Integra Lifesciences Holdings Corp (IART) 2008 Q3 法說會逐字稿

Welcome to the Integra LifeSciences third quarter financial reporting conference call. As a reminder, this call is being recorded.

At this time I would like to turn the call to Mr. [Stuart Essig], President and Chief Executive Officer. Please go ahead, Sir.

Thank you. Good morning, everyone, and thank you for joining us for the Integra Life Sciences third quarter 2008 conference call. I'm Stuart Essig, Integra's President and Chief Executive Officer of Integra's Life Sciences Holdings Corporation. Gerry Carlozzi, Chief Operating Officer, and Jack Henneman, Chief Financial Officer, join me today.

Gerry is traveling abroad and while he hasn't dialed in if (technical difficulty) Jack or I will try to field any questions you may have for him.

During this call, we will review our financial results for the third quarter of 2008 and our forward-looking guidance for the fourth quarter of 2008, the full year 2008 which we released on Friday. At the conclusion of our prepared remarks we will take questions from members of the telephonic audience.

Before we begin Jack will make some remarks regarding the content of this (technical difficulty) presentation.

This presentation is open to the general public and can be heard through telephonic access or the live Webcast. A replay of the conference call will be accessible after the conclusion of the live event. Access to the replay is available through November 24, 2008 by dialing 719-457-0820 access code [8405173] or through the Webcast, accessible on the Investor Relations page of our Website.

Today's call is a proprietary presentation of Integra Life Sciences Holdings Corporation is being recorded by Integra. No recorded 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, November 10th, 2008. Unless otherwise posted or announced by Integra, the information on this call should not be relied upon beyond November 24, 2008, 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 and market acceptance of these new products, future product development programs and potential business acquisitions are forward-looking. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from predicted results.

For a discussion of such risks and uncertainties, please refer to the risk factors included in Item 1-A of Integra's annual report on Form 10-K for the year ended December 31st, 2007, and the 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. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measures is provided in the press release we issued Friday evening, which is available on our Website in the press release section under Investor Relations.

Additionally in this press release and in the current report on Form 8-K that we filed on Friday, we provide explanations for why management believes that presentation of these non-GAAP financial measures provided useful information to investors, regarding Integra's financial condition 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 the quarter.

Thanks, Jack. The business delivered a particularly strong performance this quarter with revenues well above our guidance and street expectations.

Total revenues in the third quarter of 2008 increased by $32 million you to $167 million, a 24% increase over revenues of $135 million in the third quarter of 2007. This was $2 million above the high end of our guidance.

Our organic revenue growth was more than 11%, calculated the way we have done so historically. If you exclude the eliminated [LXU] distributed product lines that we discontinued because of their own margins, organic growth was about 13%.

On Friday, we also announced the acquisition of our Australia and New Zealand distributor which provides us with direct access to those significant markets and also the ability to provide service and support capabilities to other markets in Southeast Asia. Our Australia subsidiary will provide the base for future expansion in that part of the world.

Integra's distributor for those markets has been providing truck top-quality Integra and not Integra products, and superb service to hospitals for many years, and has a long history of serving the surgical communities in Australia and New Zealand. We have worked together for the past seven years and they have been our primary representative in Australia and New Zealand for such products as DuraGen, Camino, CUSA EXcel, [Mayfield], and the Integra Dermal Regeneration template.

Starting this quarter, we will be reporting our revenues in three categories -- Integra Neurosciences, Integra Orthopedics and Integra Medical Instruments. And we have redesigned our web site and other corporate communications to reflect these three market categories. I invite you to take a look, explore and discover the organizations and products that we offer across our companies.

We will also be highlighting these new business units at our upcoming investor forum next Monday, November 17th.

I'm sure that many of you are interested in the breakout of our historical revenues in the new categories. We have posted a reconciliation of our historical revenues in these new categories on the presentations page of our Investor Relations Web site.

The first revenue category, Integra Neurosciences, encompasses the products sold to the neurosurgeon and the neuron nurse neuronurse. The products in this category represent approximately 40% of Integra's overall revenue and are expected to grow at an annual rate of 10 to 14%.

These products are sold in the United States by our Neurosciences sales force and internationally by both direct and distributor sales forces. Integra Neurosciences revenues previously reported in both the medical surgical equipment category, such as neuromonitoring devices and ultrasonic aspirators, as well as being recorded as implant products such as DuraGen.

Our second category, Integra Orthopedics, defined our significant orthopedics business. This is our fast-growing category and includes our extremity reconstruction, Integra OrthoBiologics, Integra Spine and private-label revenues -- the majority of which were orthopedic. Together, they comprise approximately one-third of Integra's revenue in the quarter and are anticipated to have growth rates in the 18 to 22% range.

We are excited about the orthopedic franchise that we are building. With over $50 million in revenue in the quarter and only partial period results from Integra Spine, this business is already running at more than $200 million. The revenues in this category were almost all reported in the implant category in prior quarters.

While we run the extremities -- OrthoBiologics and Spine sales organizations separately -- they reinforce each other and all will benefit from our leading position in tissue engineering. Our acquisitions of IsoTis and Theken Spine over the last year and the expansion of Integra's extremities reconstruction business reinforces our commitment to the high growth segments of orthopedics.

Our final category is Integra Medical Instruments. This includes JARIT, Miltex, Luxtec and several smaller product lines. All of the revenues in this category were previously included in the Medical Surgical Equipment category.

This category accounts for just under 30% of overall Integra revenue and is expected to have a 6 to 8% growth rate. In this quarter, reported revenues of $45.2 million were essentially flat from the year ago period. While the elimination of third party distributed products was partially offset by acquired products the net negative impact was still $1.4 million versus the prior year period.

The restructuring of the Integra Surgical sales force and the discontinuation of certain low margin product lines previously distributed by LXU reduced reported growth in this category.

Overall, we continue to run the Company to balance growth and revenue and profits. Eliminating low margin product lines accomplishes both, because it improves our profitability and focuses our resources on the products that have the most potential.

I would now like to turn the call over to Gerry to discuss the activities in Integra Orthopedics.

Thank you, Stuart. I'll start by discussing Integra OrthoBiologics. It's been just over a year since we acquired IsoTis and formed Integra OrthoBiologics.

Since then, Integra OrthoBiologics has completed a number of milestones including the move to sustainable profitability. Additionally, we have completed a significant syndicate expansion and upgrade of our Irvine manufacturing facility with substantial capacity for continued growth. The R&D team continues to develop new products to fill the pipeline such as the recently launched [EBO] 3.

