As people learn about the ability, for example, if they're really wed to a sutured graft, they may go ahead and put a product in, like the Gore product, and then put our product down in addition to that. So, we have expanded the market as well as surgeons attempt to get a watertight seal.

Above it or beneath it?

You can actually put it in either place, I believe, but I would refer you to the clinical people.

Thanks, Stuart.

Thank you, Alex.

The next question comes from Bill Plavenic from First Albany.

To follow up here, looking at the P & L in the quarter, you had a really night sequential pop in revenues and not a big change in the sales and marketing line. As we look forward, I guess the question is number one, is that a function of the direct reps that you brought on finally becoming productive, number one, and number two, as we move forward, I think if my numbers serve me right here, sales and marketing as a percentage of revenues was under 20% for the whole company. Is that what I should be looking at going forward, is this a one-quarter anomaly?

It is to some extent a one-quarter anomaly. As you know, we spent a lot to some extent of the revenue generation in Q3 and Q4 of last year. So -- sorry, in Q2 and Q3 of last year. You see the ramp that occurred in sales and marketing expense from Q2 to Q3. Obviously, we saw that productivity in Q4. There are additional ramps that you will want to build into your model going forward. In particular, as we grow the Paget sales force, you will see the impact of the Paget sales force. So, you will continue to see that growing, and I will attempt in the next three minutes, as I answer other people's questions to give you a percentage on sales and marketing, but I don't believe the model is 20%, I think it's closer to 22 or 23%. So, you should expect it to ramp with the revenues.

We were delighted with how productive they were in the fourth quarter. And we think -- I think we believe they can continue to be very productive, but frankly, the high level of productivity merits more investment.

Okay. All right. Then, you know, reading through the press release, what would the growth -- product gross margin have been in the quarter taking out kind of these one-quarter anomalies?

Well, we -- you know, let me try to answer your question. We are highly con strained by not pro forma-ing numbers any longer in terms of what we do given the new sec rules.

Right.

So, we try to give plenty of detail so you can do it and analyze the numbers in any way you would like. As you probably note, we tried -- this press release was five pages longer than the usual three, so we can comply with the SEC obligations and at the same time give you enough data to analyze the numbers. Hopefully, you will find that useful. In the quarter, we did have about a $250,000 purchase accounting impact from our acquisitions, so, inventory that was acquired and that we only got to book a relatively low gross margin on.

Okay.

That was the difference between I believe the 58% and 59%. Also in this quarter in the LifeSciences division, we did have what I described in terms of failed lot, and I believe the impact of that was around $300,000. I feel confident that is a one-time anomaly. So, between those two, there's half a million dollars of what I would describe unusual event, but we don't pro forma the numbers in this regard.

Great. Thanks. That helps out a lot.

Our next question comes from John Lundquist (ph) at CIBC World Markets.

Hi, John.

Hi, guys. Great quarter. Most of my questions have been answered. I wondered if you could give us an update on BNP for long bone fractures. Lycox you sold 12 in the quarter in the U.S. Does that make it about 102 monitors for the -- to date in the U.S.? If this is correct, as well as what was the disposal sequential increase for the product line? Can you remind us what the former forecast was for 2003? It looks like you upped the guidance there. My final question is, are you pursuing other indications for the determinal (ph) regeneration template?

Okay. Let me try to answer those in reverse order. In terms of additional indications for the determinal regeneration template, absolutely. We continue to collaborate with Efficon (ph) on expanding the indications for the product into a whole variety of areas, including this last quarter, Q4, opening up a number of studies in the U.S. and Europe for new indications for the product. So, yeah, we have a significant R & D as well as clinical program with Efficon.

In terms of BMP for long bone, I would refer you to Wyeth on that topic. As you know, Medtronic and Wyeth announced an alliance in Europe which will allow the growth of the product in Europe. And in terms of the expectation on timing for the long bone indication, I really can't give you any guidance. All I can tell you is that we are working closely answering all of the questions that the FDA has for both Wyeth and Medtronic on any questions that they have for expanding the various labels in the various markets around the world. We work closely with them, but they drive the process.

