Integra Lifesciences Holdings Corp (IART) 2006 Q4 法說會逐字稿

Good day everyone. Welcome to the Integra LifeSciences 2006 fourth-quarter earnings conference call. As a reminder today's call is being recorded. At this time I'd like to turn the call over to Mr. Stuart Essig, Chief Executive Officer and President. Please go ahead, sir.

Thank you. Good morning everybody and thank you for joining us for the Integra LifeSciences fourth-quarter conference call. I'm Stuart Essig, Chief Executive Officer. Joining me today are Maureen Bellantoni, Chief Financial Officer; Jack Henneman, Chief Administrative Officer; and Gerry Carlozzi, Chief Operating Officer. During this call we will review the highlights of 2006, the financial results which we released this morning, and our forward-looking guidance for the years 2007 and 2008. At the conclusion of our prepared remarks, we will take questions from the members of the telephonic audience.

This presentation is open to the public and can be heard through telephone access or via a live webcast. A replay of the conference call will be accessible starting one hour after the conclusion of the live event. Access to the replay is available through March 14, 2007 by dialing 719-457-0820, access code 458-3668 or through the webcast accessible on the investor relations homepage of our website.

Today's call is a proprietary presentation of Integra LifeSciences Holdings Corp. 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, February 28, 2007. Unless otherwise posted or announced by Integra, the information in this call should not be relied upon beyond March 14, 2007, 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 other statements concerning management's expectations of future financial results, new product launches, regulatory approval, market acceptance of and reimbursement coverage for these new products, future product development programs and potential business acquisitions are forward-looking.

Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from predicted results. For a discussion of such risks and uncertainties please refer to the risk factors included in the business section of Integra's annual report on Form 10-K and to 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.

We disclose certain non-GAAP financial measures in this presentation including adjusted net income and adjusted net income per diluted share. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measures is provided in the press release that we issued this morning to report our financial results for the fourth quarter and full year of 2006.

This press release is available on our website in the press releases section under investor relations. Additionally in this press release and in the current report on Form 8-K that we filed today, we provide explanations for why management believes that presentation of these non-GAAP financial measures provides useful information to investors regarding Integra's financial conditions and results of operations and the reasons for which Integra's management uses the non-GAAP financial measures.

I will now turn the call over to Stuart to review the highlights of 2006.

Thank you, Maureen. The year 2006 was a year of growth for Integra. We increased revenues by more than 50% and exceeded the high end of our revenue guidance. This revenue growth came from new product launches, better selling of existing products and acquisitions. We grew not only product revenues but also the breadth and depth of our product offerings and sales organization.

Through the acquisition of KMI we expanded our extremity reconstruction productline to include the hand, wrist and arm. The neurosurgery franchise also expanded with the acquisition of Radionics and recruitment of specialist groups focused on the intensive care unit and spine surgeons. Integra, once devoted almost entirely to neurosurgery, is now a global diversified medical technology company competing in a variety of large, growing and in some cases underserved markets.

After investing over $220 million in 2006 to bring four businesses into the Integra family across all three sales channels, we continue to evaluate many potential acquisitions and the pipeline is full. Partnership opportunities also continue to flourish and in 2006, we expanded our agreement with Wyeth and Medtronics for ACS Amplify and MasterGraft.

As Gerry Carlozzi will discuss later in the call, 2006 represented a year of change and considerable positive momentum for our sales force. That said, I just want to comment here on the growth Integra has seen. As of December 31, we have over 250 people in four separate sales organizations including the brand-new spine sales force and the largest extremity reconstruction and neurosurgical sales forces in the United States. During 2006 we also opened a new European headquarters in Lyon, France and completed the previously announced European restructurings. A Puerto Rican manufacturing facility is also expanding rapidly and we expect it to be our second collagen manufacturing site by year end.

Total revenues in the fourth quarter of 2006 were $125.4 million, an increase of $52.4 million or 72% over the fourth quarter of 2005. For the full year, revenues were $419.3 million, an increase of $141.4 million or 51% above 2005 revenues. Revenues from products acquired in 2006 totaled $35.6 million for the quarter and $98.1 million for the year.

Our Neurosurgical and Orthopedic Implant revenues increased over the prior year quarter by 34%. Rapid growth in implants for extremity reconstruction and bone growth products drove implant revenues. Highlights for the quarter include Integra dermal repair product revenues increasing 28% and Nerve repair products revenues increasing by 43%. Revenues from bone growth products increased by 39% over the fourth quarter of 2005.

Sales at recently acquired Orthopedic Implant products contributed $2.4 million in sales to this category. Our duraplasty product line which most of you know has had to contend with aggressive new competition in the last couple of years achieved record sales.

Revenues from our Medical Surgical Equipment category increased over the prior year quarter by 108%. The majority of that increase came from acquired products. Radionics products, Miltex products and products of other companies sold through our Canadian sales organization all of which we acquired in 2006 contributed $33.2 million of sales to the quarter.

International sales were 23% of total sales in the quarter and 24% of total sales in 2006 compared to 25% for the full year 2005. Changes in foreign exchange rates contributed approximately $1.3 million to revenues in the fourth quarter.

