Integra Lifesciences Holdings Corp (IART) 2005 Q3 法說會逐字稿

Good morning, ladies and gentlemen. My name is Melissa and I will be your conference facilitator today. At this time I would like to welcome everyone to the Integra LifeSciences third quarter 2005 earnings conference call. All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS). Thank you.

It is now my pleasure to turn the floor over to your host, Stuart Essig, President and CEO. Sir, you may begin your conference.

Thank you. Good morning, everybody, and thank you for joining us for the Integra LifeSciences investors conference call. I'm Stuart Essig, President and Chief Executive Officer of Integra LifeSciences Holdings Corporation. Joining me today are David Holtz, Senior Vice President of Finance, Jack Hennenman, Chief Administrative Officer, and Gerry Carlozzi, Chief Operating Officer.

During this call we will review our financial results for the third quarter of 2005, which we released yesterday afternoon and our forward-looking guidance for the fourth quarter of 2005 and the full year 2006.

At the conclusion of our prepared remarks, we will take questions from members of the telefonica audience. Before we begin, Jack Hennenman will make some remarks regarding the contents of this conference call.

This presentation is open to the general public and can be heard through telephone access or via live webcast. A replay of the conference call will be accessible starting one hour after the conclusion of the live event. Access to the replay is available through November 14, 2005, by dialing 973-341-3080, access code 6474836 or through the webcast, accessible on our homepage.

Today's call is a proprietary presentation of Integra LifeSciences Holdings Corporation and is being recorded by Integra. No recording, reproduction, transcript, 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 October 31st, 2005.

Unless otherwise posted or announced by Integra the information in this call should not be relied upon beyond November 14th, 2005, 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 meanings of the Private Securities Litigation Reform Act of 1995. Among other statements concerning management's expectations are future financial results, new product launches, and regulatory approval 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 10-K for the year ended December 31st, 2004, 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 duty to update information provided during this call. Certain non GAAP financial measures are disclosed in this presentation and a reconciliation of these non GAAP financial measures to the most comparable GAAP measures is provided in the press release we issued yesterday which is available on our website in the press release section under Investor Relations.

Thank you, Jack. We had a strong quarter, achieving record operating income and exceeding analysts' consensus estimates for adjusted earnings per share. Total revenues in the third quarter of 2005 increased by $10.2 million to $69.3 million, a 17% increase over the third quarter of 2004.

Excluding recently acquired product lines, third quarter revenues increased by $6.7 million or 11% over the prior year period. We reported net income of $10.5 million or $0.33 per diluted share for the third quarter of 2005. When adjusted for certain acquisition integration and restructuring related charges, net income for the third quarter of 2005 was $11.5 million or $0.36 per diluted share, at the high end of our adjusted earnings guidance range.

These acquisitions, integrations, and restructuring-related charges included $0.5 million in process research and development charge, as well as costs associated with the closing of various facilities and related transitions and employee terminations.

We excluded these costs from our calculation of adjusted earnings, because we believe that given our active strategy of seeking acquisitions and the nature of the restructurings underway in our European operations, net income adjusted to exclude costs related to acquisitions, integrations, and restructuring as a useful additional basis to measure the performance of our business operations, both in this quarter and in future periods.

Operating income was $16.1 million for the third quarter. Acquisition, integration, and restructuring related charges reduced our operating income by $1.7 million. Our implant revenues in the third quarter increased 29% over the prior year period. Rapid growth in our nerve repair products, our dermal repair products -- which increased approximately 41% over the third quarter and acquired sales of new deal products for the foot and ankle accounted for most of the increase in implant product revenue.

Sales of the NPH low (indiscernible) valve that we introduced in late 2004 also contributed to the growth of implant product revenues for the quarter. New deal product revenues exceeded our expectations for the quarter and we are very pleased with the progress we've made since we launched these products in the United States last March. We have now opened over 260 U.S. new deal accounts since we began selling the products, adding 57 new accounts during the month of September alone.

Our U.S. reconstructive surgery group now includes 47 sales professionals; and we are working to increase that number to 54 by the end of the year. Domestic sales of our new deal and dermal repair products used in reconstructive surgery procedures continued to grow. Along with the expansion and training of our reconstructive salesforce, increasing 87% and 32%, respectively, over the second quarter of this year.

Our Duragen (ph) family of products continues to grow although at slower rates than earlier this year. We continue to see competition in dermaplasty (ph) in line with previous quarters but the total opportunity is such that we expect to remain a growing and profitable business for years to come.

Revenues from our instrument product lines in the third quarter increased over the prior year period by 13%. Increased sales of our JARIT and reconstructive surgical instruments, Ultrasonic Aspirator and Mayfield product lines provided most of the growth in our instruments.

Monitoring revenues in the third quarter decreased from the prior year period by 1%. Lower-than-expected sales of our Camino (ph) intracranial pressure monitors, and external drainage systems, negatively affected our monitoring product revenues. Sales of our (indiscernible) brain oxygen monitoring system product line which increased 12% over the prior year period, partially offset the negative impact of the (indiscernible) Camino and external drainage systems sales.

We expect that a new targeted account, sales and marketing strategy, including an expansion of our field force focused on the neuro-intensive care unit by approximately 20, will improve the performance of this category in 2006.

Our private label products revenue in the third quarter increased over the prior year period by 37%. Increased revenues of the absorbable collagen sponge that we supply for use in Medtronics infused bone graft product, Biopatch -- a product we sell to Johnson & Johnson and BioMend, the product we sell to Zimmer, led the growth in revenues from our private label products category.

Our gross margin on total revenues in the third quarter of 2005 was 62%. Although we had strong growth and higher gross product margin products, we incurred $800,000 in restructuring and manufacturing transfer costs. These charges which included severance costs incurred in connection with the closing of one of our facilities in Europe, as well as cause resulting from the consolidation of several of our manufacturing operations in Europe and here in the United States reduced our gross margin by approximate 1%.

We anticipate having additional restructuring and manufacturing transfer costs for the remainder of this year, including any remaining costs associated with the European and U.S. restructuring and integration. Excluding these charges we expect to continue to see a positive trend in our gross margin.

Selling, general, and administrative expenses decreased to $22.6 million in the third quarter of 2005, decreasing as a percentage of revenues to 33%, our target for SG&A. This included approximately $250,000 of charges associated with the closing of various facilities and related transitions, employee terminations, and other integration and restructuring related costs.

These charges increased selling, general, and administrative expense as a percentage of revenue in the third quarter by approximately 1%. In September, we acquired the intellectual property estate and certain other assets of UNO (ph).

Prior to ceasing operations, UNO was engaged in the development of its innovative Cognition (ph) system for the treatment of Alzheimer's disease. The acquisition of the UNO intellectual property estate and clinical trial data considerably extends our technology-based relevance to the management of conditions that require regulation of cerebral spinal fluid flow within the brain.

In September, we also entered into an agreement to acquire the assets of Radionics -- a leader in the design, manufacture, and sale of advanced minimally invasive medical instruments in systems for radiation therapy. Radionics products include the CRW stereotactic system, the X-Knife's sterotactic radiosurgery system, the Omni-sided Cell Image Guidance surgery system and the Cusa (indiscernible) surgical aspirator.

The CRW Stereotactic System is a frame-based system used for locating a point within the patient's cranial anatomy and guiding the surgeons to that point with submillimeter accuracy. It is used primarily for tumor biopsy, (indiscernible) collector and placement and other functional neurosurgery procedures such as deep brain stimulation and the treatment of Parkinson's disease.

The CRW product line shares the neurosurgery Cold Point with our neuro implant and epilepsy products used in many of the same procedures as our existing neurosurgical product portfolio and, in some cases, is specifically compatible with our current products. For example, Radionics offers an adapter for use with our Mayfield headrest. The Omni-cited sales image-guided surgical system is in some ways a successor to the CRW system in that it is used to locate a point within the patient's anatomy but without the use of a frame.

It can be used for many of the same procedures as the CRW system. But its more typically used for open craniotomies, or spine procedures. The Omni-sided sale therefore offers a similar opportunity for revenue synergies particularly in the spine.

The system utilizes all the software and some of the hardware used in the Omnicite sale system. However instead of tracking and guiding the surgeon's instrument to a particular target within the patient's anatomy the Edgeknife guides a focused beam of radiation from a linear accelerator. The Edgeknife system like many of our existing products is used in the treatment of brain tumors.