In terms of Lycox, as I said, we have not broken out the individual product performance. Lycox in the U.S., I'm struggling to find the numbers, but Lycox in the U.S. was certainly up sequentially, and clearly, that growth came from disposables, since the number of units of Lycox sold versus prior quarter was roughly flat. I don't have handy the number of centers using Lycox, but if you take what we said on the last call and add the 12 that we sold plus probably 5 or 10 more than are on evaluation, we have typically got 20 to 30 out there on evaluation, which we expect to convert. So, you know, there's probably, if the number was 100, 130 or 140 out there.

Okay.

Then lastly in terms of the guidance change, on the top line we increased our revenue guidance from the last time we gave guidance, I believe we gave 140 to $145 million, so we increased it by $2 million. To some extent that includes the impact of the Radionics lines, and I think gives relatively conservative judgments as to what 2003 can be. In terms of our earnings guidance, it had been previously 72 to 63 cents per share. So we raised it by a penny. We never gave guidance on 2004, so we introduced that the first time this quarter, but I believe that's in line with or above whatever few analysts have numbers out there.

Okay. Thank you very much.

By the way, David provided me with the forward looking model. We modeled sales and marketing into 2003 at about 22.5%, and into 2004 at plus or minus 22%.

Thank you, the floor is still open for questions or comments, if you do have a question or comment, press the numbers 1 followed by 4 on your touch tone telephone at this time.

We have a question coming from Roberto Morales (ph) of UBS Warburg.

Just one follow-up question. Most the of the questions have been answered. In regard to the number of salespeople, can you describe what the momentum looks like out there? I noticed that you kept flat from the 63 that you reported on the last quarter.

Okay. You know, the competitive landscape is a bit of a moving target. My understanding is that Cogman (ph) has plus or minus 40 to 50 reps with their broad range of product, and then an additional 25 to 3035 reps sells instruments. Cogman has a significant instrument business that is sold in coordination with their neuroproducts. So, they split the sales force in two.

Okay. In terms of Medtronic Neurotechnologies. Again, we don't know the numbers but our guess they have about 60 sales reps, and additional groups selling their image guided surgery products separate from the group selling Medtronic Neurotechnologies products. We think pound for pound, we have at least the sales presence of the two large competitors in the market.

Okay.

Secondly, in terms of our sales force, as you know, we grew the sales force significantly last year. And from 44 to 63.

Yeah.

One of our objectives this year was to not add a significant number of people, but to get them more trained and get them effective in selling. Now, some of our territories have actually got ton be so big that we have split them, so as of now, we are actually at the 65 sales territories. Some of which are still vacant. But the objective is not to grow the head count this year, but rather to grow the revenue with the head count that we have got. We will consider in 2004 how we expand the group, whether it be more specialists, more clinical educators, more sales people.

Plus, in Europe, remember, we have got approximately 15 sales people. We have grown our clinical education group to 12 worldwide, and our marketing department at the moment is expanding quite significantly. We're adding five marketing heads as we speak to better support the sales force. I think we think the sales force size is right. As we grow revenue, if we have the ability to reinvest in the business, it's probably going to be with more support people for a little while. Don't forget the Paget group is going to grow from four or five to eight. And if they continue to be as successful as at least they appear to be with NeuroGen, there's a good chance to grow that as well.

Just one follow-up, you can mention the number of centers that have -- NeuroGen at the end of the year?

We didn't mention it yet, and if it's in my notes here, I will give it you to. It's around 1200. The reorder rate hasn't changed significantly. It's 1140 active accounts in the U.S.

Okay.

We have it sold in 40 markets around the world.

Great. Thank you and congratulations.

Our next question comes from Ron Zabelli (ph) of Merrill Lynch. Please state your question.

Good morning, guys. Nice quarter.

Hey, Ron.

How are you doing?

Good.

Good.

I'm wondering on your revenue guidance for '03, if I look the midpoint of that, it looks like a 23% increase, does that sound right?

Yes.

And how much of that would you say -- would you consider organic growth?