The finance team has implemented new accounting and reporting systems. The marketing team has been integrated and continues to develop innovative ways to support the sales team in the field. The best of both sales teams have been combined to create a dedicated and expert group of professionals, supporting both domestic and international distributors.

We have also just passed the three-month anniversary of the acquisition of the Theken company now rebranded as Integra Spine and it has become an exciting new addition to our Company. Theken required very little in the way of restructuring post-acquisition. We have integrated some financial reporting and regulatory functions necessary for them to operate as part of the larger Integra organization.

There is much that can be done with the added resources and support that Integra Life Sciences can provide to expand the sales reach of Integra Spine from a regional player to a national and international spine company. We are pleased with the progress and results to date and look forward to the exciting opportunities provided by this high-growth business.

In the extremity reconstruction business, we continue to invest in the expansion of our direct sales organization. Over the next six months we will be expanding the sales organization from 75 direct sales people in the United States to over 105 people. This expansion will allow us to continue to expand our coverage of the extremity market and continue our growth in excess of 20%.

Next Monday, on November 17th, we will be hosting a three-hour analyst meeting where we will present additional highlights of the business.

I will now turn the call over over to Jack Henneman to discuss additional financial results.

Thank you, Gerry. International sales were 23% of the total this quarter compared to 24% of revenue in full year 2007. Foreign exchange had a favorable impact of $1.9 million. I would like to make a short digression on the impact of exchange rates on our business.

Since roughly 15% of our revenues are denominated in euros or British pounds, our topline benefits from a weakening dollar and fights against a strengthening dollar. However unlike most American medical device companies we also manufacture or procure a significant percentage of our products in Europe.

The result is that a strengthening dollar lowers our European period costs and eventually improves the gross margin of products we make or procure there. The impact in gross margin is delayed, however, because the benefit first goes into inventory and is only realized in our profits when those products are sold.

So, for example, next year our gross margins will realize the benefit of the recent sharp decline in the euro.

Gross margin on total revenues in the third quarter of 2008 were 61.5%. This included the 1.6 percentage point impact of purchase accounting from the Theken acquisition. In 2009, we expect gross margins in the range of 63 to 64.5% excluding the impact of purchase accounting.

Research and development expense in the quarter increased by $28.2 million to $34.7 million from the year ago quarter. This large number includes a $25.2 million in-process research and development charge for the Theken acquisition. In 2009 we anticipate R&D to be 5.5 to 6% of sales.

Selling general and administrative expense increased by $31.5 million to $84.2 million or 50% of revenue. This increase in SG&A expense over last year was primarily a result of the equity compensation charge and the larger size of our sales and administrative organizations, as well as the impact of acquisitions. We anticipate that SG&A will approximate 39 to 41% in 2009.

The inclusion of Integra Spine in our numbers, the decision to go to direct in Australia and New Zealand, and the plant expansion of orthopedics sales organizations have increased our expected sales and marketing expense by approximately 1 to 1.5% going forward. The operating loss was $22.9 million in the third quarter, primarily due to onetime charges.

Our expense for the amortization of intangible assets was $4.5 million in the quarter, of which $1.3 million is included in cost of product revenues. We expect total amortization expense to be approximately $4.8 million per quarter through the end of 2008 of which approximately $1.1 million per quarter will be reported in cost of product revenues.

In 2009, amortization expense is expected to be approximately $4.5 million per quarter, of which approximately $1.1 million per quarter will be reported in cost of product revenues.

In the third quarter of 2008, we recorded $3.9 million of net interest expense.

Let me take a moment to discuss our GAAP and adjusted tax rates. I recognize they can be very complicated. Let me first discuss GAAP.

Our GAAP tax rate in the quarter was significantly affected by the taxed deductibility of the large charges we took in the quarter. This gave us a large tax benefit. For the year, these charges significantly reduce the proportion of our book income that is US source.

Since the United States imposes the highest tax rates, our overall tax rate for the year will be lower than it usually is. And to calculate an adjusted tax rate we have excluded all of the purchase accounting and other charges year-to-date, as well as those expected in Q4. This gives us adding and adjusted pretax income that more truly reflects the ongoing mix of our profitability around the world. Excluding all of these charges, we now expect a 31% adjusted full year tax rate.

We reported a net loss of $15.3 million or negative $0.54 per diluted share in the third quarter of 2008. When adjusted for acquisition-related expenses and other charges, net income for the third quarter of 2008 was $13.3 million or $0.46 per diluted share.

The weighted average common shares outstanding used in the calculation of diluted earnings per share in the third quarter 2008 was approximately $28.1 million for GAAP and 29 million shares for adjusted.

We generated $27 million of operating cash flow in the quarter, a very strong result. Year-to-date operating cash flow is up 40% from the prior period. At the end of September, our cash totaled $109.3 million and we had outstanding borrowings of $200 million under our credit facility.

On October 30th, we borrowed an additional $60 million and as of Friday -- even after taking into effect, the use of cash for our small Australian acquisition -- we had more than $170 million in cash on our balance sheet. We believe that our cash flow and cash on hand are more than adequate to meet all our obligations through 2011, recognizing there has been much discussion lately of the impact of the economy on hospital capital charges and the short discussion of that might be useful.

Integra is relatively unexposed to hospital capital expenditures. Of our roughly $745 million of revenues at the midpoint of our range for 2009, only about $35 million to $40 million might be characterized as capital in the United States. And even in those cases, average selling prices range from $10,000 to $75,000 and are often paid for out of the operating budget and not the capital budget.

In any case, most of our patients suffer from severe conditions -- trauma, cancer or chronic wounds. So treatment is not optional. Little to none of our revenues are in the aesthetics or cosmetics markets. We believe the diversity in our revenue base, the disease conditions addressed by our products, and their relatively low prices insulates us somewhat from a downturn in the economy.

Now let me turn the presentation back over to Stuart.

Thank you, Jack. Our management team continues to seek out external opportunities for growth; and future acquisitions could affect our results going forward.

However, the forward-looking guidance that we are providing does not reflect the impact of acquisitions or other strategic corporate transactions that have not yet closed. We have updated our 2008 annual revenue and adjusted earnings per share guidance to reflect actual results.

We are also introducing 2009 guidance. Although we are not providing quarterly guidance, we did want to note that, consistent with our historical seasonality, in the absence of acquisitions we anticipate first quarter 2009 revenues to be sequentially lower for Q4 by about 3 to 5% with a disproportionate impact on the bottom line and that the fourth quarter of 2009 will be the strongest quarter of the year. While we will likely have quarterly fluctuations in our performance versus our expectations, we believe that annual guidance remains the appropriate benchmark for our business. Longer-term, we intend to drive internal revenue growth consistent with our target of 10 to 12%.