Revenue growth was a lot stronger than we expected, more than $4 million above the top end of our guidance. We're extremely pleased with the growth of both our existing products and the businesses we acquired during 2006. Sales and related taxable income in the United States were disproportionately strong relative to our expectations which raised our effective tax rate adjusted to exclude the impact of in-process R&D write-offs to 34.9% for the full year, higher than the 31.6% adjusted rate that we reported for the first three quarters of 2006.

The higher GAAP effective tax rate for the fourth quarter reflects the impact in that quarter of the higher than previously expected full-year effective tax rate.

Finally, the strong sales in acquired product lines had a slight impact on consolidated gross margin which came in about a point lighter than expected.

I'd now like to turn the call over to Gerry Carlozzi who will discuss our salesforce and new product development.

Thank you, Stuart. During 2006 we added 43 new sales representatives to our Integra neuro salesforce and expect that growth to continue as we expand our specialty sales groups focused on the intensive care unit and spine surgery. We now have a 148 person strong neuro salesforce which is the largest direct selling organization calling on the neurosurgeons in the United States.

2006 was a breakout year for our neuro sales team. Our flagship product, DuraGen, has faced intense competition for the past two years and we've been able to hold our ground. During 2006, we reaccelerated growth across virtually all product lines. We expect to see our neuro sales group continue to build on a momentum we experienced during 2006.

We formed a new orthopedic focused spine salesforce this past year. We currently have more than 12 dedicated spine reps on board and plan to expand the group to 24 reps by midyear. Our spine reps sell DuraGen Plus for repair of the dura matter during spine surgery and our new Integra Mozaik Osteoconductive Scaffold which is supplied in both strips and putty forms.

Integra Mozaik is a bone void filler we launched this month. It combines the benefits of Beta-tricalcium phosphate and Integra's proprietary highly purified collagen scaffold. Integra Mozaik is designed for use in spinal fuchsia and in other reconstructive surgical procedures. We are proud of the work done by a development team in creating a product that offers significant advantage to both surgeons and patients.

Our new initiative in spine serves two objectives. One, it represents our first attempt to selling to orthopedic spinal surgeons represent an untapped opportunity for DuraGen Plus, Integra Mozaik and other osteobiologic products that we have been our pipeline. Secondly, we will establish our position in the spine market for these products and continue to develop and increase our sales presence during the next three years. Then we will be well positioned to launch the DuraGen Plus Adhesion Barrier Matrix after we receive FDA approval. Last November we began enrolling patients in the clinical trial for DuraGen Plus as an adhesion barrier.

Our domestic extremity reconstructive sales and clinical organization also grew significantly during 2006. That group increased to 74 field salespeople at the end of 2006 with the addition of approximately 30 new sales representatives. It is now the largest direct sales force in the United States focusing on reconstructive surgery for the extremities. We believe we are the number four player in the market offering a comprehensive range of internal fixation, joint reconstruction implants, tissue regeneration and osteobiologic products.

The extremity reconstruction group launched more than eight products last year. Our product launches included new fixation systems and an extension of our collagen franchise to include new tendon protection products. We have a robust productline and will continue to introduce new and novel products for extremity reconstruction during 2007.

Finally, we integrated the KMI product lines, expanding our presence in hand and wrist surgery. The expansion in our sales team and new products has powered our growth in extremity procedures and has increased our sales opportunity per procedure. Towards the end of 2006, our reconstruction sales reps were participating in over 100 cases per week, a number we expect to grow rapidly during 2007.

Now Maureen Bellantoni will provide more financial information for the results for the fourth quarter and year end 2006.

Thank you, Gerry. We continue to generate substantial cash flow from our operations. In the fourth quarter of 2006, our operating cash flows were $20.9 million and for the year our cash flows from operations were $71.7 million.

Gross margin on total revenues in the fourth quarter of 2006 was 59%. In cost of product revenues we recognized $600,000 in inventory fair value purchase accounting adjustments from a recent acquisition. These charges reduced our gross margin by approximately one-half of a percentage point. In 2007 we expect improvements in our gross margin as our higher margin products continue to grow faster than lower margin products. We expect that our gross margin for 2007 will average 61.5% improving progressively during the year from approximately 60% in the first quarter to more than 62% by the fourth quarter.

Research and development expense increased $2.5 million in the fourth quarter of 2006 to $5.2 million. Selling, general and administrative expense increased by $20.3 million to $45.9 million in the fourth quarter of 2006 or 37% of revenue up from 35% in 2005. Included in this increase was $3.5 million or 3% of revenue for share-based compensation expense attributable to the impact of adopting FAS 123(R) share-based payments. We are targeting SG&A expense of 35% to 37% and R&D at approximately 5.5% of total revenue for 2007.

Operating income was $20.1 million for the fourth quarter and was $58.7 million for the full year. Our expense for the amortization of intangible assets was $3.5 million in the quarter of which $800,000 is included in the cost of product revenue.

We expect total amortization expense to be approximately $3.8 million per quarter through the end of 2007 of which $800,000 will be reported in cost of product revenues. In the fourth quarter of 2006, we recorded $2.3 million of net interest expense. We expect quarterly net interest expense to decrease throughout the year as we continue to generate significant cash flow.

