Integra Lifesciences Holdings Corp (IART) 2004 Q1 法說會逐字稿

Good morning ladies and gentlemen and welcome to Integra LifeSciences conference call. At this time, all participants placed on listen-only mode and the floor will be opened for questions following the presentation. As of now, I present the floor 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 Life Sciences Investors Conference Call. I'm Stuart Essig, President and Chief Executive Officer of Integra LifeSciences Holdings Corporation. Joining me today are Gerry Carlozzi, Chief Operating Officer; David Holtz, Senior Vice President of Finance, and Jack Henneman, Chief Administrative Officer. During this call, we will review our financial results for the first quarter of 2004 which we released yesterday afternoon and our forward-looking guidance for the second quarter of 2004 and the full years 2004 and 2005. At the conclusion of our prepared remarks, we will take questions from members of the telephonic audience. 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 live Web cast. 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 12, 2004 by dialing 973-341-3080, access code 4664385 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, transcription, 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 is accurate only as of the date of this live broadcast, April 28, 2004, unless otherwise posted or announced by Integra, the information in this call should not be relied upon beyond May 12, 2004, the last day that an archived 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, 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 factors that may affect our future performance included in the business section of Integra's Annual Report on Form-10K for the year-ended December 31,2003 and information contained in our subsequent filings with the Securities and Exchange Commission. These forward-looking statements are made based upon our current expectations and we undertake no surety to update information provided during this call.

Thank you Jack. Integra develops, manufactures, and markets medical devices for use primarily in neuro-trauma and neurosurgery, plastic and reconstructive surgery, and general surgery. Our product lines include monitoring and drainage systems, surgical instruments, fixation systems, and the innovative tissue repair products that incorporate our proprietary absorbable implant technology. We recorded net income of $7.4m or $0.24 per share for the first quarter of 2004. Operating income was $11.7m for the first quarter, a 58% increase over the first quarter of 2003. Total revenues in the first quarter of 2004 increased by $15.7m to $52.4m, a 43% increase over the first quarter of 2003. Product revenues increased by $16.3m to $51.4m and other revenues decreased by $600,000 to $1m. Excluding recently acquired product lines, first quarter product revenues increased by $7.3m or 22% over the prior-year period. Further excluding changes in foreign currency exchange rates, first quarter product revenues increased by $6.3m or 19%. Neuromonitoring revenues increased by 6%, primarily as a result of increased sales of our drainage systems. Our operating room revenues increased by 46% as a result of growth in sales of our DuraGen and DuraGen Plus Dural Graft Matrix products and the inclusion of Integra Dermal Regeneration template cells in operating room revenues. Revenues for our instrument product lines increased by 157%, principally as a result of our acquisition of the JARIT Surgical Instrument line and the spinal specialties product lines in 2003. Increased sales of our Ultrasonic Aspirator products also contributed to the growth in our instrument revenue. Excluding recently acquired product lines, revenues from our instrument product lines grew 16%. Our private label product revenue increased by 2%, the increase in revenue is attributable to the absorbable Collagen Sponge we supply for use in Medtronic's infused bone graft product, offset the exclusion of the INTEGRA Dermal Regeneration Template from the calculation. Our gross margin on product revenues in the first quarter of 2004 was 61%, the current quarter's gross margin benefited from strong sales growth in our higher margin products. Total other operating expenses which exclude cost to product revenue but include amortization increased 32% to $20.7m in the first quarter of 2004, compared to $15.6m in the first quarter of 2003. Sales and marketing expenses increased 47% over the prior year period to a $11.2m, as a result of increased sales commissions and expansion of our direct sales and marketing organization. As a percentage of product revenue, sales and marketing expenses remain constant to 22% in both periods. Research and development expenses increase approximately $200,000 to $2.8m in the first quarter, the savings that resulted from closing our San Diego Research Center in the fourth quarter of 2003 were offset by increased spending on the development of new products. General and administrative expenses increased $1m to $5.9m in the first quarter, largely as the result of increases in professional fees. On January 1, we resumed the direct marketing sale and distribution of our INTEGRA Dermal Regeneration Template and another dermal repair products. We are now operating with a fully trained sales and clinical organization of 17, selling all of our Plastic and Reconstructive product lines. Our largest sales force gave us the capacity to sell our Dermal Regeneration products directly from the beginning of the quarter. In January we also acquired the R&B and Sparta Instrument businesses. The R&B instrument line is a complete line of high quality handheld Surgical Instruments used in neuro and spine surgery. We are marketing these products through our JARIT sales channel. This part of product line includes products used in plastic and reconstructive ENT, neuro, ophthalmic and general surgery. We are marketing these product lines primarily to hospitals and physicians through a catalog and a network of distributors.

I'll now turn the presentation over to David Hotlz our Senior Vice President of Finance, who'll provide more information regarding our interest expense, tax rate and foreign currency exposure.

Thank you Stuart. We recorded net interest income of $57,000 in the first quarter of 2004 as compared to $776,000 in the prior year period, this change resulted primarily from interest expense associated with the $120m of convertible notes that we issued in March and April of 2003. We recorded other expense of $70,000 in the first quarter as compared to other income of $349,000 in the prior year period. During the first quarter of 2003 we realized gains on the sale of marketable securities that were liquidated to finance the JARIT acquisition. In the first quarter of 2004, as a result of our strong operating performance, we generated cash flow from operations of $10.9m. As of March 31, 2004 we had cash and investments of approximately $212m. The weighted average common shares outstanding used for the calculation of diluted earnings per share in the first quarter of 2004 was approximately $30.9m. We expect the weighted average common shares outstanding used for the calculation of diluted earnings per share for the second quarter of 2004 to be approximately $31m shares. I noted that the $1.2m increase in income tax expense in the first quarter of 2004 includes the impact of a slight increase in our projected effective tax rate to 36.8% for 2004. We expect our actual cash tax rate to remain under 10% as we continue to use net operating loss carry forward in 2004. It is worth taking a moment to discuss the impact of our foreign currencies on Integra's revenues and costs. We currently do not hedge our exposure to foreign currency risk. During the first quarter of 2004, our foreign currency denominated cost exceeded our foreign currency denominated revenues by approximately $4.2m. We expect this imbalance to continue through the remainder of 2004 and now let me turn the presentation back over to Stuart.