The Cusa (ph) XL Ultrasonic Surgical Aspiration System is used by surgeons to selectively dissect and remove soft tissue tumors. Like the CRW system the Cusa XL Ultrasonic Surgical Aspiration System has a common call point with our existing products.

The Radionics business generated revenues of $62.2 million and pretax income of $13.4 million for the year ended September 30, 2004. The most recent audited period. Upon the closing of this acquisition Integra will require the Radionics facility in Burlington, MA, which employs approximately 135 employees and enter into transitional supply and distribution agreements with Tyco Healthcare for products currently manufactured at Tyco facilities not included in the transaction.

Tyco Healthcare sells the Radionics products in over 75 countries, using a network of independent distributors in the U.S. and both independent distributors in Tyco Healthcare affiliates internationally. Although Radionics currently sells directly through many Tyco affiliates, internationally, after closing Integra is likely to use distributors in many of these markets.

As a result, once the Radionics products are under our management we expect the reported revenue and pretax income will be reduced by approximately 20% in the 2004 reported levels, prior to any impact associated with purchase accounting related to the transaction.

Overall, we expect the acquired business to grow at rates below our corporate growth rate targets but that operating center usually will have a positive impact on our operating income growth. Completion of the transaction is subject to customary closing conditions at fiscal year end financial audit, regulatory approvals and expirations of the requisite Heartstop waiting period.

Upon the closing of the transaction we currently contemplate -- will not occur prior to the end of 2005 -- we expect to provide more detailed guidance regarding the financial aspects of the transaction, and its expected impact on Integra's future financial results.

We continue to realize the benefits of the New Deal acquisition. The New Deal foot and ankle implant products are an important part of our strategy to sell the Integra wound and repair and dermathermal and nerve regeneration product to surgeons who see chronic wounds every day.

We believe that New Deal's first-rate foot and ankle orthopaedic product and Integra's high-tech wound repair and nerve regeneration technology are, together, the most compelling suite of products -- both metallic and orthobiologics -- sold specifically to foot and ankle surgeons. Sales of the New Deal products in the third quarter performed well, exceeding our expectations. Because of the elective nature of many of the procedures that use the New Deal products, procedure volumes tend to be lowest during the summer months so the strong performance during the quarter is particularly gratifying.

We continue to make progress in restructuring our European operations. We are on track to close our former Bertholt (ph) facility in Germany by the end of the fourth quarter. We continue to make progress on the remainder of our European manufacturing cost reduction activities.

We are also building our sales and and marketing organization organization in Europe, opening a sales office near Dusseldorf and adding nine direct reps in Germany, expanding our Belgian distribution and sales operation, and adding several additional marketing people in Lyons, France which is rapidly evolving as our European sales and marketing headquarters.

Overall in 2005, we are nearly doubling our headcount commitment to European sales, clinical, and marketing activities.

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

Thank you Stuart. We recorded interest expense of $1.3 million and interest income of $950,000 in the third quarter of 2005, resulting in a net interest expense of $390,000 as compared to net interest income of $240,000 in the prior year period.

This change resulted from the negative impact of the interest rate swap we executed in August of 2003 and the change in valuation of the contingent interest portion of the contingent convertible notes we issued in 2003.

Income expense -- income tax expense was approximately 33.2% in the third quarter of 2005 versus 34.7% in 2004. Our amortization expense for the quarter was $1.5 million, an increase of $270,000 over the prior year period. We have revised our tax rate assumption for the fourth quarter and full year 2006 to 34%.

We continue to generate substantial cash flow from our operations. In the third quarter of 2005, we generated cash flows from operations of $12 million. Our year-to-date cash flows from operations through September was $42 million. Accounts receivable improved from approximately 69 days of sales outstanding at December 31st, 2004 to approximately 62 days at September 30th, 2005, as a result of increased collection efforts during 2005. We expect our day sales outstanding to remain at roughly current levels.

International sales were 23% of total sales this quarter, compared to 21% of total sells for the full year of 2004. International sales as a percentage of total sales decreased from the second quarter, in part because certain of our non U.S. sales are seasonally weak during the summer months.

Inventory days on hand remained constant as compared to the end of the second quarter at approximately 246 days at September 30th, 2005. We have increased inventory levels in 2005, in order to minimize the impact on our customers as we complete various manufacturing transfers and restructuring activities.

This month, our Board of Directors authorized us to repurchase shares of our common stock, up to an aggregate of $50 million through December 31st, 2006. We may purchase shares either in the open market or in privately negotiated transactions. We did not repurchase any shares under our former share repurchase plan during the third quarter.

At September 30th, 2005, we had cash investments of approximately $159 million. The weighted average common shares outstanding used for the calculation of diluted earnings per share in the third quarter of 2005 was approximately 34.3 million shares.

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

Thank you, David. 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 is a top priority to complete significant and accretive transactions this year and next. However the forward-looking guidance that we have provided does not reflect the impact of any acquisitions or other strategic corporate transactions that have not yet closed. In particular, our expectations do not include the impact of the pending Radionics acquisition.

We are updating our expectations for total revenues and earnings per share for the fourth quarter of 2005 and the full year 2006. Our guidance for the fourth quarter of 2005 is for total revenues in the range of $71 million to $74 million. Total revenues in 2006 are expected to be between $330 million and $340 million. Excluding charges related to acquisition, integrations, and restructurings, earnings per dilute share are expected to be within a range of $0.36 to $0.40 in the fourth quarter.

On a GAAP reported basis we expect earnings per share to be within a range of $0.31 to $0.35 in the fourth quarter. Our expectations for earnings per diluted share in 2006 remains unchanged in the range of $1.65 to $1.75. Our expectation range for 2006 earnings per diluted share do not reflect the impact of expensing stock options, beginning January 1st, 2006, under the accounting standard recently issued by the Financial Accountings Standards Board.

I'd like to take a moment to focus on the expectations for each of our product categories for modeling purposes. Based on our total revenue guidance for 2006, we expect implant revenues of $135 to $140 million, instrument revenues of $110 to $115 million, monitoring revenues of approximately $55 million, and private-label revenues of approximately $30 million.

Looking beyond 2006 we expect sales to grow in excess of 25% for the implant product lines and 15% for the remainder of the product lines. Overall, our long-term organic growth rate expectation for revenues is in the range of 15% to 20% per annum.

The consolidated gross margin percentage, excluding costs related to acquisitions, integrations, and restructurings for the full year is expected to increase to 65 to 66% of revenues in 2006.

Long-term, we are targeting SG&A expense at 32 to 34% of total revenues and R&D at between 5 and 6% of total revenues. I'd like to remind everyone that Integra will host an analyst forum on Monday, November 21st, 2005, at 3 PM Eastern Standard Time at the New York Marriott Eastside Hotel in New York city.

We will also be presenting at the CIBC Healthcare Conference at 9:30 AM Eastern time on Wednesday, November 9th, and the CSFB Healthcare conference at 4 PM Phoenix Arizona time on Thursday, November 17th.

This concludes our prepared remarks. I'd be happy to answer all of your questions. Operator you may turn the call over to our participants.

+++ q-and-a.

(OPERATOR INSTRUCTIONS) Raj Denhoy with Piper Jaffray.

I'm curious you didn't mention any potential impacts from some of the weather that happened in the quarter. Was there anything that maybe you saw that might have hit your numbers?

Yes I would say, first, revenues for the third quarter are generally impacted by some slowness due to the summer season. And that is particularly true for New Deal products that are sold in Europe and we definitely saw some impact from Hurricane Katrina. We are able to look at the JARIT sales and were able to find about a quarter million of sales in the quarter that they came up light because of hospitals affected by Katrina.

Neuro is a little harder to measure because of the nature of those products but we estimate that sales into that area are approximately $800,000 a year. So you are looking at probably .5 million or a bit more from those two categories and we really were not able to estimate the impact on PNR -- sorry, on our reconstructive business.

So it -- candidly the quarter's performance was most affected by the normal trends in the business and the -- as in prior quarters the implant business was strong, the instrument business was strong but neuromonitoring came up short.