Our full-year effective income tax rate was 39.1% for 2006. The increase in the effective income tax rate for 2006 was driven by the nondeductible nature of the $5.9 million in-process research and development charge and the changes in the geographic mix of taxable income attributable to recently acquired businesses. The $5.9 million in-process research and development charge increased our effective income tax rate for 2006 by 4.2 percentage points. We expect an effective income tax rate of approximately 34% for 2007.

We reported net income of $10.1 million or $0.34 per diluted share for the fourth quarter of 2006. Our adjusted net income for the fourth quarter of 2006 was $15.0 million or $0.50 per diluted share. This has been adjusted for acquisition and related charges, the impact of share-based compensation, the income tax benefits associated with these adjustments, and income tax adjustments related to the impact in the quarter of the significant changes in the year-to-date effective income tax rate.

We recognized $3.8 million of share-based compensation in the fourth quarter of 2006. For the full year we reported GAAP net income of $29.4 million or $0.97 per diluted share compared to net income of $37.2 million or $1.15 per diluted share in 2005. Adjusted net income was $52.5 million or $1.67 per diluted share for the full year 2006 and $42.1 million or $1.29 per diluted share for the full year 2005.

The weighted average common shares outstanding used in the calculation of diluted earnings per share in the fourth quarter of 2006 were approximately 30.1 million shares. During 2006 we reduced our average shares used in calculating diluted earnings per share by exchanging our convertible debt for debentures that provide for a net share settlement feature and by buying back 1.8 million shares of our common stock for $70 million.

At December 31, 2006, our cash totaled $22.7 million and we had outstanding borrowings of $100 million under our credit facility. We are continuing to increase the liquidity in our balance sheet. As we announced earlier this week we have increased our revolving credit facility to $300 million and we may increase it to $400 million in the future.

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

Thank you, Maureen. Our management team continues to seek out external opportunities for growth and future acquisitions could our affect our results going forward. However, the forward-looking guidance that we are providing does not reflect the impact of any acquisitions or other strategic corporate transactions that have not yet closed.

This year we have decided to provide guidance for all four quarters of 2007. We're doing this to account for the fact that revenues in the second and fourth quarters tend to be somewhat stronger than those in the first and the third quarters. This is so because many hospitals increase their purchases of our products during the second or fourth quarters which coincide with the end of their budget cycles. The immediate result is that assuming no significant acquisitions, we expect first-quarter revenues to be below the fourth quarter of the previous year.

So with that said, let's get into the numbers. In our press release we have provided quarterly revenue and earnings per share guidance for 2007 and introduced our guidance for full year 2008. Our strong fourth-quarter revenues have increased our confidence in 2007 and thus we have increased the low end of our revenue range. Our full-year 2007 revenue guidance is now in the range of $508 million to $520 million. Our full-year 2008 revenue guidance is in the range of $570 million to $590 million.

Now for earnings. The full-year earnings per share guidance for 2007 is anticipated to be in the range of $1.70 to $1.80. We've lowered our GAAP earnings guidance range principally to take into account the expected increase in our GAAP effective tax rate for 2007. We've initiated some efforts to reduce our tax rate but they may not be fully implemented in 2007. For 2008 we anticipate GAAP earnings per share of $2.05 to $2.25.

As we mentioned in the press release beginning with our 2007 guidance we will no longer be adjusting earnings per share for the effective FAS 123(R). For those of you who are still tracking the impact of FAS 123(R), we anticipate total stock-based compensation expenses in 2007 and 2008 to remain in the range of what was reported in 2006. We expect the quarterly impact of share-based compensation expense to be approximately $0.08 per diluted share for each quarter during 2007 and 2008.

We will be presenting at a number investor conferences in March including the Susquehanna Healthcare conference in New York tomorrow; the Raymond James Institutional investors conference in Orlando next Monday; and at the Cowen Healthcare conference in Boston on March 13. We look forward to talking with you at these upcoming events.

Now we will be happy to answer all of your questions. Operator, you may turn to call over to our participants.

(OPERATOR INSTRUCTIONS) Amit Hazan with CIBC.

Just a few questions. First of all it looks to me from my model that I'm not putting together exactly where the strength came from for med/surg. It looked like it was really strong and I'm just wondering organically if you take out Radionics and Miltex where exactly did that strength come from?

Okay. Well a couple of things. First of all, the whole business was very strong. As you know we stopped reporting the organic growth rate but if you do the math and back out what we've acquired, you can't come up with anything other than an extremely strong core business. That being said we were not actually surprised by that, that is what we anticipated. And indeed if you recall the third quarter, we had an acceleration in the core business and that continued into the fourth quarter.

Probably what surprised us was how strong the acquired businesses were. And indeed the acquired businesses include Miltex, Canada Microsurgical, Radionics and KMI. And so those really did outperform our expectations and as I pointed out in both the press release and in the call, those acquisitions did have the big impact on our numbers and indeed did have the big impact principally in the United States.

Two follow-ups on there. Can you help us at all as far as whether it was JARIT or Padgett or something specifically that helped you organically in the med/surg? And then the second follow-up on that would be, if I'm calculating right, I've actually got either Radionics or Miltex down sequentially. Can you confirm that?

There's a couple of things. First, in the non-acquired businesses, and so in the non-acquired it was certainly be implant businesses and you can calculate that from our chart that were the overperformers. In the med/surg business it really was across the board certainly JARIT performed well but it wasn't principally JARIT and definitely not Padgett, Padgett is very small. So it's a whole host of things no one of which I would want to point out.