That said, we do not believe that measuring our growth by excluding recently acquired revenues is useful or provides a true indication of the underlying performance of our business. The significant impact of new acquisitions and their growth, as well as the elimination of various product lines, confounds previously provided measures.

In the future, we will provide overall revenue guidance, still excluding any future acquisitions and focus on the performance of our business by the three categories -- Neurosciences, Orthopedics and Medical Instruments.

We have also provided adjusted EPS guidance which is adjusted to reflect the special charges that we anticipate occurring over the balance of this year and next. For those of you who are still tracking the impact of FAS 123R, we expect the quarterly impact of share-based compensation expense to be approximately $0.08 per diluted share for the fourth quarter of 2008 and each quarter during 2009.

We look forward to continuing to meet with investors and invite all of you to join us next Monday, November 17th, for our Analyst Forum from 2 to 5 PM at the New York Marriott Eastside Hotel or via the dial-in or Webcast.

This year, we have invited divisional presidents to provide an overview of their divisions. And we also review the outlook for Integra as a whole and our strategy for the future. We hope that you can join us.

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

(Operator Instructions). Amit Hazan with Oppenheimer.

Good morning. Can you hear me okay?

We can. There's an echo but we can hear you.

Just a couple of questions from me. First of all, just to be clear on the SG&A expense in this quarter, it looked higher to us and I'm not sure I fully understand why that was, versus the guidance you gave on your last quarter call. Can you speak specifically to this quarter and why SG&A expense was higher?

Yes. Let me start with the G&A. The good news is G&A spending, particularly in the finance organization, was improved as a percentage of revenues. And in fact, the use of consultants was down significantly enough to reduce outside spending by about $1 million to $1.5 million.

Offsetting that was the impact of our international operations, where spending on sales and marketing was in excess of expectations. Spending on Theken or Integra Spine, which had substantial -- both gross margin but also SG&A spending.

And then finally we continue the build out of our various sales and marketing organizations -- in particular, the orthopedic organization for the extremities. And so, we spent more than we anticipated in those areas.

By the way, while the SG&A was more than expected in the middle of our range, it certainly allowed us to still deliver an earnings per share within our initial guidance.

My second question is more on the discontinued product side. Just trying to really get a handle on where we are in that process.

Can you give us a sense of how many more quarters we have like this one where it negatively impacts you by a few million, i.e., trying to figure out when this thing annualizes for you?

Yes. First, I would like to highlight the way we are presenting our numbers. I think it will help in terms of understanding what is going on in our business.

The new categories of neurosciences, orthopedics and medical instruments allow you to better understand the customer markets that we call on rather than the product types. And we have tried to be responsive to investors' desire to have better visibility in that area.

It was particularly helpful in this quarter because you see the substantial performance on the growth, in both our Neurosciences and in our Orthopedics businesses; and it also highlights the negative performance or the flatness in the Medical Instruments business.

Now, as we pointed out, that was to a great extent by design. As we've discontinued approximately 40% of the acquired LXU Medical Product lines. Why did we discontinue it? Because Integra is not a distributor. Integra is a developer, manufacturer and marketer of devices and products.

So acting as other companies' distributors typically carries with it a 20 to 30% gross margin which is nothing we really want to do. So we went through the process of looking at LXU's distribute products and chose to retain mostly the self-manufactured products.

So that was the process. We've owned the business for about a year and you'll see us anniversary the vast majority of that impact by the third quarter of next year. There's still -- are some distributed products, but they are substantially less than in prior quarters.

Okay. Last one from me, in the 10-Q, you made a couple of comments I just want to get more color on.

One was that upper extremity decline in the quarter and the other was that Miltex declined in the quarter. Any color on that would be great. Thanks very much.

Yes, again, you get more information now about different things because of the way we broke out the numbers and, hopefully, that's helpful. I wouldn't read much into any of them. They are relatively small dollars.

In the case of upper extremities, we have a number of new products that we are in the process of launching, but haven't launched a new product into that particular category for a while. And therefore you see the impact in a competitive market.

In the case of Miltex, again, I wouldn't read much into it. There will be fluctuations always in these businesses quarter to quarter. And indeed we'd expect a particularly strong fourth quarter from Miltex based on historical performance.

Matt Miksic with Piper Jaffray.

Sorry for the background noise here. Couple of questions.

One was just if you could, following up on this Miltex question. I'd be curious to know because some of that goes into -- some of those sales go into sort of general physicians' offices and dental offices. If you could remind us to what degree you have the procedure type exposure to those markets in terms of patient volumes?

And to what degree is this sort of an instrument or equipment purchase that goes on year-to-year for those kinds of businesses?

In light of the economy and in light of reviewing other companies' earnings calls, we went out to all of our divisions and asked the question, what do they expect the impact of the economy to be? Keeping in mind that the economy has been challenged for the first three quarters of the year and will continue, based on what economists are saying, to be challenged for -- at a minimum -- another year.

So we've asked the questions and certainly built into our guidance, whatever impact we think the economy will have on the business.

Indeed in Jack's presentation, we went out of our way to highlight some of the areas that could be impacted by the economy -- although we think it's relatively little in terms of our overall business mix. We focused on the potential impact on capital which we call out on the order of $30 million to $40 million of revenues which we call low ticket capital. Indeed, much of it is not in capital budgets.

And we also talked about the fact that really, trivially, little of our business is impacted by aesthetics or cosmetics or other very discretionary markets.

In terms of Miltex (technical difficulty)

Luxtec's lines around some of the distributed products? Did you talk at all about what that impact has on restaurant business? You mentioned it's flat. If you were to -- you talked in total 10 to -- you are going to 13 organic growth.

What does that do to the instrument line if you can talk about that?

Yes. One of the things I would encourage you and other investors to do is go to our Website and look at our new presentation of both the way we are showing the Company in neuro-orthopedics and medical instruments and also the historical numbers, which we break out for the last three years on a spreadsheet so you can remodel them.

And indeed, on the spreadsheets we provide -- there is also detail on the historical categories. So there's a pretty simple bridge from the old implant and med surge to the new Neuro Orthopedic and Medical Instrument categories.

Keep in mind, essentially to orthopedics is all implant and essentially medical instruments is all Med Surg. So it's really just a question of extracting some dollars to put into the neuro category from each of those. And it is easy to bridge the model and we've done it for you on the Website.

In terms of growth rates, we are going to actually at our analysts meeting next Monday go into some great detail on the markets that each of these businesses serve. But we did summarize on this call what we believe that a long-term growth rate implicit in our business and what we said is 10 to 14% for Neuro. We said approximately 20% for the Orthopedics. I think we said 18 to 22.