Thank you David. As I stated on previous conference calls, our management team continues to seek out external opportunities for growth and any such opportunities that we consummate could affect our results going forward. It's 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 we'll now update does not reflect the impact of any such future business acquisitions or additional strategic partnerships. We are updating our guidance for total revenues of between $215m and $220m in 2004, and $250m and $260m in 2005. Consolidated gross margins for the years 2004 and 2005 is expected to be 61% and 63% of product revenues respectively. Excluding a potential in-process research and development charge related to a $1.5m milestone payment that may become due in the terms of our product development agreement, we expect our earnings to be within a range of $1.08 to $1.14 per share in 2004, and $1.35 to $1.40 per share in 2005. Our guidance for the second quarter of 2004 is for total revenues in the range of $51m to $53m and earnings per share of $0.24 to $0.25. I would like to take a moment to focus on the expectations for each of our product categories and other revenue for modeling purposes. Based on our total revenue guidance for 2004, we expect neuromonitoring revenues of approximately $48m to $50m, operating room revenues of $79m to $81m; instrument revenues of $68m to $69m and private label revenues of approximately $19m .We expect other revenues of approximately $1m. We expect the private label revenues to decline in the second half of this year. Looking beyond 2004, we expect sales to grow in excess of 25% for the OR products, 15% for the neuromonitoring product lines and an excess of 10% for instruments. We expect private label sales to be flat in 2005, and then resume growing at approximately 15% per year thereafter. Overall, we continue to target long-term revenue growth at 18%. I would like to remind everyone that Integra will be presenting at the Deutsche Bank Securities 2004 Healthcare Conference on May 5, at the Banc of America Securities 2004 Healthcare Conference on May 19 and at the 2004 SunTrust Robinson Humphrey Institutional Conference on May 25. This concludes our prepared remarks. I'll be happy to answer all of your questions. Operator, you may now turn the call over to our participants.

Thank you. Ladies and gentleman, the floor is open for questions. If you have a question at this time, please press star one on your telephone keypad. All questions will be taken in the order they are received, and we do ask that while posing your question, you pick up your handset to provide optimum sound quality. Once again ladies and gentlemen, if you do have a question, please press star one on your telephone keypad. Our first question is coming from Tim Nelson from Piper Jaffray, your line is live.

Hi, Stuart. Great quarter. Can you give us little more granularity on the DRT sales in the quarter relative to your expectations you kind of gave last quarter?

Yes. First of all, as with our other individual product lines, we do not plan to breakout individual sales. That being said, when we took over the product line from Johnson & Johnson at the end of December, we said that we expected to do on the order of $10m this year, so is Dermal Regeneration Template, and further that we expected the first quarter to be weaker because of potential disruptions in the business. The good news is it wasn't weaker. We came through the quarter strong, there was no disruption and in fact our sales team was ready and quite well trained to take over the product. Furthermore, we successfully began the product launch of our Integra Bilayer Matrix, which has had a very nice reception in the market. I can say finally the J&J people are very professional and we had no issues with the transition, if anything, we and they were very focused on making sure that our customers had no disruption of the business.

So that $10m is on the low side is what you are saying?

I think there is upside for the year in that number, yes.

Thank you. You want to give us sort of ballpark of it?

I do not.

Right. Thanks. Good quarter.

Thanks a lot.

Thank you. Our next question comes from Dave Turkaly from WR Hambrecht. Your line is live.

Thanks. Good morning. On the private label side in the quarter I was just curious I know the skin moved up to the OR, and I know that you said that the Collagen Sponge was strong. Was it strong in the magnitude of double of prior year or could you may be give us little more color on why that number was as high it was?

Yes David, we were positively surprised by the overall performance in the private label business this quarter. And as you pointed out, we don't report as seen in private label any more, we report in now -- in our overall products. And so we had a originally modeled when we gave our guidance that we would have a down quarter and in fact, the performance of the quarter allowed us to have essentially a flat or even a slight improvement. That's also allowed us to be more positive about what we think that business will do in the second quarter, although we continue to model in the second half of the year, that segment or that product category will be down. That being said is the number of different factors as we said on our last call, we made a concerted effort in the second half of last year to go back to our OEM customers or private label customers and get across to them that were a quality manufacture and we expect to get better pricing, and so we were successful in negotiating improvements in the trends of pricing, in the minimums, and in an whole host of other contractual benefits across the product line, so not just in one product line. And so for the quarter we saw the benefit of that across several of the different product lines, they being said, probably the think that came in the strongest and surprised us the most on the positive sides was the and again we are not going to comment on individual products, but certainly we read the reports that you guys writer and that looks like that InFuse product is doing very well.

Great and then one other one on the Nerve monitoring side, I think it was a little lower that we are looking sequentially, I think it might have been down just a little bit, but any comment on -- what's the reason is really capital equipment much down, there's something in the quarter were something announced, what should we think about that going forward? Thanks.