In terms of the acquired businesses, I don't really have a revenue progression to share with you but I can tell you they performed better than expected.

Okay. All right. And then on gross margins when we talked less quarter I guess actually in the last couple of quarters they kind of missed and they seem to have missed again. We're looking for an increase next year but you've lowered your gross margin range that you're looking for in '07. Can you just walk us through exactly what is going on that is the reason for you having a lowered gross margin guidance for '07 specifically? And how we can gain a little bit more confidence just because there has been a couple of misses here in the last couple of quarters as far as gross margin goes?

Sure. First of all for the quarter the gross margin was slightly lower than we expected and that was principally due to the proportion of the revenues which were acquired businesses. If you recall, the two largest acquired businesses are Radionics and Miltex and we pointed out that those product lines had lower gross margins than our core businesses. Indeed as those -- sorry -- as those product lines performed better than expected, they indeed had the perverse impact of lowering the percentage gross margin. By the way not the profit but the percentage gross margin because the mix between our base business and the acquired businesses were indeed lower than we expected.

Now, why do we think it will get better? The fact of the matter is as we roll into 2007, it remains the case that the fastest growing businesses are the med/surg -- sorry -- are the implant product lines and those have higher gross margins than med/surg and indeed our acquire products show up in the med/surg category. So we continue to believe that in 2007 we will have a gross margin expansion.

That being said we brought down the guidance for gross margin by about 1 point for 2007 to reflect what is indeed the mix now between the acquired product lines and the implants. So we did reevaluate the gross margin and did indeed bring it down by 1 percentage point in 2007 and that is to reflect the reality that we indeed have [observed]. That being said, the overperformance on the top line still allows us to deliver a strong gross profit which is what will ultimately translate to the bottom line.

Okay. And just one final question from me. I'm wondering kind of more in terms of strategy here. We see where your cash to debt ratio is and relative to maybe where it was historically not exactly the same. How do we think about your acquisition strategy this year? Are you at all changing your strategy because of where your balance sheet ratio is or will we continue to kind of expect this four type of acquisitions on average a year going forward?

Sure. First of all there is no change in the acquisition strategy. Indeed the acquisitions for 2006 are already paying off handsomely. So we've not really had any change in the way we're looking at things. Furthermore, we continue to have a great pipeline. So I don't really expect a change.

I think the right way to think about our balance sheet is the relationship between our net debt and our cash flow. And as Maureen pointed out, we've grown our cash flow over the last several years at more than 35% a year. And indeed this year our operating profit came in at approximately $70 million. Keep in mind operating profit understates some of the other measures like EBITDA. So we indeed have very strong cash flow.

To reflect that cash flow we recently renegotiated our bank agreement to get us more flexibility to continue to do acquisitions. And so we made an announcement a couple of days ago that we expanded our revolver from $200 million to $300 million. Now some of that is to take into account our expectation that we will in March of 2008 be paying off the underlying principle of our convertible bond. So there will be a change in the components of the debt from the convertible bond to the bank revolver and so by having done that expansion to our bank revolver. we have the flexibility to both continue to do acquisitions and pay off the net principle under the convertible bond.

Okay, great. That is very helpful. Thanks very much.

Alex Arrow with Lazard Capital Markets.

Good morning. You gave us year-over-year growth guidance for nerve repair and for bone growth but when it came to duraplasty, you said you had record sales but wouldn't give us a percentage. Could you indulge with the percentage growth of duraplasty?

I'd rather not actually. We tried to point out the highlights so things that have been a growing quite substantially and continue to grow quite substantially that we think are worth pointing out. We are pleased with the performance of the duraplasty business and in order to make sure that people appreciate that it's not a shrinking business, we wanted to point out a record quarter.

That being said the mix of the business now with guidance for the year well in excess of $508 million is not significantly impacted by the duraplasty business growth. To point out the growth which was good would be a I think not a helpful guidance as to the things that are really impacting growth. Now I think we said on previous calls that the business was growing I think we should just leave it with we hit a record revenue number.

Okay. You had given us some qualitative comments in the past about the competitive trialing. Can you update us on the amount of competitive trialing you are seeing for duraplasty?

Yes. I think the strong duraplasty number is reflective of the fact that we've been at this game for two years with our competitors and certainly our competitors are tough but they have not impacted our revenue significantly. They've not impacted our share significantly. And whatever impact they've had are already reflected in the market. So we compete with our principle competitors in a whole range of neuro products and at this point as far as I'm concerned, duraplasty is one of them.

But specifically on the trialing, are they still giving away free products or has that sort of petered off?

I think that is not a significant impact any longer. So there is not significant competitive trialing. Indeed as I pointed out on previous calls to the extent that our competitors have accounts, it is our reps going in there and converting them back. So, to answer point blank, competitive trialing is not having an impact on our business.

Okay. Did you give us an update on the enrollment of the anti-adhesion trial? I know that is a major point.

That is a good question. And it is the sort of the first quarter that we're reporting on the adhesion trial. And I would like to avoid getting into the habit in every quarter of being judged on enrollment. We have enrollment; enrollment is significant, about two-thirds of the sites at this point are formally in the trial and enrolling patients. But I do not what to get in the habit of doing for the next three years a quarter by quarter how many patients are enrolled. If we think there is a meaningful update we will probably do it at the annual analyst meeting.