Along those lines you lowered guidance again for next year as well as you took a little out of the fourth quarter, (indiscernible) topline guidance. Is there any particular area where you are seeing softness? It's causing you to take a remeasure of what you think you can do next year and, also, in the fourth quarter?

Yes. First of all, again, I think most companies do this but I know we do and we look at each quarter's performance and then we reforecast product line by productline with our salespeople. And when a quarter like this one comes out at the bottom of the range on revenues, we don't want to, then, assume a heroic improvement the next quarter.

So we are not expecting any further negative impact in the fourth quarter; but it is just the natural impact of rolling out the performance this quarter into Q4 and into next year. Candidly, the only part of the business that is not doing what we wish it would do is the neuromonitoring business.

As you know monitoring revenues came in down by about 1% and having expected that part of the business to actually improve this quarter and next, we didn't want to keep having our guidance reflect a false optimism going forward. So we brought that down and you note that in our guidance for next year, we are only assuming about a $5 million increase in that business from 50 million this year to 55 or approximately 10%.

The rest of the business is doing what we expect it to do. Keep in mind -- Integra's gotten bigger. The shortfall in next year, the $10 million number that we brought it down represents approximately 3% in terms of what we are reducing next year's number by.

So it is really not a big number but it's real and it is principally the monitoring business. We were pleased with the performance of our key categories this quarter including, Duraplasty, including our skin products, our DRT products including our neurogen products and new Deal and the instrument lines continue to outperform.

So the biggest impact we are seeing on our business is from the monitoring numbers.

A last few questions then I'll get back in line. On the monitoring side, there there has been some talk that maybe we could get LICOX, the oxygen intensing business going as an inclusion in the guidelines for next year in the head trauma guidelines. Is there any update on that?

And secondly on the DuraGen lines maybe you could provide some sort of update on what the competitive landscape is looking like? Whether you are changing your stance there?

Yes. First of all, in monitoring, our plan for next year is to get aggressive. We are planning over the fourth quarter and into next year to add 20 additional monitoring-focused field people. And they will spend all of their time in monitoring, supporting our neuro sales organization.

I think this year, the things that have impacted our neuro business is, we did have competition from Medtronics and Johnson & Johnson in Duraplasty. And we guided our sales organization to spend as much time as they possibly can in the operating room, defending the Duraplasty business, in addition to our Mayfield acquisition, giving them additional activities in the operating room.

That did come at a cost. We don't believe we have lost share in the neuro-intensive care unit. We are the market leader with what we believe is a 60% to 70% share of those types of products. So if we are not driving the business, who is?

So with our people focused on the operating room, making sure we are not losing accounts in Duraplasty, there was nobody driving the monitoring business. So we have to react to that and we have got all the right products between LICOX and NeuroSensor and Aticadrain (ph) and our Camino product and in the pipeline, our Moebius for multi modality monitoring. We have got the products; we are not losing share; we just don't have the people.

So in our guidance for next year, in our earnings guidance that we provided and our 10% topline guidance for neuromonitoring, we are reflecting the impact of adding 20 specialists, focused on the ICU. And that has already started in the third quarter and going into the fourth. So that is what is going on in monitoring.

In terms of Duraplasty, the good news is, by focusing the attention of our sales organization on Duraplasty we have not lost significant share. I think we said on our last call although we don't have data for the competitors our best guess is the combined revenues of Medtronics and J&J in this area are something like $5 to $6 million.

And that is not a significant impact from having them two major competitors competing against us for almost 18 months.

Suturable DuraGen continues to grow fast. DuraGen Plus continues to start to become the majority share of our Duraplasty business. So our U.S. and international groups have fought the battle and are winning the battle. There's really no change. But I think the biggest impact of our competition was not on our Duraplasty business, but rather was taking our people out of the ICU and we need to react and we need to get them back on track in that regard.

You didn't answer the question about the potential conclusion in the guidelines of (indiscernible)

Oh I'm sorry, yes. We don't know for a fact. It is being kept very confidential but, yes, there is some discussion about oxygen monitoring being included in the neuromonitoring guidelines. There's also discussion about additional reimbursement for the ICU; but none of them are a done deal and both of them are opportunities in 2006.

Pat Pace with UBS.

I want to follow-up on -- we talked about the hurricanes but just some of the ortho guys have talked about softness in elective surgery and I know a lot of neurosurgery is not elective but are you guys getting any sense of that in certain parts of your business?

The only place we could identify it, as we said was in New Deal and New Deal did well but it's traditionally -- traditionally a third quarter. Because it's elective people don't have surgery in the summer. But we had a really good New Deal quarter. The U.S. business -- because we really just started to take it over in the last nine months grew 81%. Now that's not off a big base, but still 81% is pretty good. So we are not really seeing the softness.

Okay so typical seasonal softness in Europe and nothing really different in the U.S.?

Not that we observed. And (MULTIPLE SPEAKERS) neuro is not really -- the good and the bad news is most of neuro procedures are not elective.

Right. Exactly. And then on just on Radionics is there a specific issue that is holding it up? And can you just give up a little bit more detail on how you can provide in terms of the delay?

There is no delay. There is absolutely no delay. We announced the deal several weeks ago and there's a normal waiting period that is required under Hart-Scott. So there's two major components to getting the deal closed. First is, the waiting period and the waiting period expires on November 7. So we will know whether there is any second request on or around November 7. So that is going according to what you'd expect is the normal timing of the deal.

Part of what you have to appreciate is, we have never done a deal quite as big as this. We never had to have Hart-Scott filing for any of our deals so they always seem to go really fast. This is the first one that we've done that just requires a waiting period.

Now more important from a time perspective is, we need a second financial audit for our financial statements. We got one done at signing but we need a second one at closing. And that is likely to take through the end of the year.

So optimistically we could be looking at the beginning of the new year as a logical place to close after the second audit is done and if we don't have a second request from Hart-Scott. But there is nothing delayed. No problem with the deal.

It's just taken what it normally takes other companies to get a deal done and we just never waited that long before.

Just one last one on your cost management, your SG&A was significantly below what we were looking for. Was that more on the sales and marketing side? Or is that -- is there some SG&A savings that are in there?

I think it's all of those things. Our targets for SG&A is 32 to 34%. I recall being criticized for being at 36 to 37% in Q1 and that was to some extent just a buildup of various activities and the completion of various activities. I would hope to keep it in the 32 to 34% range and it's a combination --

I mean we didn't cut back on sales. In fact, we grew the salesforce substantially. I know our recon salesforce, I think we hired 20 reps in the third quarter. I mean we are at 47 now and are looking at 54 before the year is out.

We practically doubled the sales organization over in Europe. I know we added nine German reps and three or four (indiscernible) reps earlier in the year and we are looking to add a number three or four UK people before the year is out.

And then in neuro, this year, keep in mind and one of the things that gives me optimism about our forward-looking guidance for next year -- keep in mind we hired close to 20 neuro reps this year. New territories. And so we will finish the year at plus or minus 90 to 95 territories in neuro at the end of the year.

We finished last year at 80 with probably five or six open. So we have been adding a lot to the sales organization. We created a national accounts group this year which we never had before with several people in that group. So we are definitely not cutting back on sales spending.

Similarly in marketing and clinical, we probably added 30 or 40% in terms of headcount. So part of it was we just spent a lot on a percentage basis early in the year and as revenues have grown through the year it's just coming back into line.

Remember also the first couple quarters if you just look at our GAAP reported numbers, there's some big numbers in there on restructuring costs that came through to P&L in terms of headcount and costs that had one-time charges in the period.

William Plovanic with First Albany Company.

Couple of questions here. First of all the -- you talk about integration. You have a little more to go into Europe. Can you just give us a feel for what exactly is left there? And so when we can start seeing the clean P&L? Obviously prior to the Radionics (ph) acquisition.

Optimistically we should be finished in the fourth quarter and the principal activities remain -- certain restructuring headcount reductions, it's still remaining to be done in one of our major European sites. We did state that our German Bertholt site will be shut before the year is out and many of those costs have already been absorbed.

One of our other sites has significant headcount reduction but it's not done yet and so we can't book the costs yet. But our estimate is in the fourth quarter plus or minus $2.5 million is left. We did finish most of the closure activities in the United States that was supposed to happen this year. There were a few more costs associated with the transfer product lines to Puerto Rico. (MULTIPLE SPEAKERS)

And you did everything you wanted in Europe or are there still some discussions ongoing?

