Integra Lifesciences Holdings Corp (IART) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to this Integra LifeSciences fourth quarter financial reporting conference call. As a reminder, today's call is being recorded. At this time it is my pleasure to turn things over to Mr. Stuart Essig, President and Chief Executive Officer.

Good morning everyone and thank you for joining us for the Integra LifeSciences fourth quarter and year-end 2008 earnings release conference call. I am Stuart Essig, President and Chief Executive Officer of Integra LifeSciences Holdings Corporation. Gerry Carlozzi, Chief Operating Officer, and Jack Henneman, Chief Financial Officer, join me today.

During this call we will review our financial results for the fourth quarter and full year 2008 and our forward-looking guidance for the full year 2009, which we released this morning. 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 call.

This presentation is open to the general public and can be heard through telephone access or via live webcast. A replay of the conference call will be accessible starting one hour after the conclusion of the live event. Access to the replay is available through March 16, 2009 by dialing 719-457-0820, access code 1460424, or through the webcast accessible on the Investor Relations page of our website.

Today's call is a proprietary presentation of Integra LifeSciences Holdings Corporation, and is being recorded by Integra. No recording, reproduction, transcript, transmission or distribution of today's presentation is permitted without Integra's consent.

Because the content of this call is time sensitive, the information provided is accurate only as of the date of this live broadcast, March 2, 2009. Unless otherwise posted or announced by Integra, the information in this call should not be relied upon beyond March 16, 2009, 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 1A of Integra's annual report on Form 10-K for the year ended December 31, 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 this morning, which is available on our website in the Press Release section under Investor Relations.

Additionally in this press release and on the current report on Form 8-K that we filed this morning, we provide explanations for why management believes that presentation of these non-GAAP financial measures provides 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.

Integra delivered its 11th consecutive year of high teens or better revenue growth in 2008. Our 18% constant currency growth reflects the depth and breadth of our business, and the effectiveness of our strategy of balanced internal and acquired growth.

As with many other companies, 2008 presented us with unprecedented challenges, including dramatic increases in the volatility of currencies, as well as a deteriorating global economy, which contracted sharply in the fourth quarter, affecting in particular the ability and willingness of customers to purchase capital equipment.

Despite these significant challenges, Integra continues to focus on serving its critical markets. And indeed the strength and the balance of our business allowed us to deliver full year adjusted earnings per share of $2.09, right in the middle of the initial annual guidance range that we provided more than a year ago, and ahead of the Street estimate of $2.04.

As we reported early in January, Integra's total revenues in the fourth quarter of 2008 increased by $17 million to $174.4 million, an 11% increase over revenues of $158 million in the fourth quarter of 2007. The strengthening of the US dollar led to a negative currency effect of $3.5 million on sales in the quarter. Excluding the effects of currency exchange rates, revenues increased 13% in the quarter.

For the full year 2008 revenues were $655 million, an increase of $104 million or 19% above 2007 revenues on a reported basis, and 18% excluding the effect of the change in currency exchange rates.

We are pleased with our revenue growth for the year. At the beginning of 2008 we guided to sales of $635 million to $655 million for the full year. Taking into account revenues from acquisitions, which were not yet closed at the time that guidances was given, our actual revenues came in roughly in line with the bottom of the original annual guidance range we presented.

In addition, Integra's orthopedic business, through both newly acquired and legacy products, exceeded our expectations for the year. As you can see, despite the tough environment we delivered on what we said we would do at the beginning of the year.

In the fourth quarter US sales were up 16%. International revenues were down due to foreign currency effects, and up only modestly in constant currency. To get a little more specific, Europe was up 3% in local currency, though down nearly 8% as reported.

Rest of world was up 5% on a constant currency basis despite capital freezes in several of our main markets. However, on a reported basis rest of world sales were down almost 2% due to the strong US dollar.

Growth for the full year 2008 less reasonably balanced. The US posted a 19% increase, while Europe was up 15% on a reported basis, and 9% in constant currency. Our business in the rest of the world was up 27% on both a reported and a local currency basis. Approximately 18% of our revenues are denominated in foreign currencies.

As we discussed in January, our fourth quarter revenues were negatively affected by both exchange rates and a slowdown in spending for capital equipment. We have worked to further refine our assessment of the impacted of the economy on hospital capital spending, and are developing strategies to grow effected productlines despite these challenges.

We believe that approximately 10% of our worldwide revenue growth -- excuse me, worldwide revenue, can be categorized as capital products. Somewhat more could be affected by our customers' strategic decisions such as to suspend expansion plans.

In the fourth quarter we saw a significant decrease in our sales of capital products, which were down from the prior year by approximately $3.5 million or 18%, and well below our prior expectations for growth.

For the full year sales of capital products were down slightly because of fourth quarter performance, as we had previously seen growth in these products during the first nine months.