And then we've said 6 to 8% for the Medical Instruments business. You won't see 6 to 8% growth for Medical Instruments year or for the next few quarters because we are fighting the discontinuation or the elimination of the various LXU product lines. But, again, if you do the math on discontinuing 40% of a business, you have to conclude that the rest of the business is doing quite well to stay flat.

And indeed we had another strong JARIT quarter this quarter, JARIT being an important part of the Integra Surgical Instrument business.

Right. And I guess that's the nature of my question is, just, it looks like that's a double digit number against a 6 to 8% projected long run growth rate for that business if you exclude the lines that you've excluded. Is that right?

It is right and it's by design. Because we say to the guys, focus on the manufactured products. Indeed the commissions are driven towards the manufactured products. And you'll see their efforts going to driving the Luxtec manufactured and the JARIT manufactured products at the expense of the former distributed products.

Indeed, most of those or many of those distributed products they are no longer commissioned on.

A friendly reminder for those of you who have been following the Company a while. If you go back and look at the stuff we said when we actually bought LXU, we said that a business that had been running close to $50 million in 2006 would generate around $30 million in our hands.

So a year and a half ago we anticipated this exercise and have been bringing down the business methodically since.

One of the challenges of a public company is analysts doubt like that, but it doesn't change the fact that we said we were going to do it and we did it. And it is indeed the way to grow that franchise and grow the profitability of that business.

Great. Understood. Thanks for taking the questions.

Amit Bhalla with Citigroup.

Good morning. I wondered if you could start off by just reviewing with us the sales force and distribution structure given that you're now in three separate segments. So maybe just go through some of the numbers in the sales force, just talk to us about how they are distributed again.

And I have a couple of others.

Okay, and indeed for those of you find my description tedious, there will be a whole presentation posted next Monday on the Integra Web site which goes into great detail on this. And it is indeed important to understand how the business is structured.

We have put substantial effort in the last 18 months into building out our divisional organization structure and, indeed, have in many cases either hired from outside or promoted inside divisional presidents. Overall, we are presenting our numbers and our businesses in three categories. Neurosurgery or neurosciences, orthopedics and then medical instruments.

The easiest one to follow is the Neurosurgery group or the Neurosciences group which is for those of you who have been following our Company for the last 10 years, is what the company was built around and that group is approximately 150 salespeople in the United States of which 120 are reps and 30 are specialists and we talked in the past about the ICU specialists, the OR specialists. So it's a field for us of about 150 in the United States.

We haven't really grown that amount substantially in the last 12 months. It's rightsized. And it indeed meets the need of approximately 4,000 neurosurgeons in the United States.

In Europe we have a direct route of about 30 calling on neurosurgeons and neuro nurses and in the rest of the world we go through distributors. And as I mentioned earlier today, we are also now direct in Canada and in Australia and New Zealand; and that's just part of the Company maturing and wanting more direct access to our customers.

All right. Let me turn the attention now to orthopedics. Orthopedics is a group of approximately $200 million run rate in revenue and there's three main sales organizations there.

There is the Extremity sales force which has been now around at Integra for approximately four years. We have roughly 80 direct people. And as we said on the call, we expect that to grow next year to over 105 direct salespeople. So that will continue to grow, and grow in line with substantial market growth and substantial growth in our business, well in excess of 20%.

In Europe, we are direct. In fact we are one of the biggest players in Europe in terms of the extremity's market.

The second sales channel in orthopedics is Theken Spine. That's the most recent acquisition. We rebranded it Integra Spine and we've only owned it for three months of which two were reported in the third quarter.

Theken Spine is a fully integrated spine company, but really only covers about 40% of the US. The rest of the country is fair game and in our hands will be adding a number of regional managers that will support an increase in the number of distributors.

And I must say there's been real enthusiasm to align themselves with Integra because of the breadth of our product line, because of the quality of the Theken product lines, because of the access to OrthoBiologics products, because of the strong neurosurgery franchise that we have. So as we go into next year, we will be adding management, but we won't be adding direct reps because we have a distributor-based franchise.

Then finally we have the Integra OrthoBiologics sales organizations. That's about 20 to 25 of our own people and then the rest is through distributors. Again, we manage distributors, some of those distributors are Integra Spine distributors. Some of them are not, but it's a separate franchise.

So that's roughly the sales organizations and outside of the US, other than extremities, it's all through distributors.

Finally we had the medical instrument business which really has two major components. One is the Integra surgical instruments. Again, formerly, Luxtec and JARIT, and the other is Miltex. Integra surgical is half direct, half indirect or distributor. And Miltex goes all through distributors and dealers.

Integra has roughly 50 direct people and then literally hundreds of distributor reps. In particular Miltex has thousands of distributor reps. But then again they only spend a small amount of their time on the Miltex products.

So that was probably more time than a call like this warrants, but we will be going into that in great detail on next Monday.

If I could just have two other follow-ups. Could you put some goalposts around general gross margin ranges for the business segments now that they've reshuffled a bit?

Then can you talk about Radionics? I know you mentioned earlier that there is not much in the way of capital exposure, but the Radionics business does exposit you to the radiation oncology segments. Talk about what is going on there? Thanks.

Sure. In reverse order I think our total revenues that go to oncology from what we formerly called Radionics, may be about $10 million and if we sell three or four systems a year at $300,000 or $400,000, that's a good year.

Most of that business is software, repair and service, parts and equipment. I wish we had a business that was competitive with (inaudible) or Brain Lab or one of the big players, but we really are servicing a historical customer base that what we acquired as part of the acquisition of the CUSA ultrasonic aspirator line.

Now that doesn't mean we doubt have a good product. We actually have an excellent product and particularly in price-sensitive accounts they will buy the [Xknife]. That being said, there's nothing about our business strategy that is reliant on selling new capital in the radiation oncology area.

And I think I've been consistent in saying that since we bought it.

In terms of the margin structure of the new categories, let me start by saying as you look to our margins in the next few years, we actually expect a reasonable ramp in our gross margins. And Jack talked about next year in the 63 to 64.5% range and we will go into some more detail at the investor meeting in a week about why we believe it can grow into the high 60s even in the longer run into the 70s.

But we are a company that is increasingly in high margin orthopedic categories that comes with a cost. And as we pointed out earlier in the call, we have indeed increased the expectation for GG&A percentage by about 1 point to 1.5 point because of our presence in those markets. But on the other hand to gross margins for many of our orthopedic products can be in the 80% range.

We are not going to break out gross margin by category, but I will remind people of what I've said in the past. The instrument gross margins have historically been in the 50s. We have some upside with the strengthening of the dollar versus the euro, although it will take six to nine months for that to turn.