If things go as expected in the fourth quarter we will be done.

Secondly you talked about DuraGen was up year-over-year. Was it up double digits?

Again, Bill, I don't believe we have given that detail before and I don't want to now.

Lastly in your opening remarks, you had -- I believe it was discussions on the IDRT and the BMWD and did you separate those out or was that -- are you looking at that as all one product line?

We are looking at it as all one product line. I probably, because there was so much material to cover, maybe I wasn't as clear. I normally break out the DRT and the nerve repair and if somebody here could help me out.

Yeah, you did on --

If we find it here, Bill, we will -- .

Page 3.

Bear with me, Bill. We gave -- Dermal Repair was up 41% from prior year. And that is all I said there. Dermarepair includes both BMWD and IDRT. And then I think a number we gave later on was the growth in Newdeal which was sequentially 87% and the growth in Dermal Repair was sequentially 32%. Apparently we didn't break out the nerve anywhere here so I can't help you right now.

So Newdeal was up 87%, sequentially?

Correct.

But again it's all relatively small base and that is U.S. only, Bill.

So that's the impact of our going direct through our recon group here in the U.S.

Then last question. Any new iterations of tissue repair products you have coming down the pipe you would like to discuss?

You should assume that as we go into the next year we have got quite a few actually planned for both the reconstructive meetings and for the neuro meetings. I hope we will have another flavor DuraGraft (ph) next year. I hope to have our tendon wrap early in the year next year for our recon group. We have got a number of things that we've either talked about at prior meetings or that we plan to launch, but have not yet disclosed.

We just launched a whole host of flavors of our neuro product -- our nerve repair products, both a longer GAAP product and additional wraps and that's a very exciting area. We are also planning at our analysts meeting coming up, our investor meeting to spend some time taking people through our adhesion trial for DuraGen Plus.

And we are real excited about starting that. It looks like it will start in the second quarter but it looks like it is going to be a very good study. And the data that we have got already is giving us a lot of encouragement in the various preliminary trials and data collection activity.

So now that's not a product launch next year but I hope that will generate some more acknowledgment in the spine community that our DuraGraft products are very relevant in the spine.

David Zimbalist with Natexis.

Your -- just the one clarification. Your 2006 guidance assumes that second quarter cost ramp related to the adhesive trial. Correct?

Yes. The question is did we build the impact of the adhesion trial into our guidance for next year. Yes.

Just a couple of questions here. If the implant growth if you take out Newdeal. It appears to be somewhere on the order of about 12% and it's been in that mid, low midteens range over the last couple of quarters. Other than Newdeal becoming part of the base, what would enable you to accelerate that into 2006?

Really good question and there's a couple parts to it. First, this year our major activity in our neuro group has been to play defense on DuraGen. That doesn't continue indefinitely. We have stabilized the situation and have, in fact, begun the process of winning back significant new accounts.

We have -- finally as we got into the back half of this year reinvigorated the activity of driving the product into the spine. We have significant interest in new obligations that would normally go to autograft now that we have our suturable product. So we believe we can reaccelerate the DuraGen products as the go into the new year. So that is part one.

Part two is skin and nerve get bigger. So each quarter we talk about growth of 30 to 40%. That is good. And also the bigger and bigger base and so having those products as we go into next year continue to be running at high rate and we haven't seen those decelerate.

That is going have an impact on our numbers next year in a way they really did not have in our overall numbers this year.

NpH, the recognition of normal pressure hydrocephalus as a real clinical problem, is increasing in the neurosurgery community. We have a high-margin high-dollar product that, really, we have not had a chance to grow our hydrocephalus business for years. That business has been essentially flat to declining since we began acquiring the various hydrocephalus products and that is because we never have anything interesting to talk about.

Our sales of NPH are expected to increase and in fact the higher than our sales of the predecessor project the (indiscernible) as we go into the new year with both the higher gross margins and a significant increase in revenues both in the U.S. and next year.

Then finally, keep in mind that in our numbers for this year when you all calculate organic growth we get zero benefit for Newdeal. And we have been talking about how much effort we have been putting in Newdeal in the United States and in Europe but the way we calculate organic growth, any growth so far this year in the United States for Newdeal, I don't get any credit for in the mathematical calculation of organic growth.

Next year, we have a very nice comparison of Newdeal versus this year's since we started the year with practically nothing of Newdeal in the United States. That doesn't account for the growth of that business outside the United States. And it is not a small business, Newdeal.

So that, plus the overall impact of having a reconstructive salesforce almost twice the size that we started this year with, a neuro group that is not playing defense and is 20% bigger than this year gives us the confidence to drive the revenue guidance that we provided for 2006.

And keep in mind that, although this year, we have had diminished revenue growth compared to our historical expectations, it was only a year ago that we grew revenues 20 to 22% every quarter. So we are not drawing a straight line into this year's roughly 11 or 12% organic growth and saying, "That is where we need to be or that is where we have to be.' We have got the confidence that we will be back in the 15 to 20% range next year.

Just to clarify. When you say the 47 reps and recon that is actually the U.S. reps. Right?

Correct and that includes -- just for clarity, that includes five management -- or 6 management people.

Right but did the nine reps in Germany (MULTIPLE SPEAKERS) Those are all other businesses?

We do not include our European numbers when we talk about numbers of wraps and -- as I was just doing.

One last cost question. You have been putting in an ERP system. It's been starting to roll in. Can you talk a little bit about what kind of cost savings you think you are starting to get or are you starting to get them from this ERP system? And where are you at in terms of recognizing the savings from your consolidation activity on the manufacturing side?

Well, I think we start -- let me do it in reverse order. Although I would love to be an advertisement for one of these large ERP companies, we did not expect cost savings from the ERP. What we expected is, improvement in our ability to run the business and grow without headache. And, really, since we've implemented this system I've got several examples of our ability to add product lines without headache that I can point to.

The first of which was our ability to launch Newdeal into the United States with minimal activity, minimal disruption and to take it immediately through our sales and marketing and distribution activity.

We have similar optimism that the Radionics integration will go smoothly as we source products from Tyco into our U.S. distribution center and Oracle system. And I can tell you as the team is working today, we believe that that system will make it much more efficient in doing so.

We've also been able to consolidate our accounts receivable and certain accounts payable activities and customer service from our various locations, including JARIT into New Jersey. It's hard to put the a finger on whether there is real cost savings from that or whether it's cost that won't be added because of it.

Now we did talk about significant cost savings from a manufacturing site shutdowns and I think you started to see some of that this third quarter and keep in mind -- and I think I've been consistent in saying this. The first thing you see from the site shutdowns is not improvement in cogs because it takes almost three-quarters to turn the cogs. What you see is a reduction of G&A because you do not have plans. You do not have headquarters. You do not have finance people and that savings is what goes to the bottom line and I think you started seeing the third quarter the impact of those reductions from the first half of the year. And prior year.

You will see it in cost of goods and you've seen it to some extent in cost of goods but you'll see it in cost of goods as we go into next year, as we predicted, a 65 to 66% growth margin next year. A sequential improvement of close to 2 gross margin points from this year.

So I'm not hanging my hat on the Oracle ERP as a cost savings. I am hanging my hat on the headcount reductions in our sights.

Robert Goldman with KeyBanc.

Thanks. Two questions, Stuart. The first and I apologize in advance if I've already missed the answer but I think your sales guidance for both the fourth quarter of '05 and the year 2006 is under the guidance that you had been suggesting previously. And I just want you to go through if you wouldn't mind some of the key reasons why.

The second is on the share buyback that the Board authorized. It is more typical for us to see wording to the effect that the repurchases will be from time to time in the open market. It is less common for us to see about the possibility of private transactions. So, wanted to explore with you the reason why the wording on private transactions and if in fact, there is a scenario if you could envision that you would be willing to sell to a private player at under the market price.

Let me be clear on the last point. All that you should read into our share repurchase is the normal boilerplate. I'm pretty sure what we said in the press release and what we said, what we'll say in our 8-K and what I said on the call is the same thing that we've always said, which is a plan to buy back shares in the open market. But the boilerplate language that gives us an opportunity to buy it in private transactions should we wish to.

We bought back 3/4 of a million shares in Q1. We did not buy significant -- or was it Q2 Dave?

Q2.