No, I will say, look the numbers for nerve monitoring, this quarter were not as good as we had hoped. Remember part of -- I think one of the attractive aspects of our business is when one particular product category is doing well, sometimes another particular category is doing not as well of vice versa, and so this quarter, I don't read anything into it. Nerve monitoring was not as strong as we would've liked. It's not capital we've been selling lots of Camino monitors. I think we've point that out on prior calls, we saw probably on the order 400 to 500 Camino, Licox, Ventrix monitors in the last twelve months. And just a statistic were are up close to a 100 single parameter monitors, again mostly in Europe but really implementing that strategy of having a low cost monitor available outside the United States. So now I really don't read much into it and if you go through the whole particular category was relatively weak.

Okay thanks a lot.

Thank you, our next question comes from Tom from Piper Jaffray, your line is live.

Hi it's this morning.

Hi Tom.

Hi. I want to follow up a little bit on the private label questions and that is without scan and this year, can you just give from a category standpoint, like you do in the other categories, a pro forma growth rate year-over-year?

Pro forma growth rate with out . Let us think about that, and if we can give an answer, we will give it later in the call.

Okay.

Calculate that and if we can come up with something, we can. The thing I will say is in prior quarters before we went direct with skin, we were booking on average about $1m of skin ain trends for pricing to J&J, plus something on the orfer of another $1m or $1.5m of other revenue. And you can see the way our P&L is progressing other revenue we modeled for the rest of the year at essentially zero because we don't expect to get any other revenue since most of that was from J&J. So if you go back with out going is the too much detail here, if you go, but I think, I actually can't answer your question, I think about it. If you go back and add private label plus other revenue last year it was on the order of $7.5m to $8.5m for skin and without talking about specific numbers, we had guided depend on higher for skin this year.

Okay and down in the second half, is that just because pricing improved in second half of last year so it's a tougher comp or is there sometime else going on?

The most significant factor and we have talked about this on previous conference calls is that our contract with Medtronic for cranial plates and screws expires June 30.

Okay.

And we expect to continue to supply them product, but not at the levels that we have supplied for the last two years and part of that was our strategy to have own cranial plate and screw system and if things go as planned, we will be launching our own cranial plate and screw system in the summer after that contract, and the no compete in that contract expires, but we have a friendly relationship with that division and expect to be able to continue to supply them, but we did model to be down, reasonably significantly because of the expiry of that contract.

Okay. And then one other sort of a broader question for your Stuart, new to the story. So, when you add an R&D instrument business or Sparta disposable or the other several that you will add over the next couple three years. Can you give me, you know, in summary of how you leverage that within your sales for instance when you say that this is mostly through a catalog and a network of distributors and there is two in January. Are you just shifting where the sales go from one place over to your place or is there something - - some magic that you put in there, where you can leverage that through your own marketing expertise?

First of all, every deal is different. So, and these two deals are actually very different even though they are small, but let me just talk about it. We have an extraordinary capability of delivering instrument to hospitals through our JARIT sales and marketing organization. Just to give you a sense, they are in over 6000 hospitals in the US. We are the number two instrument company in the United States after and we ship well over a million instruments a year. So, when we bought the R&D product line, we were able to take, what was essentially a couple million dollar a year revenue product line and take and reduce the cost of goods substantially because of our ability to buy products a lot less expensively because of our volumes that we were buying in Germany, sell it through well established sales and marketing organization that has a lot of cloud in sale processing and in the OR already and reduced G&A, because we were able to take this side out completely. So, there is a lot of synergy there and there is revenue synergy there as well because of the fact that, a) we got a much larger sales and marketing organization in that small company and b) we got every major GPL in the United States. So, that one -- there is a lot of leverage and we expect to grow that business in line with not the lower instrument, JARIT's growth rate, but our overall corporate or even in excess of our overall corporate growth rate. So, well in excess of 18%.

Thanks. And just as you are going on that one and you are giving great detail here, what is the timing of those kinds of leverage. Is that over the period of a quarter or half? When you do get to your optimum on these acquisitions?

Again, it depends a little bit on the deals. That is a pretty easy deal for us. JARIT did it essentially with guidance from corporate, as apposed to even requiring much emphasis here in Plainsboro and that being said, you would expect to get the topline leverage after about six months and the bottom line is done. You know, now it takes about 6 months to turn the inventory. Remember whenever you do an acquisition you get an inventory step up, you got to sell it, and then, you have to buy new inventory. But we are now placing purchase orders through to German vendors for JARIT, for 85% of our non-JARIT instrument lines. So, I mean that project is done now and you will start to see the benefit of it in our gross margin, probably second quarter, but certainly third quarter.

Thanks.

Thank you. Our next question is from Ryan Rauch from SunTrust Robinson Humphrey. Your line is live.

Good morning Stuart. Congratulations on a good quarter.

Thanks Ryan.

Can you just walk us through guidance unless I just didn't read the press release right, I mean what is different with your guidance and than what you gave on the February 27 call. It appears exactly the same to me. So, can you just, sort of explain? Is there anything different in your guidance and then I will follow up with a couple more?

First of all, guidance is unchanged. All we did was use the some magic words from the perspective of saying we are updating it, but the update is unchanged.

Okay. And then for the second quarter, you never gave second quarter top or bottom line guidance, but $51m to $53m, is there any -- are you just being conservative there. If you just did $52.5m are you expecting a sequentially down revenue quarter or there is something specific to the June timeframe seasonality etcetera? Can you just walk us through your Q2 guidance?