Neurosciences, we've generally said, gross margins are roughly at the corporate gross margin and, clearly, orthopedic businesses have margins in excess of the average corporate gross margin. So I think we don't want to give out either competitive information or get in a habit of reporting that information. But I think that gives you plenty of room to understand, roughly, the, structure.

And again -- and I am repeating myself. One of the advantages of the Med Surg -- sorry, the Medical Instruments business only growing at the 5 to 8% range is that our lowest gross margin business is our slowest growing business. So just the mix, as we go forward, will improve our gross margins.

Thanks for the detail.

Taylor Harris at JPMorgan.

My first one is just on the Neuroscience business where you had a good quarter growth above what you are talking about in terms of your long-term expectations. So any color on that phenomenon?

Well, everything did great. So if you heard Jack's talk, we had double-digit growth in almost every one of our major categories, whether it be duraplasty, ultrasonic aspiration, the ICU monitoring products. It was just a really good quarter.

And I think that's a reflection of the tenure of our neurosciences team. The market share we're able to take, the new products that we've been able to launch. We just have a -- 10 years, we've been growing quite substantially well in excess of 30% a year, including the acquisitions and eventually our customers have become aware that we are the major player in this market.

If you recall last year, Q3 was a pretty tough quarter. So I don't want to overstate how well we've done, because we had a pretty easy comparison versus the third quarter.

Yes. Particularly on CUSA, as I recall.

Yes -- which was terrible last year and not dramatically great this year, but sort of now finally doing what it was supposed to do.

On the tax rate, what's the -- is the 31% rate something we should look for in 2009? Or is it going to pop back up in the mid 30s?

It's probably the hardest question we have to answer and our track record on this one hasn't been good. We are modeling in our forward-looking guidance the midpoint of 30 and 35%. So we are modeling 32.5%, but I'm not sure that means we think it is going to be 32.5, we think it is going to vary between 30 and 35%.

I wish, I hope -- as we start to have more experience and a lot of these acquisitions have anniversaried and a lot of the tax planning that we did in the pasts start to mature -- that we will start end up with a relatively fixed number throughout the year.

One thing that's worth in the spirit of taking a victory lap, the maturity and improvement in our finance organization and tax organization is finally letting us get some of the benefit from our historical tax planning activity. And so it is indeed nice to report a 31% and it's a positive thing and it's sort of back where we had hoped it would the a couple of years ago.

So it's going to bounce around, and implicit in next year's earnings guidance is the midpoint of 30 and 35%.

So maybe I misunderstood some of the comments Jack made. But I thought that the reason it was at 31% this year is just because of some of the onetime charges that hit the US P&L, which is your highest tax jurisdiction. Is that right? And if so, are you expecting more of those charges next year that also keep it down in the lower 30s?

Jack's point was that, indeed, our GAAP rate for the year will be well below 31%. Based on the information we have right now, the GAAP rate is dramatically below 31%. And that's the impact of those onetime charges.

So in detail or either Jack was not as clear as he could've been or you missed it. So (multiple speakers). The 31% is indeed the adjusted rate which reflects the current mix of businesses around the world, excluding the impact of the onetime charges.

Okay. And then (multiple speakers)

And the 30 and 32.5% that we're talking about I don't want to have a pinpoint. The 30 to 35% that's implicit in next year's guidance, again, it assumes we back out the impact of any onetime charges. And if you look in the reconciliation in the back of our press release, we do indeed predict onetime charges next year principally purchase accounting for the Theken inventory, and a little bit for the Australian/New Zealand inventory.

And then on currency, I appreciated your comments on the effect at the gross margin line. What's the overall effect as the dollar strengthens in its comparisons next year? What's the overall drop through to the bottom line?

In the short term it's kind of negligible. It's definitely not bad.

You know, there are a couple of companies have said the strengthening of the dollar is really going to hurt their earnings in the next few quarters. It really doesn't for us because there's a reasonable offset between the revenue -- the negative impact on revenue, but the positive impact on our period expenses.

But as you look out six to nine months, we start to turn the inventory that we are making or buying now at $1.30 or $1.28. And that will have a positive impact on gross margins in the middle to back end of next year. Was that clear?

It is, but I guess the net effect at the gross profit line. So you have -- so it hits revenues but gross margin is better. What is the net effect at the gross profit line?

In the short term, the net effect at the gross profit line is marginally negative. It is marginally negative on the gross profit line in the short term until we turn those inventories in which case it will become positive. But our operating expenses in the short term in Europe go down which means the net impact on operating profit is essentially nil.

Okay. So I mean this is good news for you guys? It is -- (multiple speakers).

It is on -- the strength of the dollar is unambiguously good news for Integra's bottom line.

Great and then last question on your liquidity profile, I was hoping you could spend a couple of minutes just going through what are your possible obligations? When could the converts get put to you? The same thing with the Theken milestone. And just sort of lay us out a roadmap for liquidity over the next year or so?

Jack is going to cover it, but I just want to make a couple of points. $170 million in cash last Friday. So if there's any message to take away from our numbers, substantial cash on the balance sheet and year-to-date operating cash flow; because we got a bunch of questions last quarter and I'm surprised I didn't get even at least a pat on the back for the $27 million of operating costs cash flow this quarter.

Year-to-date cash flow over prior year, up 40%. So -- but we do, Jack talked about it a little bit already, but he's going to give you sort of a prepared walk-through of where we are on cash obligations over the next three years.

So we have two major uses of funds really between now and all the way to the end of 2011. So it really is three years.

In the fourth quarters of 2009 and 2010, we have taken purchase price to pay and that requires some guess as to where things go. But we sort of assumed for our purposes that you don't aggregate in the area of $50 million to $75 million.

The other use is the repayment of the bonds due in June of 2010; and that has an aggregate principal amount of $165 million. Assuming that the converts are out of the money which we do assume so because they struck in the mid '60s we will have to repay those with cash. So that's $165 million for bonds and about $75 million for Theken.

Our sources include $170 million in cash on our balance sheet today. Another $40 million in capacity in our credit line. So that gets you get you to $210 million essentially today.

And we are generating in the area of $15 million to $20 million of cash per quarter on average. It bounces around a fair amount, but I think if you look at our performance this year and even last, that's a reasonable number to use over the next couple of years. So if you add up the cash we have, the remaining capacity on our bank credit agreement and our quarterly cash flow, and even if you plug a conservative number for that we're in excellent shape to meet all of our obligations.

And that means that our next real financing moment will be at the end of 2011 when we will need to set up a new credit agreement with our banks.