Excuse me. Q2 . We did not buy significant shares last quarter principally because we were working on our Radionics transactions and did not have the flexibility to buy shares. And all we were signaling was another plan to go in and buy up the $50 million of more shares under the same set of circumstances that we anticipated in the past.

So you may be reading more or you are reading more into the language than anything we anticipated or do anticipate and we will reread the language and make sure we didn't write anything odd. But the plan is to be in the market buying back shares. Nothing more than that.

And on the sales growth guidance?

Yes in terms of the sales growth guidance, look, we had hoped to do better this quarter. And we didn't. And we are trying to reflect that in the fourth quarter and in next year. The combined impact is less than or approximately 3%. It's just that Integra is getting bigger and so $10 million seems like a lot of revenues. But the impact is really 3% next year and merely reflects our point of view on monitoring and our ability to grow that business.

And I just don't want to keep that in ongrowing monitoring until we deliver it. That is the main impact on next year's numbers and, implicit in our guidance for next year, is roughly a 15 to 20% topline growth organically. Because the numbers don't include Radionics.

In terms of the components we provided guidance on the components. And I will quickly reiterate this. We expect implants next year at 135 to 140 million instruments at 110 to 115, monitoring at 55, and private label at 30. And the only kind of color I can give is, we are bullish on the business going into the fourth quarter and going into the new year. We tempered our fourth quarter numbers merely to reflect the performance of the third quarter and we are particularly bullish on our implant business and our instrument business, and are trying to be more cautious on monitors since our predictions have not yet come true on our ability to turn it around. Or specific on how we believe we will turn around monitoring is by the addition of 20 ICUs sales specialists starting this fourth quarter and going into next year, who will hopefully allow our OR. sorry, our neurospecialist group to continue to spend the bulk of their time in the OR, which we think it's important. So they can drive the DuraGen number and keep driving the other implant numbers.

If I could just ask one additional. You mentioned that, obviously, the numbers don't include the expensing of the stock options which would commence January of '06.

Can you give us any sense or just remind us of the 10-K and what the impact on earnings, in fact, could be?

Yes. I have a specific answer to the question so give me one second. Hang on one second.

Okay, yes. At the moment, the best estimate for the impact of expensing stock options is in the pro forma net income we've provided in the notes to our financial statement. For the third quarter of 2005 if we had expensed stock options according to the new FASB statement 123, the impact would have been to reduce diluted earnings per share by $0.05. And our expectation is that due to grants made this year and expected to be granted in 2006, the impact may be slightly higher than this amount in each quarter of the coming year.

Amit Hazan.

Just a couple of quick questions. First of all, just back to guidance for a second. We saw you come in on operating earnings at the high end of the range. We saw solid operating leverage in the third quarter. Why are you lowering fourth quarter EPS from your past guidance?

I don't think we are, really. I think the implicit guidance in the -- remember, we gave annual guidance and then we gave third quarter guidance and you can come up with an implicit guidance which was plus or minus $0.40. And so what we wanted to do was to provide a range and our best guess as to where we would come out for the fourth quarter which was $0.36 to $0.40.

I would say we feel good about our cost control and we feel good about what the margins came in and we, on the other hand, wanted to have a relatively broad range which reflected the range of revenues that we guided to for the fourth quarter. Obviously the bottom line will depend on the -- where we come out on the topline range and we do expect to continue to invest in the fourth quarter and grow the business as we go into 2006.

So I think what you're seeing -- I don't think we really lowered the number in earnings for Q4 but rather gave a more precise range for -- sorry. Gave a specific range for Q4.

If I look back at the yearly '05 guidance that you gave, it does like coming in at the high end of the range that the new range would be a little bit lower. But that's the only reason I asked the question. And just to expand on that, if we look into 2006 you have now lowered topline guidance for '06 twice over the last couple of quarters. But bottom line guidance has stayed the same and here we are with the growing sales force and a number of your divisions with an adhesion trial starting in the back half of last year.

Maybe just help us get some confidence that that EPS number for next year's, which has not been changed, is make up of where are you seeing the upside, in spite of the fact guidance has come down on the top line a couple of times?

If you look at the guidance we have for next year of $1.65 to $1.75, note that this quarter, adjusted earnings per share is $0.36. That is not a heroic increase, as you go into next year. $1.60 is $0.40 a quarter.

So we don't have that big reach that we have had, historically, in terms of growing the business. In order to hit the guidance. So 1.65 to 1.70 I think comes out to about $0.43 a quarter and we are at 36, already, sitting here in Q3.

We had expectations for gross margin increases this year and next that are coming true. We committed at the beginning of the year to shut down a variety of sites and we spent money to do that. And we committed to reduce head and we spent money to do that.

And that is where we are going to see the impact as we turn our inventory this year into gross margin next year. Again, also keep in mind that the part of our business that is growing the fastest is the implants. And they have gross margins that are significantly higher than the monitoring products and the instrument products. So that 65 to 66% gross margin is the principal driver, even with the revenues at 330 to 340 for next year that gives you the confidence to drive the bottom line.

You can build in the guidance that we provided at the end of my talk of 33% plus or minus of SG&A. And of approximately 5% on R&D. And I think you can construct a model that handily lets you do $1.65 to $1.75. And is not without room for some error.

Perfect. Then, lastly on Radionics, No. 1, just curious what kind of impact they had at Astro, if they were there and what product they may have highlighted and No. 2, we saw Alicta (ph) and in particular Varian (ph) introduced new products, (indiscernible) products that is. Maybe just a comment on how you seen the competitive landscape for Radionics here, going forward in the next year or two?

Couple of points. First of all obviously with Radionics being in the mode of a transaction, there is a limit to how much we can talk about and, frankly, there's a limit to how much they can do both in the market and in their -- in what I can disclose to you. So I -- you didn't see very much you in the last six months from Radionics. And I doubt you'll see that much new in the next six months from Radionics.

Bear in mind that the Radionics product has been around for a long time and has substantial installed basis in the United States. And that is really what we're buying here. We are not, and I think I made this point certainly at -- any of you who were at the Congress of Neurosurgeons, we are not predicting substantial growth in the parts of the Radionics business that competes directly with Varian.

Keep in mind what mostly Radionics does is provide add-on tools that work with Varian and Electa and other product lines. So I don't have either a plan or a concern about competing directly with those players. What we do is mostly synergistic with those players and in fact we get various components from those players.

So I don't think we are looking at a situation where I have to worry about their new products and be concerned about cannibalization of our -- or the Radionics product lines. Rather how do we work synergistically with those products and how do we make sure that our system, in fact, is into where they are going.

I think that is a little bit of mis -- not your misunderstanding but perhaps our failure to communicate that clearly early on in this acquisition. Radionics -- it's been a long time since Radionics was a direct head-on-head competitor with either of those two players.

Chad (indiscernible) with CIBC World Markets.

Stuart, I wonder if you could talk a little bit about how Radionics' ultrasonic aspirator compares to your product line and whether you see any issues there from the HSR standpoint?

Sure. In principle, there's a variety of ways to remove tumors in the brain. It is everything from things like our Ruggles and our R&D lines where you use a manual handheld surgical instrument, to our new most Buzz Bipolar, which is an electrical or electrosurgical radio frequency device which can be used to dissect the tumor, to devices that use water jets to remove the tumors.

All the way through the ultrasonic, which is a device which uses selective ultrasound to eventually shake the tumor like a jackhammer and ablate the tumor.

The two principal differences between the Cusa product and our selector product have to do with 1., the power of the instrument and the Cusa product is perceived as more powerful and stronger and, therefore, what our guys might argue, being less selective.

And then the other difference is the selector has an internal cooling system to the handpiece rather than an external system and, therefore, is more appropriate for going through, for example, keyholes to cut the tumor because their device is bulkier (ph).

Our point of view is that there are so many different ways of attacking tumors, we want to have a full arsenal and we want to -- just like we have done in other areas of our business -- make available for our customers all of the leading technologies rather than try to persuade them that ours is the better one than the other.

And we found that our surgeons really don't wish to be told by salespeople which product to use. They want to just know that our group will be there to service and support them. And that when they do a surgery it's going to be there and not be broken, rather than being taught or trained to use one of the other and so that it's our plan. We expect both product lines to survive and in fact to be enhanced by our sales and marketing organization.