What we have tried to do, our long term guidance on revenue growth remains 18%. Organic is a very hard thing to define given how many acquisitions we have done, but what we have said is on a long term basis without doing additional acquisitions we believe we can grow the business at 18%. That hasn't changed. What we did for the first time this quarter is provide you guys with a quarterly chart by our two divisions that allows you to analyze the numbers any way you want, back out 2002, back out 2001, and look at the various growths. So, depending upon how you calculate the growth over this quarter over prior years anywhere from 17 to 22%, and going forward depending again on when we do our acquisitions in the -- and the like, you can come up with slightly different percentages. Rather using the organic that led to confusion in the past, we believe the sustainable growth rate in the top line is 18% without doing additional acquisitions.

But what you also said was in the December quarter, your product revenues excluding acquisitions for the previous 12 months was about 22%?

Correct.

That looks like an acceleration from the September quarter from 13%?

Correct.

Okay

It's up significantly from Q3 and above the long term guidance that we have given.

Right. You had indicated you were delighted with the sales force productivity. Would you say there were any other important elements to that acceleration in underlying growth?

I mean, it was across the board in neurosciences. Literally every product line with trivially few exceptions was up dramatically in the quarter. We were really pleased with all of the product lines, as opposed to it being one or the other. That being said, the ones with the biggest impact were DuraGen. We sold a lot of capital in the fourth quarter, which we view as a really positive event.

That's terrific. I apologize if someone already asked this, but what are your plans for further expansion of the sales force going forward?

At the moment, we believe that the 65 sales people is the right number of people for 2003. We did add two that we had not planned to add simply because two territories got so big and we promoted some people, so we had the ability to complete a territory and still have excellently paid salespeople and high quality people. So, we're up to 65. We don't intend to expand that number in the neuro group this year, but we are expanding quite a bit some of the support activities. Five new marketing people, additional clinical education, specialists, and then in the pageant sales force we are going from four or five, which is what we have got right now up to eight by the end of the year, and we have had real nice successes with pageant with NeuroGen already. If they continue to do that, we're likely to go beyond the eight salespeople.

It sounds like you have multiple negotiations under way on the LifeSciences side for new collaborations?

Yes. I am quite optimistic we will in 2003 at least -- announce at least one and maybe a couple of or three deals that will get the tissue engineering side growing more than the 15%.

The pipeline of acquisition opportunities?

It's never been stronger.

Okay.

This environment, this stock market environment that we have got right now, even though I don't like the price of my stock frankly, it's just clobbering other people a lot worse than us. The lack of money for venture capital people means that the companies are finally coming around to the point of view that they're not going to have an up round. They're not going to have a down round. There's no more money. We see opportunities to buy product lines and venture backed companies and public opportunities where there is no interest in mini microcap stocks. I think this is a great environment for Integra. I haven't been more bullish about our opportunity to consummate deals. As you know, we have five deals done last year since the Radionics deal was done in the last month of the quarter. We continue to be bullish will the ability to get four or five deals done a year. We used to say three to four. Maybe we will hit five again. But we should stick to three to four.

Terrific. Thanks a lot.

Thanks, Ron.

Our next question comes from Alex Arrow of Lazard.

Hi, Alex.

One more detail. Would you be willing to comment on the ASP of the Lycox monitor and disposables?

I can't comment on the ASP, because I honestly don't know it but we don't discount very much, if at all. The list price is $2,000, when you add some of the peripheral, it generally comes out to a $14,000 or $15,000 unit. In terms of the disposable, I think the configurations are $425 to $475. We really don't discount it. Occasionally at a teaching institution, we may put an extra monitor in for a period of time or something. We don't really have to discount these things.

So, then you said 12 units in the fourth quarter, so we're really only talking about $150,000 worth of capital equipment for the Lycox line?

Correct. Which is consistent with the path. It's last quarter is about 14 unit, I think we said or 13, and that hasn't changed.

Okay. Thanks a lot.

Thank you.

The floor is still open for questions or comments. If you have a question or comment, please press the numbers 1 followed by 4 on your touch tone telephone at this time. Excuse me, gentlemen, it appears that we have no further questions.

I'd like to thank everybody. I look forward to our report at the end of this first quarter. Thank you.

Thank you. This does conclude today's presentation. Please disconnect your lines at this time, and have a wonderful day.