There's talk about these puttable bonds which (inaudible) or not.

Right. Okay. That's helpful. And, Stuart, I will congratulate you on the third quarter cash flow.

Somebody should. Thanks a lot.

But I guess -- and it does sound like you are just walking through that. You are fine from the liquidity point of view, although I would imagine that perhaps larger deals on the skill that you've done recently are probably off the table for a little while? Is that a fair assumption?

It actually is. We are not either ignorant or insensitive to the current credit environment or to investors' taste for debt to equity ratios or debt to interest ratios. And I think you should take it that over the next, say, three quarters our primary activities will indeed be either piling up cash or paying down debt. So I think we are appropriately reactive to a more conservative profile.

Witness, though, a small $5 millionish acquisition which is well within the tradition of Integra's typical deals which are $5 million to $20 million deals. So I don't think we are in any way saying that we can't or won't do smallish acquisitions. But I think the $75 million to $100 million deals are going to be off the table for a while until the overall markets improve. Because clearly cost of capital in this market has gone up.

Yes. Thanks.

Joshua Zable with Natixis.

Congrats on a great quarter. Just a couple of quick ones. Most of my questions have been -- .

First of all thanks for that breakout, the revenue breakout. I know you have been talking about it for a while so we appreciate it.

Is it safe to assume now, given that you spent less money on consultants and obviously you have the wherewithal to do this, that the finance group is up running and complete and ready to go, or are we still building that out?

I think it is in really good shape. I will let Jack talk about it, but certainly we've reduced consultants in the US to essentially zero. Every company uses a small amount of consulting. And I would put us in the same category now as most other companies.

Internationally, we've got a little bit of work to go. I think before the year is out, we are pretty much done.

So Jack and his team are to be congratulated for putting into place, I think, a really strong finance organization. And I think it's costing us more than it was, say, two or three years ago, but that's actually offsetting the substantial consulting that we were suffering with in terms of spending for the last year or two.

So net net, I feel like we've really made a lot of progress and we will start to get leverage off of the overall organization of being able to grow on that backbone. That being said, I think we will be appropriately conservative and make sure we got good staffing indefinitely in the finance organization.

Yes. I agree with that. We have added a lot of good people. We've gotten enormous enormously positive help from all around the Company. So I would say as a team, the entire financial organization is both bigger and performing better than it was a year ago. And all of that is very positive.

We are and remain a complicated company. You are not going to see us as one of the first reporters in a quarter for quite some time. But that said, I think that this period now is we've made really big improvements and we are all very happy about that.

Great. Congrats. Good work. I know it has been a challenge for you guys.

Secondly on the new -- the acquisition, the small acquisition, can you talk about the timing? Maybe it could be just obviously the weakening dollar over there or the strengthening dollar here? Then we've seen you sort of -- obviously if they are a distributor, they have been distributing your products. They probably have other distributed products to the extent, are you going to discontinue some lines over there, etc.?

The good news -- let me put it into two pieces. First of all, they've been our distributor in Australia for seven or eight years. So we've known the people there for quite a long time.

We actually trained them, we participate in their meetings. They participate in many of ours. So it is a lot like the Canadian acquisition we did a few years ago. Which by the way, if my memory serves me right, since we've owned the Canadian company we've either doubled or 2.5 times their revenue in our hands. So owning these and being able to invest in the future is quite helpful.

We were able to buy it cheaper than we expected to without hurting the seller because the deal was always negotiated in Australian dollars. And so we did get the benefit of the run-up in the US dollars against the Australian dollar.

That all being said, we're translating their revenues back in Australian dollars. So it doesn't really help in the short-term.

Now if the Australian dollar strengthens, because it really has gotten crushed, then we might get a windfall. But we didn't buy them because of the dollar or the currency. It's been on the plate for, I think, probably a year at least -- the acquisition.

So we closed late last week and that, again, it just happens to coincide with the reporting of our numbers. But there was no particular strategy. These things get done when they get done.

So it's a nice little acquisition and it is not big in revenues. It's a contributor in terms of overall gross margin and, again, it will drive our SG&A up a little bit, our gross margin up a little bit. But on the other hand, it's not a really significant impact.

They don't really sell much other than our products. It's sort of trivial.

Okay, great. Then just -- you sort of answered it there, but my follow-up to that would be, I know you have actually given -- talked about the currency here quite a bit. And I'm just trying to understand as far as your distributors go, are your contracts with them in dollar terms or their respective currency? Just trying to get an understanding to the extent of how it would affect sales?

15% of our overall revenues are euro or pound denominated. That's the important thing to remember. So some of our distributors are in dollars. Some of our distributors are in euro or yen or pound.

So it just depends on to some extent history, the market, the way in which the dealer likes to work. But in general, if you just do the math on a 15% of our total revenues being in euros or pounds and any other currencies are de minimis.

That's very helpful. Thanks very much.

Tao Levy with Deutsche Bank.

Looking at your Medical Surgical, I know some folks asked this earlier on. But you know it was significantly better than expected and I'm using the older terminology because I haven't had time to adapt to the new way you are breaking things down. Was there any sort of onetime-ish big orders that came in in the quarter that would affect Q4 or now that we've anniversaried sort of a tough year with, for example, CUSA and other things that we should expect similar rates over the next few quarters?

There was nothing onetime. We certainly benefited from CUSA normalizing and Q3 of last year been particularly bad. But as I said in the Neuro business the monitoring was strong. That was an old Med Surg product. CUSA and other ablation tools were strong. That was an old Med Surg category. JARIT was particularly strong. That's an instrument now category. We said Miltex was flattish.

So, again, these numbers bounce around and when we were showing a Med Surg for a couple quarters of 0 to 1%, we said, "Really, it's not that bad."

9% is probably not that good. It's -- it just depends on the anniversarying of various activities. The mixes, the particular quarter and, again, the biggest impact now -- and that will end, that is in the Med Surg category which we put in the back of our press release for those of you who just want to look at last year, that LXU discontinuation has been beating the hell out of that Med Surg category.

So we had to, again, for this quarter -- we reported really good growth in our Med Surg category despite the 2 or 3% or whatever the total impact discontinuing those product lines were.

As we go forward, we will not be showing the old implant for Med Surg categories anymore. So we are available (multiple speakers). Yes we are available to help you transition to the new categories. But we are not going to keep going back and forth.

But there's a great spreadsheet reconciliation because we know it's painful to do this up on our Website and, again, all you need to do is just pull some of the implants and some of the Med Surg into the new Neuro category and what's left behind is Ortho, which is all implants and instruments, which is all Med Surg. So it is not as daunting a modeling as it may seem.