There is quite a bit of competition in this area and our objective is going to be to be the most quality- and service-focused of all of the companies.

Switching to Newdeal do you still see is Right Medical still have Newdeal inventory that they are out -- do you still seem selling that out there or do you just mostly see them with the Charlotte system? And if you can talk a little bit about the competition (MULTIPLE SPEAKERS)

Candidly about being disrespectful we hardly see them at all. What we see is Synthes and we say DePuy (ph). And so to the extent they have inventory, my guess is they are just disposing of it and not selling it. Because we for a few quarters were running up against them selling it but they don't seem to be anymore and then if you read their public statement they appear to be selling the Charlotte system.

We don't see it much. So we are not sure what they're doing and, frankly, it doesn't matter that much to us anymore. The real players here are Synthes and DePuy and in a really strong Synthes account or DePuy account, boy, it's hard to take the business from them. But there's a lot of surgical podiatrists and orthopaedic foot and ankle guys who do not merit a call from DePuy or Synthes or have not been getting a lot of attention from them.

And therefore they appreciate a sales organization focused just on that market. I think that is what we're doing. The same way that many neurosurgeons don't truly appreciate the fact that there -- other companies are much more focused on spine and would rather deal with a neurosurgical-focused company like us.

We're hoping to create that same sense in foot and ankle where you really want to come to Integra for your foot and ankle needs and let the other orthopaedic specialties be served by the more general orthopaedic players.

Then if you X IPRD, your R&D was probably the lowest it's been in a number of quarters. I was just wondering if you could comment on that and in the fourth quarter, should we see that go up more towards 5% of revenue?

If it's at the lowest level, it is only been 100 or $200,000. We are doing what we have been doing. The last few quarters, keep in mind, we significantly restructured our R&D group. There were people let go. Activities consolidated.

So if you look at our GAAP numbers, there's several hundred thousand dollars a quarter, maybe as much as .5 million a quarter, activities that have to do with severance and restructuring in prior quarters. That's less so now and I think, roughly, the 2.8 to $3 million level, excluding the without any IPR&D charge is kind of the number we're targeting for the rest of the year. It'll grow next year as you point out. As we start the clinical trial, those expenses will start to ramp and the percentage R&D will increase.

Now our revenues are increasing faster so I had had an objective of 5 to 6% R&D, and I'm just not sure that is realistic. Although post-acquisition of Radionics. those guys actually do spend quite a bit of money on developing and improving their products. And we would certainly intend to continue to do that.

In fact I'm pretty excited about the R&D team we've got to know up there. And we think they have got a winning team which could drive not just the product lines they've got up there but some of the product lines where we have not been as successful as we would like to be particularly in electronic development.

Jayson Bedford with Adams Harkness.

Have a couple of quick questions here. First, on the monitoring side I think your guidance implies 13% growth. Obviously you are going to have an easier comp as well as 20 additional salespeople.

Is there anything else there that will help accelerate that revenue growth on the monitoring side?

Well I certainly don't want to commit to accelerating it anymore in heating my $55 million number which I am absolutely determined to hit. As you would appreciate I don't like to be wrong. And we have been unable to turn that number; and we are committed to turning that number. In terms of -- we don't need products. We need focus.

We have the market leading products. I think most of the folks on this phone call have been to the Congress of Neurosurgeons and seen the prospectus on our Company. And, candidly, the competition has not been able to hold a candle to our product.

The issue is, if our salespeople are not spending time with the customers, customers do not use them as intensively and we just have been too focused on duraplasty and on driving NPH and driving Mayfield. And that has come at a cost.

I think it was a good decision to make, but it is not something that we would want to continue indefinitely. Hence, the commitment to add these additional sales support in the new year.

So it's existing portfolio, greater focus.

Yes we are not betting on new products. We've got good new products. They just have to sell more of them.

Just shifting ever to the NPH valve, the product's been out there for three, four quarters. Are you seeing growth at the market level? Or are you gaining share versus the programmable valves out there?

At the moment we are just growing with a market. We are not taking share. We hope to take share but what we're seeing is the market growth.

What will allow you to take share?

Again, larger sales organization, ability of the group who are focused on the operating room to focus on that product because they are not playing defense either on duraplasty or in the ICU. Additional marketing support. We've added another marketing person to the group already, selling -- responsible for supporting that product. Additional clinical activity. We've added, I think it is now three surgeons to our Speakers Bureau and we'll continue to add additional experienced users to the speakers' circuit.

It is just blocking and tackling. So we are pleased with the performance but I don't want to say we are taking share. Again this is a part of the market where we are number three hydrocephalus, not number one as we are in many of our other categories. And it is a topic of great focus and so what we really want is J&J Medtronic to continue to focus on building the NPH market, which they appear to be doing.

Last piece on the P&L, the CoCo (ph) add back was about $800,000. A little higher than historic levels. Is that 7 or 800,000 the level which we should see going forward?

This is David. As I mentioned, the interest expense was up. The interest expense is related to the convertible bond so therefore it is part of the add back. And the product of that will continue which is the negative impact of the swab. There was an increase in the contingent interest which was large, which was a combination of the change in the stock price as well as rate. That probably will not continue at quite that level.

The calculus on the CoCo is hard to follow but as your stock price goes up, the contingent interest is worth more and therefore you book a phantom, higher interest expense. It actually gets backed out when you calculate EPS. So it is irrelevant to the EPS but it is relevant to the face of the income statement.

Glenn Novarro with Banc of America Securities.

Couple of things from a modeling point of view. As we look at Radionics, by our calculations, that deal looks like it's $0.10 accretive. Can you at least tell us, are we in the ballpark with that assumption? Secondly our accretion assumption assumes that you -- that the revenue for '06 is about 20% less than it where was in '05. Can you get it, tell us how you get to that number?

Is that what you experienced with Newdeal for instance. And, lastly, can you actually give us the absolute Newdeal revenues in the quarter? Thanks.

Yes. I think -- well, a couple of things. First of all let me talk about Radionics. We provided a 2000 -- at the end of September 2004 revenue and operating profit number. And we do not typically expect a 20% decrease in revenues when we buy a business. It wouldn't be a very good business. And certainly we saw nothing like that with Newdeal.

What we're talking about here is really, the way in which they run the business versus the way in which we will run the business. And outside of the United States, which represents just about 50% of Radionics' revenue, outside United States Tyco -- because they are such a big company -- is direct.

So we will have, we will have to appoint distributors in about half of the market. Maybe it's 2/3 of the markets and, therefore, we will sell to those distributors at about a 40 to 50% discount off of the list that Tyco was able -- sorry, the ASP that Tyco was able to achieve.

So because Tyco is through its own affiliate they get to book the hospital revenues. We will not, in any market were we are not direct, and, therefore, we need to take approximately 60% of their non U.S. business and we will start to book that at 40 to 50% off in dollar revenue.

And that is a real cost of doing business as a smaller company, compared to a big company like Tyco. Now the other side of that which is good is that we won't have any sales and marketing costs associated with those distributed revenues of any real substance because we will be able to add much of what they do to our own existing sales and marketing infrastructure. So it is not a -- a media 50% haircut on operating profit as we start to sell those products through distributors because Tyco was booking something on the order of 15 to 25% for its own SG&A for those product lines.

The first thing you see is when you blend all that together and you also make some assumptions about the transition period, we felt that, based on what we know now, that a topline revenue -- assuming we booked the full year of revenue of approximately 20% less than the 63 million or round numbers -- $50 million is not a bad estimate for revenues.

And that assumes that as you transition to distributors, you may lose some sales or there may be some near-term slowdown in sales with a pickup towards the back end of the year sequentially?

If you're trying to layer it in, yes. I wouldn't take 50 divide by four and assume that if we start on Jan 1, it'd be 12.5 a quarter. No, I'm sure it'll build and there's other parts of that that are real that have to do with accounting that will make it be a build throughout the year as well.

There are certain things that will go up on our balance sheet as prepaid for example, that won't find their way through the revenue line until we -- until we do them ourselves and it's -- The accounting is complicated, when we get there, we will walk through it.

Punch line is, we wouldn't want to be remodeling more than about 50 million and although we do not give guidance your assumption that it ought to build over time is definitely right and also we don't know that it will close Jan 1 and so we've got to wait and see how that plays out to know the impact of the numbers. Hence, why we don't want to give you got us with those numbers in.