Sure. First of all, no we are not expecting a sequential down quarter, I think you ought to know that we had a $1m of other revenue this quarter, which will now - - that will be zero next quarter or close to zero, and therefore, product sales will make up for other revenue. So, that's part of perhaps what you see as the change in the quarter. I wouldn't, I don't like to describe our guidance as either conservative or aggressive, it's just what we believe we'll do, and so we believe we'll do in that range, but no, we're not sort of giving any kind of subtle hint that we expect a down quarter, no it's quite the opposite, we expect a good quarter. So, I guess that's as good an answer as I can give. In terms of the other changes, I guess, I'd say we fine tuned the different product lines, so the reality is the neuromonitoring came in later than we expected in the first quarter, but the OR and the instrument came in stronger, and so we gave the break down of those, you can see we were just a little more aggressive in the private label, in the instruments, and in the OR, a little less aggressive in the neuromonitoring, but the changes in our guidance from last quarter are extremely subtle.

Okay. And then on your gross margin guidance, Stuart, I mean you just did a little over in gross margin, that's your guidance for '04. The euro is heading in your direction, are we supposed too assume you don't expect to see any gross margin expansion throughout '04, I mean, and if the euro stays where it is today, you mean that should be a positive impact if your guidance is still based on 1.28 exchange rate?

Okay. A couple of thoughts. First of all, we know and we're sensitive to the fact that there was a significant improvement this quarter over the last in gross margin, and so before we sort of take a victory lap, we thought we had to let it season a little bit. We had a very strong gross margin. It was actually higher than what we'd guided since we guided last quarter to 61 for the year and said we expected sort of a gradual ramp from 60 to maybe on the order of 62 by the fourth quarter. The good news is that we beat that number and I don't want to turn a good into bad by then saying, well next quarter we expect that to go up a lot more and then disappoint anybody. I think a reasonable number for the year is 61, if we have a better quarter next quarter that will be great and we'll have reason to talk about it going on.

Okay. And then finally on the SG&A line, I mean, do you say that the $1m increase quarter-over-quarter was professional fees and some of the sales and marketing associated with commissions that build out of Padgett, but it appears you only added one person to your Padgett sales force. Can you walk us through the SG&A increase with a little bit more detail? And is this the normalized rate we should assume going forward or is there some synergies or cost saving potential going forward?

Yes. I like to make a distinction between sales and marketing and G&A, in the sense that sales and marketing spending we view as a positive and to the extent that we've an opportunity to invest in our sales and marketing organization and still meet or exceed our financial objectives, we're going to do that. So, we came in for the first quarter with sales and marketing of about $11.2m, which frankly was a little less than we expected. I remember, when you measure the sales and marketing expenses, there is a certain amount of timing involved. So, yes we are now at a full complement, our plastic and reconstructive growth, but some of those people came in during the quarter, some of the expenses in terms of travel hit during the quarter, we had sales meetings, we had a number of big shows, similarly in Neuro we're almost ramped up to our full complement of 80 plus, management of 10, plus clinical of 10. So, a 100 Neuro people, but as they roll into the year and they start to hit steam and grow to topline, just think about the impact of commissions of a 45% increase year-over-year in our OR products, that's significant and we're paying those people more because they are delivering more. So, sales and marketing was frankly a little less than we had anticipated and we would expect that to continue to grow throughout the year. My guess is it will cap out at about a 21% of sales for the sales and marketing line. That's what we are targeting and the good news is since other revenues going forward are diminimus, you can now start to really measure our gross margin and our sales and marketing expenses as a percentage of total revenues. You don't have to do this complicated backing out of other revenues. On the other hand, G&A was flat and there is a number of reasons G&A was flat and there is a lot of optimism that that's going to come down throughout the year. First of all, we have a net expense between first quarter and second quarter of on the order of a $1m to complete in an aggressive way all the work that we need to do for being in compliance with Sarbanes Oxley for '04. We have significant spending in the first half of the year on the Merck litigation and we had significant other spending on professional fees, and we do expect that spending to be onetime in nature and so by the second half of the year, we expect that to step down reasonably substantially. So, we came in at G&A of $5.9m for the first quarter. And we could see ourselves back down to a normalized level on the order of $5m to $5.2m by the fourth quarter of G&A. So, we see that coming down not just as a percent but absolutely as we finish the allotted as one time activity with consultants.

Okay and then finally can you just walk us through some of the finer points on the DuraGen, the LICOX, NEUROGEN, anything from accounts to capital equipment units sold etc. like you usually do?

Sure. We first of all DuraGen was very strong as I said. We don't like to break it out, because we are the market leader and we don't need to give our competition any help in terms of understanding how we are performing. So, DuraGen continues to see substantial year-over-year growth, both domestic and internationally. In the United States, we have got well over 1500 domestic accounts. Internationally now we are selling in approximately 65 different countries as well as between 100 and 150 direct accounts in England, France, and Germany. Interestingly, the sales split hasn't changed very much. It's still roughly 90:10 cranial-spinal, and that's I think just in the nature of our sales organization, which continues to spend the bulk of its time with neurosurgeons in cranial procedures. So, I think there is a lot of opportunity to continue to grow in the spine, particularly as the sales force grows and have more time to actually call on spinal . So, that one's is doing real well. DuraGen Plus has been a real success. We don't intend to breakout DuraGen and DuraGen Plus. I think for competitive reasons, we don't really want anyone to know how they are doing, performing, but I will tell you DuraGen Plus was very strong and in particular the launch of the 5/7 size, which is the largest size available, I believe of any Dural Graft and therefore gives us an opportunity in a whole host of procedures and obviously has a very high price point. And then again, EnDura is also performing well and giving us an opportunity to sell into new accounts and into accounts where there is a predominance of neurosurgeons focused on suturing. So, I think our Duraplasty strategy has gone well. In terms of LICOX, we sold let's see, in the US total about 125 LICOX monitors. To date only five in the quarter. We have a significant number on loan and under evaluation, and our catheter sales for LICOX are very strong. We have outside the US approximately 200 monitors in use. I mentioned SPM, SPM is very strong interestingly in the US and outside. And we launched it in the US and I think surprised ourselves a little bit with the interest of that product in accounts that perhaps can afford the $9000 or $10000 for an MPM. We expect to launch our Novus neurosensor at the CNS as we continue to talk about, in October and that will give us another opportunity to talk with our customers about multi modality monitoring. So, those are the high points I think.