And also on the revenue guidance for the fourth quarter you said you guys did not change that. But obviously the currencies have gone [against you]. Can you talk a little bit about the currencies?

I see that's factored in, but you are okay keeping Q4 numbers. I know a few other companies have lowered the outlook more recently to take into account the strengthening dollar.

We did take it into account and our guidance, we feel good about it. I mean we did, after all, beat the high end of our range by $2 million this quarter and the street by $6 million.

Yes. Flat growth in private label? That was a little bit lower than what you previously reported. Is that just a timing issue?

Yes, again, there's not much to read into it. Some of those private label products over the last year have flattened out. You've read about in particular, some of the orthopedic products that we OEM, their growth diminishing. So I mean that's real. But it's not just Q3. It's, again, we hadn't reported it for a while, but over the last six to nine months some of those OEM or private label products have flattened out year-over-year. And, again, that's implicit in our guidance going forward as well.

Is that the type of thing that bounces back with -- kind of like CUSA wasn't doing well or JARIT wasn't doing -- ? And then all of a sudden you get this growth or is it --?

The private label has historically bounced around, but again there's a decent amount of it that is in the orthopedic market for some of our large orthopedic OEMs and their product lines they have set have started to grow less quickly.

On the tax rate assumptions for the fourth quarter, you kind of have to get to a 24% range. Is that to get to your 30% full year? Is that right? Or is there something wrong with that model?

Well -- it's really complicated and it'd be very hard to do on this call, but implicit in our guidance is an adjusted 31% for the fourth quarter, not 24%. But it would be easier to take off-line to go through the details, but the way to think about it is every quarter you have to reassess what the full year rate is.

And we've reassessed the full year right rate in the third quarter and in his 31%. So the math for the fourth quarter is 31%, but adjusted but the GAAP rate is well below that.

But (inaudible) in the press release or in the Q I think you talked about a 31% full year adjusted (multiple speakers)?

Correct.

And the first half of the year was north of 35% I think and then this quarter was 31%. So in order to get to the 31 for the full year, the back half has to be -- or the fourth quarter has to be below that 31 (inaudible)?

But again you have to relook at the whole year. And in fact if you look at our adjusted full year guidance for 2008, it's up. It's up substantially because we have to adjust the first two quarters (multiple speakers) 31%.

So you went back and (multiple speakers)

Now trying to be intellectually honest we did not take a victory lap for raising full year guidance this year. Because the truth is, we did raise full year guidance, but it was mostly the impact that the first two quarters being adjusted down to 31.

Are those other numbers on the Website, or they're (inaudible)?

They are in the press release and (multiple speakers)

Off-line.

Our IR team can walk you through it, but if you look at our new full year guidance, we actually raised it by about 7 or 8%, even though we left fourth quarter and -- sorry not percent, $0.07 or $0.08 even though we left fourth quarter unchanged.

And we were careful not to highlight it as raising the full year guidance. Because the truth is, it is sort of an anomaly of a jump in the first two quarters down to 31%.

But the full year guidance did go up by I forget exactly but $0.06 our $0.07, but it really is just because of that estimate of the 31% rate. But we are not assuming fourth quarter is down at 24 for the adjusted. We are assuming 31 because we adjust the full year to 31.

Perfect. My last question on the convert side, there's, obviously, new accounting potentially rules that go into effect next year. What's the impact on -- for you guys on EPS?

We are going to give the GAAP an adjusted guidance in the new year. So we are going to give those numbers probably when we report -- well some time in early 2009. (multiple speakers)

And you'll break out shortly to convert.

And so we, I'm sure, like other companies will present GAAP and adjusted excluding the impact of the convert. That said, you can do the math. We do want to do it because we don't want to give the forward-looking guidance yet. But you can do the math by taking a guess at our stand-alone borrowing rate when we did the convert. Because you would do it based on when we did the convert and compare it to the cash rate of approximately 2.75. And you would then apply that to the principal less the implicit value of the equity.

So I don't doubt you can get to that but we don't want to give it because, A, we want to finalize the numbers and we want to kind of give the numbers when everybody else does and it's just a little bit early to be applying next year's accounting principles.

Thanks.

Jayson Bedford with Raymond James.

Just a couple quick questions here. Just on the Reconstruction group, are you seeing more bundling or cross selling of the skin products with the extremity hardware? Is that still something you are looking to, to optimize?

It's the same reps. And there definitely is call point synergy and so I would say it's been happening. I don't know that is accelerating so much as its what we've been doing for a while.

There's a lot of opportunity, particularly in the foot, but as it relates to a lot of orthopods doing would care centers. And then in the hand, this synergy is between the copper extremity products and the nerve guide products.

We are seeing synergy in having launched our OrthoBiologics products. Recall, we launched a range of Integra OrthoBiologics products both Mosaic and the former IsoTis products. And the [Xtremity] sales force is selling that. Typically if you're plating you are going to put in some kind of orthoBiologics. So there's definitely synergy there as well.

That's helpful. What was taken in the quarter?

It's in the Q. So I think I can give it out and it was $6.8 million I think and that number is in the Q and then in the press release was taken plus the legacy IsoTis which I think was about -- was it $17 million, I think or no? It's in the press release. I can't flip to right now, but they are both in there.

Friendly reminder (multiple speakers)

There are some other acquired products in there is well. Sorry.

There's a little bit of other acquired, but also a friendly reminder that the Theken number is basically two-thirds of a quarter just so everybody remembers that.

It was 15 between the IsoTis and Theken for the quarter.

And it looks like IsoTis came down quarter on quarter. Is that seasonality?

Sorry. It's more than 15. I'm sorry. We should probably take it off-line, but what were you saying?

I think it was 16.2 the combination which implies that IsoTis came down quarter on quarter. Is that just seasonality?

I think it's just nothing. I think it's down from prior quarter by $0.5 million and I wouldn't read anything into it, except the randomness of the numbers quarter to quarter.

Fair enough. Lastly what is the organic growth assumed in the '09 revenue guidance?

Again, we are not giving out implicit organic growth. Bottom line is, we continue to believe our long-term growth rate is double-digit and as I said in the call, we need to get our investors to appreciate that there's substantial growth in the things we have acquired. And I hope the new way we are presenting numbers will allow us to show for example that there is going to be substantial growth over a $34 million Theken number in 2009.

And there's going to be substantial growth over the historical Integra OrthoBiologics numbers, even if we haven't reported them for several years. And so I'm going to continue to bang away against this idea that the way to measure our organic growth is based on things we haven't owned for two years. So I think you should look to our 735 to 755 and try to look at how each of the businesses have grown. And we will start to try to provide measures that help you understand how the acquired businesses have grown in the last year as well.