We have seen the impact of reductions in our customers' capital spending in both the US and in foreign markets. Indeed, as you may be aware, declines in capital spending are not only a US hospital phenomenon. In fact, freezes on capital expenditures in several foreign markets contributed heavily to our slower sales.

We reported our revenues in three categories -- Integra NeuroSciences, Integra Orthopedics, and Integra Medical Instruments. The first revenue category, Integra NeuroSciences, encompasses the products sold to the neurosurgeon and the neuronurse. The products in this category represented approximately 37% of Integra's overall revenues in the quarter.

Integra NeuroSciences revenues in the fourth quarter declined 2% to $64 million versus the prior year period. NeuroSciences' revenues were weak across all capital productlines, declining from the prior year period. However, we continue to grow our disposable and implant lines with duraplasty products in particular, recording growth rates in the upper single digit range in the quarter.

From a geographic prospective domestic sales held up reasonably well and were up over 5% in the quarter. Internationally however, sales were weak, predominately in the sale of capital equipment. Of course, currency also negatively affected our NeuroSciences revenues.

Integra Orthopedic revenues, which includes the Extremity Reconstruction productlines, Integra OrthoBiologics, Integra Spine, and private-label productlines, grew by 40% to $63 million from $45 million in the prior year period. We're excited about the orthopedic franchise that we are building. It constituted approximately 36% of Integra's revenues in the quarter.

With $63 million of revenue in the quarter, this category is running at more than a $250 million annual runrate. Revenues from the recently acquired Theken companies exceeded our expectations in the period. We continue to see strong domestic growth in our Extremity Reconstruction business of 20%, while currency tempered our overall extremity growth in the quarter.

Collagen-based products, including artificial skin, nerve and tendon repair products, grew 25% in the quarter. Metal fixation implants for the extremities grew at a double-digit rate. Private-label revenue was down in the quarter versus the prior year, because of a combination of declining growth rates of certain of our customers' products, as well as efforts by many customers to limit or reduce inventory. We expect this phenomenon to continue for several quarters.

While we run the extremities, OrthoBiologics and Spine sales organizations separately, they reinforce each other, an old 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 Extremity and Reconstruction sales organization, reinforce our commitment to the high-growth segments of orthopedics.

Our final category is Integra Medical Instruments. This includes Jarit, Miltex, Luxtec, and several smaller productlines, including the recently acquired Omni-Tract line of retractor systems. This category accounted for just over one-quarter of overall revenues in the quarter.

We reported revenues of $47 million in the fourth quarter, which were essentially flat with the prior year period. However, internally generated growth of proprietary products and acquired products were offset by the effect of the continued elimination of third-party distributed products. Slower capital sales hurt our Luxtec surgical illumination line, while our handheld medical instrument line grew in line with our expectations.

Overall, we continue to run the Company to balance growth in revenue and profit. Eliminating low margin productlines accomplishes both of these objectives because it improves our profitability and focuses our resources on the products that have the most potential.

Now I would like to turn the call over to Gerry to discuss some recent product launches and the performance of our sales groups.

As Stuart said, I would like to take a few moments to recap the performance of our sales organizations. Our NeuroSciences group lodged 7 products in 2008, and has a full slate of products lined up for launch in 2009, including a next generation tissue ablation system, the CUSA NXT. This will address the needs of the neurosurgeon.

The next generation CUSA will provide surgeons with the power, precision and control they need for selective dissection of soft tissue and hard tissue, including bone, for neuro and spinal applications. This is the result of Integra's extensive ultrasonic tissue ablation engineering expertise and years of development effort. The next generation product provides a truly innovative advance in ultrasonic tissue ablation technology, further separating us from the competition.

This addition will enhance our diverse line of CUSA tissue ablation products, including the CUSA Accell, CUSA Selector and CUSA Dissectron Sytems. Over 2,000 centers worldwide use CUSA products for a variety of tissue ablation procedures, including the removal of brain and abdominal tumors. Whenever we see a rebound and a demand for capital equipment, we are optimistic that we can drive an upgrade cycle with this innovative new product.

To minimize the economic impact of capital purchases, we have been aggressively promoting service and repair contracts for existing equipment. The service and repair contracts will not offset the current demand for new systems, but they will enable us to secure a relationship with our existing customers, and put us in a better position to upgrade existing systems when capital hospital budgets free up.

We have had quite a bit of activity in the orthopedics area of our business. In extremity reconstruction, we continue to invest in the expansion of your direct sales organization. Our Extremity Reconstruction team expanded from 75 direct sales people at the end of the third quarter to 85 people by the end of 2008, and we anticipate expanding the sales force further to 115 people during 2009. This expansion will allow us to continue to broaden our coverage of the extremity market, and provide value-added services to support the growth in excess of 20% in this category.

In addition, I would like to update you on the progress of two important projects. First, we are on track to begin our wound trial in 2009. We expect the trial to last about three years. And the purpose of this trial is to gain FDA premarket approval for the use of our Integra Dermal Regeneration Template for the treatment of diabetic foot ulcers, especially in outpatient settings.