All right but could we suffice it to say that the three-year trial entire timeline is still three years given --?

Yes, it's intact. There is no change in our point of view on our Adhesion Barrier trial. It is very much consistent with what we said in our analyst meeting earlier this year.

Okay.

I'm not hedging on the trial at all. We are on track in the trial but I do want to have 12 quarters of reporting on the number of patients and speculation about where we stand in that trial.

Okay. Can you say would we be able to see an interim look at next year's AANS or CMS or any conference?

Can't predict. We are not doing an interim look on the outcomes of the trial as I think you know. So there will not be a breaking of the code midway through the trial. The trial design is done such that we can get the fastest possible enrollment. If you were to break the code midway through, you'd have to increase the sample size and we don't want that. So we want to get the trial done as fast as possible.

I don't doubt as has been our policy that over the next several quarters or years we will give an update from various clinicians and our own people as to where we are on the trial. But what I want to avoid is this quarterly -- we're not a biotech company -- and I don't want to have to report on my clinical trial every quarter.

Okay. On Mozaik, I know it has just launched to 2.5 weeks. Can you give us any comments on how the first 2.5 weeks of Mozaik have done?

Great. Mozaik is a new product which hopefully has been kept pretty much a secret until we put out our press release. We've been working on that product for about 1.5 years to 2 years and we tried to keep it and our skunk works so the competition did not know we were sneaking up on them. Indeed the Mozaik strip and the Mozaik putty are both being used in surgeries. Indeed the day we put out the press release I think it was that day or the next day we had our first implant. We have plenty of product in stock and we have roughly 12 to 15 spine specialists working the largest centers who by the way we identified in advance and were expecting these products available.

And then we've got our close to 150 neuro people out their driving this in the neuro account. So I expect Mozaik to be a significant revenue driver particularly in the back half of this year and going into next year. The margins are extraordinarily good, not quite as good as DuraGen but close. It's right on call point for us and other companies have really plowed the field for collagen, ceramic or cadaver based bone void fillers and so there is an established marketshare which I hope to get a significant piece of based on our strong sales and marketing organization and Gerry alluded to that earlier.

Are you doing the same thing with Mozaik that the competitors were doing against you with duraplasty? Are you doing free trialing against RTI or Orthovita?

I don't want to answer the question. I guess I would say a balance. I think you know -- I think you've been following the companies for ten years now. We're not big on free. And so if we do do a free case, it is probably going to only be the first case as a trial. I would expect to compete not based on giving away stuff free but based on the quality of our product and based on the strong performance of our sales and marketing organization. I can tell you we got POs for the vast majority of the cases we've had today.

Okay. My last question --

Oh yes, and Gerry makes one point. It's not our objective to be a price competitor. We think we have a high-quality product that can compete quite aggressively with any of the competition at or above their price. Obviously we're going to win business but I don't expect to win it based on price. That is certainly not the way Integra generally plays.

Okay. Thanks. My last question on just -- I'm trying to understand your comments about your extremity reconstruction group. You said it was fourth place. Are you talking about the number of sales reps is the fourth largest extremity dedicated sales force or do you mean by revenue or are you talking about the more than eight new products?

If you recall from our analyst meeting we haven't changed the point of view. We presented basically a total market size of about 700 million including soft tissue, trauma and joint replacement. And we then broke that into the major competitors. Of course like in many things Johnson & Johnson, [Depew] is the market leader but we think when you add up our revenue base including KMI, Newdeal and then all of the collagen products we're the number four player.

By the way there is probably four or five orthopedic companies who are real close to ours. So I don't want to pound my chest too much on this. The point is, there's a number of small companies that are growing quickly that are startups -- we're way ahead of them.

Okay. So you're talking -- but the way you calculate the fourth place is not by revenue it's by number of reps?

No, no, I'm sorry. It is just by revenues.

Okay.

I can refer you back, Alex, to the presentation that we gave at our investor meeting earlier. There really is no change in that. Certainly our revenues have gone up but not enough to change the share amounts in any significant way. In terms of headcount I think we still are the only direct sales organization calling on foot and ankle and hand and that is that roughly 70 salespeople that Gerry referred to.

That is why I was asking because I thought it was -- I couldn't think of who the other three would be -- maybe --?

I was not clear. I'm not talking about in terms of headcount. I believe we are number one in terms of dedicated headcount. We are number four in terms of revenue.

Okay. Thank you.

Jayson Bedford with Raymond James.

Good morning. Just a quick question to follow on the last question. Can you give us a revenue run rate for your extremity business?

I would prefer not to. We don't break our numbers out that away and we don't wish to. You can certainly do some math based on what you believe our skin and nerve and Newdeal and KMI productlines are. But we don't intend to break out our sales by category. So I can't give that to you.

Okay. And Stuart is it fair to say that skin, nerve as being 100% of those products are going into the extremity business?

Yes. One other point to make since I don't want to appear vague. We did say in the presentation that we gave a good four or five months ago in November that we thought it was a $750 million market and we had 9%. So you can come up with a ballpark number. But I don't want to get into breaking it out on a regular basis in the quarterly calls.