On the operating profit line, same kind of analysis goes into it. And we felt that taking the $13 million of operating profit closer to 10, was a good guesstimate for what it would look like in our hands, first year. Again assuming we closed on Jan 1 and I'm sure you're right. That that will also build through the period and, in fact, building the full $10 million may be too aggressive. Particularly since all the inventory that we acquire will need to be stepped up and basically run through the P&L with minimal profit as with all purchase accounting deals.

We do not have the final accounting valuation done and, therefore, cannot give you guidance on the amortization of intangibles. But certainly we articulated an expectation that the deal would be accretive even with all of these things. But I don't want to provide you with a number whether it's $0.10 or more or less.

Because there's too many moving parts and obviously when we give guidance, we want to be accurate and responsible for the numbers and it's just too soon to do that.

Actually you gave us a lot and that was very helpful. On Newdeal, I believe in past calls, you actually gave us a ballpark revenue number.

Yes you can actually get it from the press release. It is 3.531 million because it's the only -- it's on the last page of the press release. It is the only product line that was acquired since the beginning of 2/3/2004.

Every other acquisition we have done has now been grandfathered. So the business did 3.5. And keep in mind it always has a soft Q3. So when you see a down sequential from Q2 it is not because the business didn't perform well. The business actually performed better than expected and, certainly, we are expecting a significantly larger number in Q4 out of Newdeal and we are only a month into the quarter but I think we are on track to achieve that.

Alex Arrow, Lazard Capital.

First on instruments. The number there was almost 2 million less than we had been looking for. And I know that you -- in your prepared comments, you said that the JARIT, the reconstructed tools, the selector and the Mayfield led the growth. What else is there besides those four?

I thought that was basically it in instruments unless I am missing something. And since those led the growth was there something else that was a disappointment in instruments?

Well, there's a lot -- there's a whole lot of things in the instrument categories. Things which were not as robust but, again, I wouldn't read more into it than they were just not as robust. But they do show up in the instrument category. The Ruggles and R&B productline was not particularly stellar for the quarter. Spinal specialties was not particularly stellar. Bertholt, which is in the process of being closed essentially, certainly did not perform well, although we expect it to perform better once we are through the transition. Those are all things which underperformed for the quarter.

And of that underperforming category can you give us a sense of how much of the 20 something million total instruments per quarter lined those less stellar groups they represent?

That is a level of detail, Alex, I just prefer not to start to provide guidance on.

And the reason for that is, I'm not -- the reason for the underperformance is the general lack of focus because you were focused on duraplasty and so forth or was there anything else you could add as to what was going on with Ruggles and so forth?

I hate to say it. It's just sort of, I think noise. It's just -- it's not -- I wouldn't want to put my finger on something and say, "Well, gee, they did something wrong.

Certainly -- well, the one thing I would say. We shut the spinal specialties location and moved it into our California location and we shut or are in the process of shutting Bertholt and are moving it into our Andover. That's never good for a business even if we are doing our best to keep the sales organization focused.

So I think that's probably the only real substantive thing that I can say.

Let me move to Newdeal. I know you've been very specific about how it did to the 3.5 million in the September quarter. Indeed, did better than you expected. And as this is the first year we don't have a specific seasonality pattern to look for and I know you said it is going up in the fourth quarter.

Can you be any more specific about what the seasonal pattern looks like to help us with our fourth quarter expectations for Newdeal?

We would hope the fourth quarter will be in excess of the first and the second quarter. Not combined but we expect the business is down in the third quarter and has been at least as long as they can remember and articulate it to us. I'm certainly looking for a record quarter worldwide on Newdeal in the fourth quarter.

And the first quarter was higher than the second. You are saying higher than 4.5 million?

I don't mean to be that specific. I don't have the actual Newdeal number in front of me for Q4 but, yes, I would -- if -- let me just look here. I will take a risk and go with a yes, Alex.

Would you be willing to be specific as to the Europe versus the -- I know it's mostly in Europe but so --?

I expect that Europe will run in excess of Q1 and Q2 and certainly the U.S. is going to run substantially in excess if you want in Q1 and Q2. So when you put -- combine the two of them, I mean, the more I think about and I don't have the specific numbers right in front of me for Newdeal I'd be kind of really surprised if it wasn't a record quarter for Integra with Newdeal just because of the impact of the U.S. business starting to really mean something.

As you look at the '06 growth outlooks for Newdeal, would you say it's more of a U.S. (indiscernible).

No, the Newdeal business when we bought it was growing Oh U.S. 15 to 20%. I expect them to continue to do that. The U.S. is obviously -- what is going to drive growth more in line with target implant growth rates of 25+% rate short.

Last question just on the estimate you gave for the duraplasty competition. You said you thought that Medtronics and JJ combined it, only about 5 to 6 million. Is that based on the estimate of those accounts you had where they are trialing and you are giving them the estimated dollars that they would have sold if they hadn't been filing? Or are you including accounts that you may never have had but they got? How do you calculate that 5 to 6 million?

On marketing, again, it is more precise than most of the market data we are able to get our hands on. And there are no like published IMS or available data sources that we can buy that we are aware of. On the other hand because they are glad to be so important to us and because we've been pretty focused every method recorded but every week on how we are doing, we do keep by account a scorecard. And we know when an account has flipped from our product to theirs or back and we try to keep track of it. We also try to know where, for example, one of them has taken the business from one of the other competitors whether it is Gore or Synovis or Lifecell. And we're watching that and trying to keep pretty good marketshare statistics.

We could be wrong because there is no viable data. But we do keep very careful score; and that is where we came up with these $5 to $6 million of revenue. It is not $5 or $6 million of revenue we lost. It is our best guess, it is $5 to $6 million of revenue.

And on a worldwide basis?

I doubt we doubt we know much of what is going on outside the U.S. No I bet it is mostly U.S.

But, again, remember we've said in the past our duraplasty revenues OUS, are now more than 15%.

And we don't -- we don't really have the kind of infrastructure OUS that allowed us to capture the kind of marketshare that we did in the U.S. We're hopeful with the increase in headcount we will get us but international's never been a huge part of Integra until very recently with the acquisitions and the sales expansion activity.

If I could squeeze in one last question. The sum of the issues in the pass or questions that you have faced. I know you've dealt with the issue of growth by acquisition versus indogenous (ph) growth and you explained to us that the reasons for the indogenous growth. Anything you can tell us about how you think 2005 is going to shape up as far as your indogenus growth perhaps just by measuring the original collagen-based businesses? Where you didn't have the acquisitions, what your goals and expectations and how it actually looked like it is turning out for pure (indiscernible) acquisition growth?

Honestly, Alex, it's almost a thought exercise I don't even want to -- I'm saying this respectfully. I don't even want to validate it. It's a little bit like saying what would the U.S. be without immigrants? I mean we are a company that grows both by organic growth of collagen products and by a significant development activity in growing the companies we have acquired and then by buying other companies to accelerate our, activity. And if you go back to the Company 10 years ago we were doing $12 million of revenue and I have a lot of confidence we're on track to -- if you include Radionics, looking at 380 million to 390 million of revenue next year. That is a pretty good growth whether it comes from acquisitions, improving the acquisitions that we have completed our collagen-based products I mean you know between DuraGen and skin and DuraGen absorbable collagen sponge and BioPatch and BioMend that we are driving the hell out of our collagen products.

But we've also done some extraordinary things with the acquisitions we've done and even though this hasn't been the best year for Camino, until this year we were growing at a 15 to 20% a year and this was -- that was all organic growth in a business we bought eight years ago.

So I, of course, respect the point of view that we have to grow all of our business lines in order to make our objective of 15 to 20%; but think about the risks we have taken out of the business by having such a balanced portfolio of products and having, for example, this year JARIT and recon hitting its stride while we -- and providing resources while we defend duraplasty against two major competitors.

I think it validates the strategy.

William Plovanic with First Albany capital.

Just some questions, you talked about the distribution expansion. You talked about the 20 specialists being put in place for the monitoring. Can you give us an idea of the timing of when all those reps were in a place? Same with the expansion on the narrow salesforce?

Are you talking about this year or what are we looking at for next year?

No. This year. You in terms of the (MULTIPLE SPEAKERS) because, typically, in these types of businesses it takes six to nine months for these reps to really start to produce and gain traction.