Fair enough. Thanks.

(Operator Instructions) David Roman with Morgan Stanley.

Good morning, everyone. First of all, I also want to thank you for all of the detail on the Website. It was very helpful to us over the weekend.

First on the -- any benefit from the federal R&D tax credit?

Not yet. No. That is going to be a fourth quarter event and we don't have an estimate for it yet. But no because it was passed in the fourth quarter it doesn't -- sorry, in the third quarter, it doesn't impact the third quarter, it will impact the fourth quarter.

Is that included in the guidance or not?

It's implicitly included although again that tax rate is a challenge. You should (multiple speakers)

Yes. Yes.

Assume roughly the 31% adjusted tax rate.

Then on Theken, right around the time you acquired the business there obviously was some M&A in the space. Have you been able to pick up any distributors given the recent movement, specifically Zimmer and [Abbott]?

Without talking about individual companies, the answer is yes. I don't want to give any indication as to whose dealers are coming our way, but there's tremendous turmoil in the spine market right now, whether it be for mergers, companies choosing to go direct. Companies having -- because of financial challenges to restructure -- there's buying businesses. The larger companies changing their models.

So it's an exciting free-for-all in terms of representation in and if you keep in mind that Theken only covers less than half of the US with any salespeople at all, I think you are going to see substantial organic growth in 2009 in our Integra Spine franchise.

And potentially we might see higher SG&A in near-term than higher sales looking farther out?

Not because of Theken. You'll see the percentage go up.

But the Integra Spine model is a small number of regional managers. So we are adding three or four next year at a cost of about $1 million for the year or $1 million and change.

The rest is through dealers and the dealer SG&A is incremental. I'm sorry, I misspoke. Is proportional. So in other words, they generate a buck of sales because we shipped in the hospital and we pay them X percent.

So that wouldn't drive an SG&A prior to revenues. Some of the things we are doing with the direct sales force, for example adding 30 reps and extremities does -- but really the guidance of 1.5 increase in SG&A has more to do with the percentage of sales that is spent to generate a dollar of Integra spine revenue.

So in their particular case it is not speand ahead of revenues. With a direct sales force you spend ahead of revenues. Do you follow me David?

That makes sense.

But it will change the overall percentage, because it just takes more SG&A to generate $1.00 a revenue in spine than it does in particular with some of our more mature businesses like Neuro or Instruments.

Yes and there are a lot of good comps out there were we see that.

Lastly, the R&D number was very strong this quarter and it looks like the guidance you are giving for next year is slightly above what we were looking at. Can you maybe highlight some of the key projects that you're working on? I'm sure we will hear more about it next Monday, but what are the top few things we should be thinking about?

First, you've got to roll in \to your numbers and Integra Spine business that's growing substantially year-over-year that's got spine margins in line with other spine companies, that's got SG&A actually better than most spine companies, but certainly as a percent of sales higher than Integra. And that spending 9 or 10% of sales on R&D. So they are averaging up our R&D spend as a% of sales.

So as you look to our model going forward, and we will cover this in the analyst meeting, I think you'll see margin improvement in gross margin line probably above what we historically have been talking about, but giving some of that back in the SG&A as a percent of sales and the R&D -- and we've always said we hoped R&D would be between 5 and 6% then and then delivered on a 5. Now in the quarter we delivered on about 5.5%.

So now in terms of the projects, they tend to be individual projects in the orthopedic categories and it would be individual spine sets that Theken Group is launching this year and next with individual extremities sets that the Integra, extermity reconstruction, group, and then it's more the historical legacy activities in the rest of Integra.

So I can't really highlight one particular thing, because it's really the buildup of many, many projects. You are seeing overall an impact of thee Integra DuraGen Plus adhesion barrier trial which is starting to roll into our numbers at increasing rates of expense both because as patients move through the trial it actually cost more and we accrue that based on for example been getting their first radiology exams, their second radiology example.

So as we increase patients, there's the per patient fee of doing the surgery, but then you have a bigger, installed base of patients that are working their way through the clinical trial. So the quarterly expense goes up incrementally each quarter, so that is an impact.

That's all very helpful. Thank you.

(Operator Instructions) Bill Plovanic with Canaccord Adams.

Three quick questions. The first, how many any patients had you enrolled or what percentage are you through with the enrollment of the adhesion barrier trial?

We haven't discloses the numbers. We will do an update at the analyst meeting on the clinical trial though. So we will be giving you a little more insight next Monday on the overall trial. But enrollment is good and increasing on a monthly basis.

And we continue to be very excited about clinical trials and, obviously, we now have a chance to be first to market.

Yes I saw that. Secondly, the acquired revenues, you have $16.2 million with IsoTis and Theken. What was the remaining $1.5 million? Is that (inaudible) dental or is there more than (multiple speakers)?

Yes. It's that little dental acquisition we did for Miltech -- that will anniversary this quarter.

It it is in Miltek, that's what it rolls into [four] -- in the medical instrument at this point?

Yes.

Last question. Just as you look at all of the integration you've done, all the deals you've done, it seems like the IsoTis deal is done. The Theken deal, there is not a tremendous amount of integration. It is effectively already done. They are stand-alone operating. [How] more charges, much more of this do we have to go or is this it? Where it's pretty much clean? And we start to start to see benefits on the P&L moving forward.

If you look at our forward-looking guidance for the fourth quarter and for next year, you have our guests at the charges based on what we know now and the vast majority of those are the purchase accounting for the Theken inventory. We did acquire quite a bit of inventory. So normally we are able to push through the purchase accounting in a quarter or too. You can see in our forward-looking guidance it's taking a little longer than that.

It's actually about four quarters and that's just because of how much inventory they have carried historically and the way in which you do to purchase accounting for that. But if you look at our guidance for 2009 there's not huge numbers for onetime impact of these things.

And to your point we absent buying something new and certainly Australia is not one of those [things], there's not a huge amount of incremental purchase accounting or onetime event that are anticipated at the moment.

Last question was Australia and New Zealand. Was that a stocking distributor?

It was but it's not a big organization. Order of magnitude if my memory is correct, maybe they had $1 million of inventory.

Thanks.

As there are no other questions in queue, I would like to turn the call back to management for any additional or closing comments.

I would like to thank each of you for participating in our quarterly earnings call. And I hope you'll take the time to either meet with us next Monday at our annual analyst and investor meeting or dial in for the Webcast or phone call. So thank you and look forward to seeing you next Monday.

Again, that does conclude today's Integra LifeSciences third quarter financial reporting conference. Thank you for your participation. Have a good day.