Okay thanks a lot. Have a great day.

Thanks Ryan.

Thank you. Our next question comes from Jayson Bedford, Adams Harkness, your line is live.

Hi good morning guys.

Hey, how are you Jayson?

Doing well, thanks Stuart. Just to follow-up the last question in terms of the G&A line. Any plant closures in '04 and just where are you in terms of kind of squeezing out the cost efficiencies?

So for nothing modeled. So, in these numbers we are I think done with the closures for the time being and have completed in particular the West Coast activity, and are really I think done with that, as I think it is a good way to put it. As you know, I don't like to think I am done with anything. We are looking hard, in particular at our cost structure in Europe and looking at whether there are any opportunities, if not to shut aside, certainly to move activities around so as to be more efficient. Also, as you might expect we hope to consummate some more acquisitions this year and with the acquisitions come additional opportunities to look for facility savings. I should mention we have a significant cost reduction project underway. It is not a plant closure, but it is a cost reduction project moving some of our activities in the states to our Porto Rico site and we are actually doing a significant expansion of our Porto Rico plant, which should be done by the end of the year and it will allow us to do some significant manufacturing down there. That may also over time help us optimize our overall corporate tax rate.

Okay, that's fair. And then just switching over to DuraGen, I realize you don't want to give out a raw number, but is 30% to 35% year-over-year growth for DuraGen fair? And then secondly, are you seeing I guess concurrent use of DuraGen and then Dural out there?

Again, we really don't want to breakout the individual numbers. Certainly, since we grew that segment well over 40% and since that segment is certainly the largest part of that segment, the largest individual part of that segment is DuraGen, it had to grow well in excess of 25%, or we never could have achieved those numbers. In terms of concurrent use, yes, we are seeing cases, although I'd say it is early to say if this is a significant phenomenon, but where they'll EnDura, and then put DuraGen or DuraGen Plus on top of it. Certainly there are a lot of procedures you could do that and our sales reps are not shy in educating people on it. I think the biggest opportunity, as I pointed out when we launched EnDura, is our ability to go into accounts where there maybe significant DuraGen users but also have a sutured graft on the shelf and say, you really should only have Integra graft on the shelf, and that lets us have both of those products there and prevents any backsliding away from using DuraGen to using a suture product.

Okay. That is fair, and just finally, I think you alluded to it but you still plan on introducing your own cranial plates and screw line later this year, and just can you give us an update on new product introductions for the rest of the year?

Yes, we are planning on launching cranial plates and screw system during the summer. And that project appears to be on track. So, we are pretty excited about it, and it is right on call point. When you are doing a tumor procedure and you've just finished using your Integra Ultrasonic Aspirator, and your Ruggles, or your R&D instruments and just finished putting down your DuraGen and EnDura, and the rep is just standing there waiting for the case to be done, and now we have got the opportunity for an additional $400 to $500 sale of our cranial plate and screw system. And why would you use anyone else's other than the guys who have been doing the rest of the procedure with you. So, yes, we see a nice opportunity there, and it looks like it is on time for the summer. The AANS, American Association of Neurosurgeons is in about two weeks. We have a number of very positive product launches there, and they are in line with what we have been talking about doing in terms of product launches. And the back half of the year we are looking at what we have been talking about, which is the Integra low flow valve, a new differential pressure valve that we will be launching, the next generation Ultrasonic Aspirator, our new Drainage system, the nervous NeuroSensor and the NeuraGen nerve graft. So, when we did our meeting last year, and said to you we were really investing in R&D group and upgrading the R&D in the marketing department. If we can launch half of these products on time, this will be the best year we have had in the history of the company in terms of number of product launches. So, I feel like this R&D and marketing group has really come a long way in the last year and we got a lot of product launches on track for this year. That doesn't mean we want to do it in one slab but I am not going to declare perfection in that group yet, but we got a long way in really having some good product development in the part of the business.

Okay. When is the nervous neuro monitor coming out?

CNS, October. Actually it will be pre-launched during the summer into selected accounts. The product is approved already and is manufacturable, but we want to make sure we get the launch right, and part of our approach to product development is that get it into some accounts for a couple of months, and make sure all the bugs are shaking out of our products.

Great. Thanks guys.

Thank you. Our next question comes from Robert Goldman from Buckingham Research, your line is live.

Hi, Bob.

Thank you. Good morning, Stuart.

Good morning.

Couple of questions to follow-up. First on R&D, which you were just speaking to. It sounds like at the moment that you are getting good productivity out of the dollars you are spending, plus the reality also is that your R&D to sales ratio continues to go down. When might we expect a turnaround in R&D to sales, in other words, when will it start to keep pace with your revenue growth rate do you think?