And I am staring at Jack and Gerry here to make sure I don't get my numbers wrong. I think we started the year -- let's just talk about recon, at about 20 people. And we finished the second quarter at about 30 people and we finished the fourth quarter at about 40 I shouldn't say people -- reps in territories. So we have about 40 reps in territories plus the five or six management people at the end of the third quarter.

And I would hope, I think we are looking for like six or seven people, before the year is out reps. To end up with 54. So that is recon. And Jack points out, obviously, because you are hiring so quickly, there are definitely people that haven't worked out who we've had to let go during the year. An interesting statistic might be that we will probably finish the year with less than half of our recon people having been working for us for more than six months.

And so, yes, they'd better be a lot more productive next year and I expect them to be and, again, some anecdotes. I just saw commission check go out for a new rep who generated in one month $300,000 worth of BMWD who, I believe, hadn't been working for us for more than a few months and that's because apparently she called someplace that nobody else did before.

So there's neat opportunities that just having those bodies are just doubly generating.

In the neurogroup it's been more measured. I would venture to guess we are adding about five reps a quarter this year although we did have some attrition this year. And so definitely there's many more reps than just 20 new people this year. Because of some of the attrition and definitely this year, it took a toll on the neuro group given how hard everybody was fighting and how much activity there was.

We should finish the year with all maybe 90 of the plus or minus 90 of the reps in place. And then I thank we are targeted to add five of the ICU specialists before the year is out and then I think we model next year like five more in Q1 and Q2 and Q3.

Then, JARIT has pretty much stayed without any significant headcount additions. And now I'm looking over to Europe. Europe has been a big build. I think we're almost done but we've got ten in Germany. About 20 in France. We have got four in England with another three more to go, plus or minus. Benelux got six or seven.

Then we have got approximately eight individuals who are what we refer to as distributor managers. They don't actually walk into hospitals for the most part, but they manage our international distributor network. So we may have one guy who manages the Middle East, another person or a couple people who manage Latin America, couple people who manage Asia and they carry all of our product lines and are much more business-focused.

They sit down with our distributor for a new deal in Brazil and negotiate what they are supposed to achieve in the next 12 months. And then we will do the same thing with our distributor in Brazil for some subset of our neuro products and so they are more business-focused than detailing oriented.

Then we have about 30 people in marketing in the U.S. and probably four or five in Europe and growing.

Then, as a frame of reference you talked about where Germany, France, and all those countries are. Where were they at the beginning of the year?

I think I had two guys in Germany and half of that was in Benelux and most of the incremental people in France came from Newdeal and in the UK we maybe had three guys. We did not have much the sales organization in Europe.

Jack is mentioning, we've really got a lot of confidence in these Newdeal guys and having now had them work with us for a year and do the right thing in terms of the integration and in terms of the culture, they are running our European business. And I am counting on them to drive the business over the next three to five years and they've indicated both informally and formally that they intend to remain with us going forward and drive the business. So we are excited about them.

In regard to the Newdeal guys it sounds like the Newdeal business internationally was a little lower than everybody was looking for. Do you think part of that is maybe a function of the fact that they are working on building out the international infrastructure for you and maybe you are taking your eye off the ball a bit?

I don't think so. I mean, again, I don't know offhand what the various analysts had for the Newdeal number for Q3 but my guess is it is more a failure on my part to properly indicate the seasonality than it is some performance. Clearly, they are being stretched thin. But the truth is we are giving them a lot of resources, too. I don't think the Newdeal business did anything other than what I expected it to although perhaps my expectations were not articulated crisply enough.

Follow up from David Zimbalist.

This has been a very helpful conference call. One question that hasn't been addressed. Tax rate estate. Since you brought it down, your rate for 2005 appears to be 34% now. Can you talk about what brought it down and how sustainable that is?

This is David. It was mostly an allocation of incomes into different jurisdictions. We have a couple jurisdictions, lower rates in Europe as well as Puerto Rico. We had more income in those. We also had some credits that we were able to recognize in the U.S. and those combined to lower the rates. But this year we put in place a number of plans that we think we can sustain that rate in the next year which is why we gave guidance for 34% for the full year '06.

Keep in mind, part of the G&A you've seen for the last few years has been substantial spending on reorganizing our entities around the world. Historically, we utilized them -- we continue to utilize for a while -- a substantial NOL base, but we are rapidly eating into the NOL base and therefore like other major companies have done a variety of activities to make sure that we are paying the right taxes around the world. And I think you are starting to see that in the rate which you really don't get credit for or did not get credit for the rate, historically, because of our use of NOLs.

Operator are there any more questions?

Robert Goldman with KeyBank.

David Holtz covered some of this space. I just wanted some clarification and maybe a little bit more on it and that's on the interest expense. I know this is added back below the line. But could you just, again, take us through why the rather significant change in interest expense, the net interest expense in the quarter? And for modeling purposes give us an idea of how we should model that line? The net interest income line for '06.

Okay, for the third quarter there's the real interest that we pay on a convertible bond which is only 2.5%. Then there's a swap and rates have gone up and remember we swapped 50 million of that convertible bond and so that floats. And as rates have gone up we're actually paying real cash interest, closer to 4% than 2.5%, because of the 50 million swap, which served us well for the first three years of the bond when rates were well below the current short-term rate. So part of what you're seeing and you should expect to continue to see going forward is that 50 million of our $120 million bond is floating.

That's pretty straightforward. What is less straightforward is an aspect to the convertible bond called a contingent interest feature. And that contingent interest feature is a real economic penalty that we pay to the bondholders at the term of the bond. So when we actually return the cash or allow the bondholders to convert at the end of five years, there is a penalty built into the bond where, as our stock price goes up, they get anywhere from nothing to as much of as much as 1.6 million, I think it is, of additional interest income or additional payout, based on our stock price going up. That is called a contingent interest payout.

It is just another aspect of the convertible bond and it's, again, built into the original structure which was very advantageous. Well, because our stock went up from approximately 30 early in the year to approximately 38 during the third quarter that became worth more. And even though we don't cut them the check during the quarter, we report it as a phantom interest expense and that is what you saw.

So if the stock now doesn't go up or down much, that piece will not recur in Q4. And since I don't provide projections as to which direction our stock will go in 2006, I can't produce a projection as to where that will go although it does cap out at 1.6 million or 1.7 million and -- David do you know offhand what stock price it is at 1.7 million?

Well no, it also depends on over the amount of time until maturity. Because it's a the present value kind of calculation. But it's -- right now I think we are about halfway to the 1.7 in terms of accrued value and evaluation as to the third quarter.

So, you could look at in any quarter depending upon where the stock goes, it could go up 2 to 300,000 or down 2 to 300,000. It's not money going out the door until the last day and then when the bond, in fact, converts or gets paid out, they do get -- assuming the stock price is high, an additional 1.7 million. By the way we do get a full deduction for that amount and more in terms of the interest deduction that we get in our tax filing.

So it's a very advantageous structure although somewhat complicated in terms of the way we present it. And this is true for anybody who issued and there is I think 300 issuers of what was known as a contingent convertible bond at that time 2.5 years ago.

As far as guidance us for '06, you are tracking to be modestly negative on net interest expense for '05, taking all this into account. If they stay where they are, if your stock price stays where it is, what would that net interest line look like in '06?

Would be similar to just slightly negative for the full year. On a net basis. Pretty much, our model has interesting come offsetting interest expense by the -- throughout '06.

Obviously, there are some assumptions built into that on the growth in cash and growth in cash due to earnings and we don't build any impact into our numbers of for example share repurchase or other activities. We just assume nothing changes in our model.

The one important thing in that assumption is it does not include the cost of Radionics so that will decrease our interest income.

Just one final point on that. If we assume 0 on the net interest expense line in '06, would we also assume 0 as far as the add back of after-tax interest expense?

No you add back the interest expense but you don't add back -- you don't subtract the interest income. So, again, we'd model somewhere between 1.1 and 1.2 million a quarter for interest expense. The add back would be on an after-tax basis of that amount.

There are no further questions in the queue at this time.

Thank you, everybody, and we look forward to reporting on our next quarter's progress later this year.

Thank you. This concludes today's Integra LifeSciences conference call. You may now disconnect.