Okay, fair enough. The fourth quarter was strong it looks like organic growth was north of 20% here. The first-quarter guidance falls off a little bit in terms of the top line. Were there ever any kind of onetime or nonrecurring revenue boosters in that fourth quarter?

No. And indeed if you do again the math on your own based on the first-quarter guidance there is strong organic growth implicit in the first-quarter guidance. It is just in fact the case that the fourth quarters have gotten very strong and it is just not reasonable to expect that it will be flat Q4 to Q1. That is one of the reasons we gave the quarterly forward guidance is we really think it's important that people focus on our quarterly progression and there is nothing more exaggerated about the 2007 quarterly progression in revenues than was occurring in 2006. It's a little bit hard to tease it out of the numbers because of the acquisitions so swamp the quarterly progressions.

Okay. Just looking at the '07 guidance at least. Our math seems to imply an acceleration in organic growth in the second half of '07. I'm just wondering is that a result of productivity improvements from the new reps or are the new products really contributing to that?

Let me make a couple of points. First of all in terms of organic growth in the next year, there is certainly strength in it and I'm glad you picked that up. And it is a reflection of how strong the base business was in Q4. I think in the first couple of quarters it is basically a continuation of the same trend. As you get to the back half of the year we have launched a ton of new products and we have a bunch of new products coming into the market. Gerry has talked about them in the past.

Certainly in the back half of the year there is an impact from the new products as well as the new headcount. Most of the fourth quarter is just a reflection of the strength that we expect in the fourth quarter and you saw this fourth quarter.

Okay. Just two last quickies on the guidance. Besides the $0.32 in options expense are there any other non-cash items contemplated in your '07 guidance?

No. Indeed we worked really hard to try to make the numbers easier to understand. And so we are now not going to adjust out FAS 123 and -- but no, there are no other onetime items at the moment anticipated. It is sort of a double-edged sword; the onetime items come with the acquisitions. Everybody loves the acquisitions but then everybody feels some pain when we have to walk you through the adjustments that come out of the acquisitions.

But because our last acquisition closed in the third quarter, there was no fourth quarter acquisitions, we're not building anything into the Q1 through Q4 numbers.

Okay. Lastly, it looks like the delta between our EPS and your new guidance is the tax rate at 34%. What was the old assumed tax rate for '07?

We never really gave out that number. But you can assume it was in line with what we had expected for 2006 which was about 31.5%. The appropriate range for 2007 is 34%.

Is the 34% what you expect in '08?

I would say for now build the model that way. We are not going to be complacent and we will work to reduce our rate. But knowing what we know now I wouldn't assume anything other than a 34% rate. And certainly the guidance that we gave from a 2007 -- 2008 EPS would reflect the 34% rate, so yes.

Thank you.

Brian Wong with First Albany Capital.

A couple of questions. First off, it seems like there's been a lot of consolidation in the extremities market recent. I was just wondering what your thoughts were and if you were going to continue to look for acquisitions in that area or what your thoughts were in terms of future M&A and further consolidation (inaudible)?

Sure. This is Gerry Carlozzi. As we look at the extremity markets we estimate there's about 30% of the market that has been unconsolidated, held by smaller companies trying to penetrate the market most of them using an indirect sales channel or a distribution network. They are sort of getting to the limit where they either need to go out and raise some significant financing to fund the distribution channel or partner with a company such as ours.

So we've certainly had our eyes and ears open in terms of potential opportunities out in the market. We spend a lot of time evaluating those companies, identifying who they are and initiating conversation. Part of our strategy is to be very active in not only looking at it from an M&A side in terms of what productlines we could add to our extremity business through a merger and acquisition that would be complementary to our distribution channel but also we look at opportunities where we can apply our current technology and leverage our capabilities to support our distribution channel and continue to build the business.

So we're doing both, looking at it from an internal development approach, building our sales organization to increase sales coverage in penetration and as well as a merger and acquisition campaign.

I would like to reiterate that with Gerry's background in orthopedics and the quality of the people we've been recruiting to the sales, marketing and product development organization, we are going to have a hell of a pipeline in our metal implants as well as in our tissue engineered productline. And for the last several years we've been investing substantially in the tissue engineered products, the orthobiologics so as to be able to launch them both in neurosurgery and in orthopedics and indeed the strategy is playing out the way we hoped it would. We've now got an extraordinary extremities sales and marketing organization that is able to drive these products and we have a pipeline that is going to be able to drive these products.

We do not need an acquisition to be successful in the extremities business. In the same way we do not need an acquisition to be successful in the spine business. With Mozaik we will be able to drive through our direct sales organization and through our neuro sales organization I think extraordinary growth in the Mozaik productline and in our DuraGen Plus [Durograft]. And when we have the approval for our DuraGen Plus Adhesion Barrier, we will have a ready group of people to sell that into spine.

So the strategy does not rely on acquisition. That being said, we're not going to be shy and we haven't been shy in the past. If we see good fits, we will go out and buy them.

One other point, we are now the partner of choice for quite a few companies. There is no shortage of product development companies or companies that are focused in other areas of either orthobiologics or metal who if have they have a foot, ankle or hand product are not coming to us and looking to us to partner with them. And that will significantly over time be a positive.