That's a really good question, and one which we are focused on. First of all I got to make a point which is, while on the one hand R&D expense decreased as a percent of total revenues, we're up dramatically in R&D from last year. I think if you do the number, we are up, I think it's well over 30% or 40% year-over-year in terms of R&D spending. So we are investing more, and then you make the point there is also a mix change, we did take out a lot of Bricks-and-Mortar expense out in California, and reinvested that dollar expense - that dollar spending into new product development. So, that again is more productive R&D, and then there is a mix change toward the monitoring, toward the cranial plate and screw, and the other product line. So, there is a significant change. The other point is with on the order of $70m of our guidance in instruments that does not require R&D, that requires sales and marketing. And so when we do the map we back out roughly $65m to $70m of instruments and never they require R&D. That gets our R&D closer to 8%. Now, 8% not that great, and 8% is less than I would like to spend here at Integra, if we had total confidence in our R&D group to use the dollars effectively. We are hell of lot closer to that. So I would certainly hope that if the company progresses through the year we have an opportunity as we talk about 2005, to say even if the R&D go up in terms of absolute dollars, I don't want talk about percentages because it just depends a lot on the mix of our overall revenues. To answer your question, I'm lot more confident today than I did a year ago in our ability to intelligently invest R&D dollars into things with medium term and short term return. Long-term we continue to be, I think very effective with the Collagen products.

If I could follow up on the R&D, and then I've got another question on gross margins. Just as a point of definition here. When you say R&D is up 30% to 40% year-over-year, what are you speaking to there; I mean they weren't up in the first quarter. Is that a projection or what is that?

When you go back and look at the R&D spending year-over-year, and you take out the one time charges, they purchased intellectual property from last year.

Okay.

I think we are significantly up.

Got you, that's what occurred in the fourth quarter of '03 you are speaking to?

Dave, was it fourth quarter David?

We had higher one time cost in the fourth quarter related to the shutdown in San Diego.

Yes. So that's fourth quarter. Yes.

Now on the gross margin, as you say it was flat at 61% of product sales in the first quarter. Is there a way to tell us even if directionally what happens to gross margin, if you take out the impact of skin? Which I assume aided the gross margin in the first quarter of '04.

On gross margin. As you know we went from booking on, let's just say the same amount. So we use, we are not going to break out the DRT, but let's just say it was 2.5m. We went from booking about a 40% gross margin historically on about $1m to now booking on the order of 60% to 80% gross margin, but that only will give you the product gross margin on $2.5m. That's not enough to account for a significant part of the gross margin improvement. It's certainly part of it. But the mix to DuraGen, to NeuraGen, to new products as well as the skin, goes across the entire set of product line. The other point is that's not a one-time improvement, and so I am really quite hesitant to say, well you know, we should back that out. I don't think we should back it out. My own view is if you want to look at Integra today as a snapshot and look at Integra going forward, that's a permanent improvement, and is in fact our real gross margin. So, while I want help you model it, I guess it's an intellectual matter and I am not going to concede the fact that it's anything other than in a permanent gross margin.

Let me ask one more question if I can and then this would've more of a positive ring to it, but at least the way I've been defining organic growth which takes out private label acquisitions, currency, and what I've been guessing was the incremental impact of sales from skin, you did have in my models, a nice pop up in growth rate in the first quarter relative to the prior two, a reversal of a decelerating trend in the first quarter, you popped up, and just wondering why in fact it did pop up? Was there any special promotional program, is it just that the new sales people are kicking in, again I am not including skin in this, inventory builds, you know, just looking for some rationale to it?

Well, first of all to say, its not inventory builds because it's very hard for us to build inventory anywhere. So, its across the line in particular in the new products whether its DuraGen or NeuraGen, we've had -- I mean we went through, a very strong ultrasonic aspirator year-over-year, instruments which, some people have an image of instruments as being a 10% grower. Our neural instruments were in excess of our corporate growth rate, and of course the sales force. Again, I want to always be helpful in people modeling, we even have a new thing, Bob Goldman growth, and we if we do Bob Goldman growth, we're still up 17%, we even calculated it before the call Bob because we knew you'd ask. Bob Goldman apple-to-apples growth, we're up 17% year-over-year. So, but again, I want to take credit for taking the skin direct because the expenses are in the P&L, and so my own view is the growth is in the P&L and so, organic growth without acquisitions is going to 22%.

Okay. Thank you very much Stuart.

Thanks Bob.

Thank you. Our next question if from Chad Suggs from CIBC World Markets, your line is live.

Hi, good morning guys. Actually Chad in for John. It's in your last call on October 27, I believe you commented on organic growth first half to '04 exceeding 18%, and then second half of dropping below 18%, and I wanted to just see, are you guys still expecting that, can you comment on that?

I don't remember saying that. So, we're looking around the table here to see, we generally, I don't remember saying that Chad, I am not saying we didn't, I just don't remember that. Our number for the year is in the guidance that we gave and so, you've got Q1 actual, you got Q2 guidance now on this call, and you got an annual number. Certainly, the back half of the year, we're expecting significant revenue growth. All I can think of is from what you're asking is certainly after this quarter, JARIT gone as a comparison. So, maybe you're thinking not the organic growth number but the total growth number, because total growth is very high this quarter, because you do still have a little bit of benefit from JARIT, but I don't recall saying that.

Okay, I'll go back to my notes. Secondly, do you expect the tax rate, did you say that your tax rate was 36.8%? You expect that going forward through the remainder of the year, is that what you stated?

Yes. That's our expected tax rate for the full year.

Okay. And then sort of on Spinal Specialties previously you'd given guidance of stating that you'd expect that in particular to do about 4m, sort of after you guys have made the purchase, and I just wanted to see if that is still in your expectations, you think that particular business line is going to exceed those expectations?

Right now, they're doing a little better than that but not enough to impact our numbers.

Okay, great, thanks.

Thank you. Our next question is coming from Glen Novarel from Bank of America. Your line is live.