One last comment. Mozaik will also be a available in a matter of a month or two to our extremities guys who will be calling on a whole host of new customers with the ability to in addition to selling NeuraGen and TenoGlide and the skin now sell a bone product.

Okay. I know you said this in the past but you're not interested in becoming a metal implants company in the spine area. But given the amount of activity and the amount of innovation particularly in motion preservation, any thoughts to rethinking that strategy?

Well let me be clear on, I think what I said in the past but certainly my point of view now. I don't think we said we are not interested in being a metal player in spine, indeed, I'm very interested. The question is can we find a company that has the appropriate mix of high-quality products, ethics, lack of concentration of customers and appropriate price per deal. And if we can put all those pieces together we'd be delighted to do an acquisition.

The issue is those are few and far between and we no longer wish to wait around for one of them. We will drive our spine organization on the orthobiologics and we can drive significant incremental growth from that. If we happen to find a company with the mix of attributes that I described for the spine business then we'd be delighted to own one. So if I led you to believe otherwise in the past, I apologize.

Okay.

The fact is we haven't coughed one up in four years so I don't want to wait around anymore to generate what we think is significant incremental growth in orthobiologics.

In terms of the integration of KMI, is everything complete? Should we be expecting any onetime charges going forward on the integration of KMI and Radionics and Miltex?

Fortunately you should not expect any charges from KMI because we made the decision at closing to close down the site. And so that was reflected in the opening balance sheet.

Okay. And for the other acquisitions?

There are no integration expenses contemplated in the guidance that we've given.

Okay. A couple of housekeeping things. You mentioned bone growth was up strong. What exactly are you including in the bone growth category?

Good question. I'm not sure it is quite the category. It was a set of words that we tried to use to describe the following products. ACS, which we sell now, that is the product that is the carrier for InFUSE. The Amplify which is not for sale now but is the next generation carrier for InFUSE. MasterGraft, which is an OEM arrangement that we have with Medtronics for a collagen, ceramic matrix, and in the future I expect we will include Mozaik in that description which is our own collagen, ceramic carrier.

There are significant differences between MasterGraft and Mozaik. They are both great products and both fall into what we would categorize as bone growth products. To be clear what is not in there are bone fixation products like Newdeal and KMI.

Okay. And then, Maureen, if you could tell us what the CapEx for the year was and what should it be going forward?

CapEx for next year I think is $20 million. And for this year --

She'll check on this year. We don't have the number at hand. But roughly in the budget it is $20 million.

All right. Great. Thanks.

Certainly when we file our K in another day or two we will have it.

Thanks, Stuart, nice quarter.

Raj Denhoy with Piper Jaffray.

Just a couple of questions and I might have missed it but did you guys update the share buyback program and where that stands at this point?

We did but I suspect with all of the stuff we've been saying it was easy to miss. We actually bought quite a bit of stock back in the forth quarter, a little more than 900,000 shares. And we have approximately half of the $75 million plan left for 2007.

Okay. Just second, I know you spent a little time explaining why you think the first quarter is going to be down on the fourth quarter. If you look back to it, I think that pattern maybe doesn't play out in numbers historically and I'm curious if there has been some of the acquisitions that you've done maybe they're perhaps a bit more capital intensive. What is prompting you now to think this is really going to start happening to a great to degree here going forward?

Well again, I think, Raj, it has been a phenomenon in the past but unfortunately it's always hard to tease out because there are acquisitions that go into the Q1. For example we did KMI the first day of Q1 of 2000 and -- sorry, we did Newdeal the first day of Q1 of 2005. So you had a step up in Q1 versus Q4 that is not explained by strength in the underlying business but is explained by strength in the acquisition.

So it is hard and I apologize for having to make you struggle with the numbers. But assuming no acquisitions and we do do a bottoms up model, the first quarter expectation is what we expect. Now there absolutely is a pronounced fourth-quarter impact from hospital buying. I don't think it is so much capital intensive, it's budget intensive. There is some capital, but as you know, our capital numbers are just not that much of a significant part of our business. There is, however, certainly an impact of hospitals wanting to spend their budgets and that is both on capital and on disposables in the fourth quarter.

Okay, fair enough. And then just one last question. If you look at the 2008 guidance you've given, I think it implies something in the order of 10% to 16% growth on 2007. Is that kind of the new range we should think about for you guys on a long-term basis just kind of this low double-digit growth? Are those now your own internal targets even beyond 2008?

Our internal targets are certainly higher than the roughly 13% growth implicit in the midpoint of the range. So our internal targets are higher. As you know, we'd like to get to the point where our growth targets are realistic which is why we built a roughly 13% growth rate in the 2007 to 2008 number. But I can tell you surely our targets are a lot higher than that.

Okay, Great. Thank you.

(OPERATOR INSTRUCTIONS) David Zimbalist with Natexis.

I want to circle back around to this -- on the guidance in the first quarter. Essentially the second half of this year your organic growth was running roughly 20%. It seems that for the first quarter guidance if your organic growth off of your first-quarter sales is 20%, then you are expecting the contribution from acquisitions to be down relative to what it was in the fourth quarter by a fairly material amount. Is that essentially from a bottoms up basis the way you are thinking about the quarter because you had better-than-expected sales in the acquired products this quarter you're thinking maybe next quarter it is quieter?