Hi Stu.

Hi Glen, how are you?

Just one final question on DuraGen, I am just looking back at my 4Q notes and I believe you said that DuraGen sales were up over 30% globally, international up over 60%, and then you just came back and said sales were up over 25, so maybe, I think you just said up over 25, is it really up over 30. I just want to make sure that there is no slowdown in DuraGen occurring.

There's no slow down in DuraGen occurring. We are really working hard and you guys are working hard against it, so we are really working hard not to give out our DuraGen number. But, we are not in any sense signaling a slowdown in the growth of DuraGen.

Okay and do you want to comment at least on the international number? I mean you are still seeing great penetration and great growth there?

I believe so. I got to go -- I check and see if there's any difference there, but yes, I mean we haven't seen it go down. So, yes, I think that international is still doing well, and we get the benefit of our direct sales organization, which is really having probably the greatest impact.

Okay. Maybe we can talk a little bit offline on that. Thanks a lot.

Thanks.

Thank you. Our next question is coming from John Sauder from Wales Splitter , your line is live.

Hi Stuart, just two quick questions. First, with respect to DuraGen Plus and its premier pricing, just want to make sure you are not getting any push back from customers on price. And then secondly, it looks like a barrage of new products here coming up. Can you give us a little bit of your plan on sales force training for all the new products?

Yes. First of all, no, there really is no push back on DuraGen Plus. I think people see the value of the product and price is not really the driving factor in the decision-making. So, no, I don't see any issue there. And then, in terms of training, a very good point, we had in the first quarter a significant training and again, if you look at sales and marketing expense, spent probably on the order of $250,000 or $300,000 to bring together our sales organization and train them for five business days, and they were trained frankly on only these products for the first half of the year; the DuraGen Plus, the EnDura, the product line and a little bit on the cranial plate and screw systems. We will be planning to bring people together again at least once, maybe even twice this year because there is a lot of training that needs to be done on all these new products and certainly, we will be doing -- we already have on the table a plan to bring people together before the Congress of Neurosurgery because of the significant number of product launches there. And that has expenses tied to it, but on the other hand, it really accelerates the launch of these products.

Great, thanks Stuart.

Thank you. Our next question comes from William Plovanic from First Albany, your line is live.

Great, how are you doing Stuart?

Hi Bill, how are you?

Good. Actually my first question is for Dave. Could you give me some clarity on -- you had mentioned FX impact, cost exceeded revenues by $4.2m. What did that really mean to the P&L?

I think the best way to describe it is, we mentioned that there is a $1m favorable benefit year-over-year on the topline related to the FX rate. But, we lose all of that and a little bit more if you take the ratio of $1m to $4m net. We actually -- it costs us on the bottom line basis. We don't want to break out the total effect of it, but as a ratio basis, any of that growth that you see on the topline related to it is not growth on our earnings per share basis. But, it's not very significant meaning it's not $0.03, $0.04, or $0.05 anything like that, it's smaller impact than that.

Said differently, we said on the last call a $0.10 movement against us in Euro last quarter was on the order of $0.02 for the year, penny and a half for the year. But, the good news is, it went from 128 down to now 120. You don't get all that benefit in one quarter, it rolls in through the year, but it certainly makes the numbers a little bit better for the year. The other thing, which you may have noticed is we talked about $4m difference that's compared to about $5m difference last quarter. So, I think we told you we had proactive efforts to move much of our distributor network to billing in Euros and that's had a real impact, plus our European business has grown in the direct market. So, we said in the fourth quarter our net short position for the year in Euros was $25m. We are now at a run rate of 16. So, our objective from a financial perspective would be to be matched, first the best way to get there would be by growing our European revenues.

Okay, and then the actual dollar amount for topline benefits for foreign exchange this quarter was?

$1m. The difference between 22% and 19%, organic growth is $1m of foreign exchange.

Okay and then

We were at 22% organic growth and then if you don't want to give us credit for the exchange, take it down to 19%.

We will give you all the credit Stuart.

Thank you.

And then on other revenues you mentioned it was $1m in the first quarter but that was going down significantly, looking at the miles, I think previous guidance had been about $300,000 a quarter, is that going to zero or is that remaining at that $300,000 a quarter for the remainder of the year?

Odds are high, it will be a positive number but we said in our forward-looking guidance model it zero. So, the answer is there is probably a couple of hundred in there but we are just modeling it at zero for the moment.

Okay. That's all I had. Thank you very much.

Sure.

Thank you. Our next question comes from David Zimbalist from Texas, your line is live.

Thanks. Hi Stuart, Could you talk a little bit about the neuromonitoring business? It's the only business that you have got to an acceleration in the back three quarters of the year versus their performance in the first quarter, what are you expecting to be the key sources of that acceleration, and can you also, in the same context, talk a little bit about hospital budget and where they seem to be in terms of interest and budget for the neuromonitoring capital equipment sales?

Sure. First of all, keep in mind that our neuromonitoring business is all about disposables, it is not about capital. Occasionally, we will have a particularly strong capital quarter or a particularly weak capital quarter, but if you add up, in the roughly $50m number for the year, maybe $3m or $4m of that is capital. So, that's not enough to move the growth meter one way or another. Also, I guess I would not - it is technically an acceleration in the back half of the year but if you go back and look at our historical performance in neuromonitoring, it's been anywhere from 12% to 18%. So, we've guided people to on average in excess of 15%. So, it's been a disappointment for the last quarter or two and my own feeling is that it has more to do with product cycles, it has to do with utilization, it has to do with the way our sales reps are spending their time and frankly if I was the sales rep I would be spending more time in the OR right now than in monitoring. We do have some programs underway to make sure they don't neglect their monitoring accounts but it is not really about capital, it's just about the amount of time sales people are spending in monitoring and also it just, this quarter wasn't that great compared to a year ago and we expect that they will revert back to closer to where it was in the second half of the year. It is not a very satisfying answer but as I go down the product lines, you can look at our Camino line, you can look at our Licox line, you can look at our drainage lines and they all for the quarter did plus or minus 8% to 10%. We were particularly weak in neurosupplies this quarter, but you know what, it doesn't matter, it will be back to where it was next quarter and it is not a trend from the prior quarter. So, I will say the group has been disappointing this quarter but I am not calling it a trend, and I wish I could give you a one thing but I just can't.

Okay, fair enough. And of the hospital budgets?

Actually, hospital budgets for capital are good now. I think you probably heard that from other companies, there has been a lot of capital freed up this year and a lot of it is going into, I hope I am just not sounding , so this is a good capital year actually.

Thanks.

Now, you normally see it in the first quarter so, I am not saying you are going to see it second or third but we certainly are not budgeting some big bumps, and I think there is some upside there.

Okay. Thank you.

Thanks.

Thank you. As a remainder ladies and gentlemen, if you do have a question please press star one on your telephone keypad. Our next question is coming as a follow-up from Chad Calcagnini from CIBC World Markets, your line is live.

Yes, just one quick follow-up. Is there any more deferred or net revenue related to the J&J that is less on the balance sheet or anything that you expect to be coming through in the next quarter at all?

J&J is completely off the balance sheet.

Okay. Thank you.

Thank you. Our next question comes as a follow-up from Robert Goldman from Buckingham Research, your line is live.

Hi Bob.

Thanks again Stuart. Two things. One is you mentioned Stuart some things to look for the CNS later in the year, but I just made my flight reservations for next week for the AANS. I was hoping maybe you are in a position to tell us what to focus on there and then also since that is your major meeting I believe of the year, I might be wrong, might we expect a bit of a bump-up in SG&A in the second quarter to fund your programs at the show? And then my other question just to throw both out and to sit back is on the number of shares, I think your guidance is $31m for the rest of the year, and I assume it is a bit of a bump-up from last year because of options exercising, but the board, I know, at Integra did pass a share repurchase authorization and I am wondering when you might start using that?

Okay, good. First of all on the Double A&S, you made good point and I just forgot to do those. Double A&S launches -- we're launching a new combined oxygen and temperature catheter for the PMO and it's a unique catheter that allows you to do two things at one, oxygen and temperature through one channel on the bolt which then allows you to do pressure monitoring at the same time. So it's a product line extension for and designed to marry neuro monitoring with -- pressure monitoring with metabolic monitoring. NeuraGen Plus 5/7, the official launch is at the Double A&S. Admittingly, we, actually, launched it about a month or two ago and it is doing extremely well. We also are launching our Epilepsy line, so we have the complete line of Epilepsy products and this is the first time we can, actually, say that and that's got a lot of potential. If you are looking for something to jazz up our neuro monitoring growth, we have some high expectations, frankly, not built into the numbers, but some high expectations for these Epilepsy business that we are building. New line of Neuro Endoscopy products, the neuro view line. We've had a -- what I can only describe as a tired Neuro Endoscopy line and we did a partnership with a leading fiber optic company to introduce a new technology for Neuro Endoscopy and that will be launched there and we have a device to a sift in the implantation of our NeuraGen product line, it's an instrument and allows for faster surgery with the NeuraGen product line. So, those that are the launches at the Double A&S.

Right and as far as any expectation for an SG&A bump in the second quarter as a result of a A&S?

It's built in than our numbers and there is an expense to it, it's not a bump up. It's implicit in the guidance that we've given. These meetings cost on the order of a $0.25. But we have one in the first quarter for the sales force and so, meeting like this is similar in size in terms of the dollar cost. So, it's not a bump up in SG&A. It's just in line with the things that we've been saying. And then in terms of shares outstanding, we did not buy any shares back last quarter. One of the hard parts of trying to do share repurchase is because we are generally looking at acquisitions, we often don't have an opportunity to be in the market and buy stock. So, last quarter, we didn't really have an opportunity more than about a week to do much and so we didn't do much. We certainly intend to utilize the program and we'll be in the market, depending upon our point of view on the stock and our point of view on our ability to go in and buy stock. The other thing to keep in mind is we have not assumed that the convertible bond shares are outstanding. Obviously, if the stock does, particularly, well, then we'll have to calculate the -- you'd do a different calculation on shares outstanding for the convertible bond. Now, remember, the bond conversion calculation happens at $37 and change. So, should it be in the money for an appropriate period of time, then it will impact the earnings per share. My recollection, Dave, is it has a negative impact of about $0.02, overall, for the year, fully diluted, if it happened to be out there for a whole year.

That's correct. Thank you, Stuart.

Thank you. As a reminder ladies and gentlemen, if you do have a question, please press star one on your telephone keypad. Our next question is coming as a follow-up from William Plovani from First Albany. Your line is live.

Yes, Stuart. Can you just remind us, does the stock have to trade over $37 or was it over $34 and change for like 30 or 60 days to trigger that event?

Has to trade over $37, but when you do the math, it's converted to $34.

Thank you.

And the timing is actually at the end of the period -- for the earnings quarter-end.

Thank you.

Thank you. At this time we are showing no further audio questions. I'd like to turn the floor back over to management for any further comments.

Thank you very much to everybody for participating in our call and we look forward to seeing many of you, I hope, at the Double A&S in a couple of weeks. Thank you.

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