I wish it were as easy to reduce to that. We certainly saw strong organic growth in the fourth quarter and I don't out we tempered our expectation to reflect that we wouldn't want to bet on such strong organic growth in Q1. So I think we tried to probably build realistic expectations for strong organic growth but not extraordinarily strong in Q1. I don't think we built significantly down numbers into any of our acquisitions although again you've got a back end impact from hospital buying that does impact the fourth quarter.

So I would try to take realistic expectations on both and not go to any particular extreme, David. It's not like organic growth is drying up and it's all acquired. It's not like all required is drying up and it's organic. I think we're trying to get the reasonable expectations for both businesses. And I think and I hope our revenue expectations on a quarterly basis for next year are conservative, that is where we are trying to be.

Okay. In terms of your bone growth, do the royalties that come from the Medtronic relationship also flow through there?

Yes sir.

Okay. Can you also talk about your cash flow targets for 2007? You've given your sales and you've given your EPS and stock-based comp. Anything else that we should be thinking about? Your inventories in the fourth quarter seemed to get a little lighter which is nice. Is that something that you expect to continue as you work through 2007? Can you help us understand that?

Yes, indeed. I think the positive impact of the last several quarters of hard work by our people have brought our days of AR more into where we would wish them to be and have brought our days of inventory more into the range. And obviously having inventory days be reduced generates more cash. That is a real positive thing that I think you've seen consistent improvement during the year and we expect that to continue into the new year.

In terms of cash flow, yes, you saw very strong third- and fourth-quarter cash flow. We absolutely expect that to continue into the new year without -- we don't want to get into giving formal guidance on cash flow but you certainly can -- our cash flow is a hell of a lot better than our either operating profit or certainly net income would indicate. And that is certainly a reflection of the strength of business. I don't want to give you a specific number but certainly the cash flow is a lot more than the fourth-quarter $20 million annualized.

Okay. Great. And then your SG&A continues to on a dollar basis climb fairly nicely year-over-year. You are investing in the sales force a lot. Is there a point in 2007 where you start to see incremental leverage off of this/ You've got -- the range you've given gives us something similar to what we are exiting the fourth quarter at.

I think there is leverage in it, absolutely. Keep in mind the big increase in SG&A from 2005 into 2007 is the FAS 123 which wasn't in the 2005 numbers and is in the 2006 in 2007 and the bulk of our FAS 123 expense hits the SG&A line. It's the acquisitions which come with their own infrastructures and obviously we do things like we did in KMI to reduce costs there, but they are still real. And the significant buildup in our sales force.

But, yes, if you look at the guidance we've given for 2007, we do anticipate particularly as you get toward the back half of the year continued leverage in our SG&A line.

Okay. And the hiring you are expecting to do in your salesforces is in essentially in the first half?

Yes. And it is mostly in spine and in the extremities business.

Okay. Did you give a target for the number of reconstructive reps you are looking to add this year?

Gerry, do we have a target?

In the reconstructive reps as far as what we have budgeted according to the revenues that we're projecting, we're pretty much up to a full complement of reconstructive people as of now. So we're at about 68 reps in our reconstructive sales organization that puts it at about 76 total people supporting and selling in the field reconstructive surgical products.

The big increase is -- in our sales organization is going to come mainly from our orthopedic spine specialists. We have a little bit more than 12 right now, it will expand out to 24 during the first half of this year. By the end of the second quarter we should be at 24. And then we have an ICU specialist program, we're currently at 20 and we'll build that out to about four additional people. So you are looking at about 16 more people on the neuro side, a couple of people on the recon side, all should be filled within the first half of this year.

Okay. And just for the math, you said you had 148 people in neuro at the end of the year. Does that include the IC group or not?

It does include them, yes.

Great. And then just a last couple of questions. Any update on the NPH business? Is it also starting to pick up steam?

I don't think the NPH business is picking up steam. I think you can put that in the category as a nice new product but not a revenue driver in our model.

Okay. And then on the Radionics and your prior base business in ultrasonic aspiration. Has the integration of those two, the parsing of the selling into emphasizing one product versus another, has that basically at its completely integrated at this point?

Yes. Indeed it is a great marketing plan that the guys put together. Everything will be sold under the CUSA name and CUSA is like Kleenex in the neuro OR. And so they will have the CUSA EXcel which is the former Radionics product and the CUSA Selector which would be the former historical Integra product and we will get to leverage the quality of the CUSA name for the Integra product which is always a great product but didn't have the name.

So the guys will be selling both, the Integra product, the Selector, will be aimed more toward neurosurgery and the EXcel product from Radionics will be certainly sold into neurosurgery but will also be aimed to other franchises both in general surgery and the spine.

Okay. In Europe have you built out your full distribution for Radionics yet?

The European distribution for Radionics is our neuro group. I wouldn't say it is quite built out. We are still recruiting headcount in both sales and marketing in Europe and that although I neglected to mention it earlier, will impact the first half of the year SG&A as well.

Thank you very much.

And with no further questions I will turn the conference back over for any additional or closing remarks.

Well, thank you everybody. And I appreciate your participation in our quarterly call and I look forward to our presentation next quarter. Take care.

Thank you. That will conclude today's call. We thank you for your participation and you may disconnect at this time.