Second, we continue to make progress in the development of the Integra two-piece ankle for the domestic market. We continue to be on track for release to a control group of surgeons late in 2010.

In Integra Spine, with the integration complete, we are focusing on increasing our distribution network. In fact, since our New York investor meeting in November, we reported sales coverage of approximately 20 states. We now have approximately 50 distributors covering two-thirds of the US. We also have expanded from three regional managers to six. And we plan to add one more in order to manage the growing distribution network.

To date we have not seen any slowing in the growth or expectations for growth in this business. We are also expected to begin selling these products internationally in the second half of 2009.

In addition to expanding our distribution network, we also continue to launch new products. In January we announced that we received clearance from the FDA to market the Vu e-POD and Vu L-POD, a spinal intervertebral body fusion devices. Prior to receiving this status, the FDA cleared the devices as final for vertebral body replacement devices. This dual classification of the Vu e-POD and Vu L-POD increases the number of procedures where these products can be used.

The Vu e-POD's unique technique of distraction during insertion reduces the number of steps and instruments required to perform the surgery, and as a result reduces the amount of time needed to perform the procedure.

In OrthoBiologics we continued to launch new products. We recently launched Accell Evo3, the latest generation in Demineralized Bone Matrix products. Accell Evo3 is composed of an optimized blend of particulate demineralized bone matrix, the proprietary Accell bone matrix in a unique reverse phase medium. Reverse phase medium is a thermo-reversible carrier that thickens the body temperature and it is more flowable at room temperature.

The optimized platform of Accell Evo3 enables the bone healing process to take advantage of the naturally available bone proteins. And it is specifically formulated to provide surgeons with the best possible interoperative handling characteristics.

We're also driving synergies between our Spine and OrthoBiologics platform. Through our consolidation efforts in the past six months we now have a majority of our top spine distributors carrying our OrthoBiologics platform. We have also added Theken's comprehensive line of synthetic OrthoBiologics to our Integra OrthoBiologics product platform.

We have the most comprehensive line of synthetic collagen and demineralized bone matrix-based OrthoBiologics products in the industry. We view our OrthoBiologics portfolio as a cornerstone of our spine strategy, and a competitive advantage driving our products into the spine market.

Now I will turn the call over to Jack for a review of our numbers.

Before I discuss expenses, I would like to expand briefly on international sales. In the fourth quarter international sales were 21% of revenues compared to 24% for the full years 2008 and 2007. Foreign exchange had a favorable impact of $5.6 million for the year, but in the fourth quarter we saw a negative impact of $3.5 million. Half of this impact came from the euro which accounted for approximately 70% of our foreign currency denominated sales. And the remainder of the impact came disproportionately from the British pound and Canadian and Australian dollar. The euro was down 9% against the dollar in the fourth quarter from prior year, while the British pound and Canadian and Australian dollars each fell about 20% against the dollar.

As we have said previously, we also manufacture or procure a significant percentage of our products in Europe. As a result, a strengthening dollar lowers our European period costs and eventually will improve the gross margins of products that we make or procure there. The favorable impact on gross margin is delayed, however, because the benefit of these lower period costs reduce the actual cost of inventory manufactured or procured, and is only realized in our profits when those products are sold. Therefore we anticipate that our gross margins will realize the benefit of the sharp decline in the euro as we progress through 2009.

Gross margin on total revenues in the fourth quarter of 2008 was 61%. This included the 1.3 percentage point impact of purchase accounting on acquisitions, and charges related to facility consolidations, manufacturing transfers, and systems integration.

Gross margin was slightly lower than projected as the negative impact on revenues from the stronger dollar was matched with costs of goods coming out of inventory that was manufactured or procured and valued at a time when the US dollar was much weaker.

In fact, the $3.5 million negative impact of currency exchange rates, and taking into effect the offsetting impact of period costs and manufacturing, decreased overall gross margin by approximately 0.5%. We expect that this dynamic may continue to pressure our gross margins slightly in the first half of 2008. Potentially offsetting this downward pressure is the mix benefit that we expect to see from the rapid growth in orthopedics business, where the products have higher gross margins.

In 2009 we expect gross margins to ramp up through the year. For the full year 2009 we anticipate gross margins in the range of 63% to 65%, excluding the impact of purchase accounting and other special charges. These numbers remain volatile and will continue to depend on the lag impact of currency fluctuation in our P&L.

Research and development expense in the quarter decreased by $1.6 million to $10.2 million, or 6% of sales from the prior period quarter. Last year's R&D expense included $4.6 million in in-process R&D charges related to the IsoTis acquisition. In 2009 we anticipate R&D spending to be 6% of sales.

Selling, general and administrative expense increased by $2.5 million to $67.4 million or 39% of revenues compared to 41% of revenues in the fourth quarter in 2007. Although SG&A expense increased in absolute dollars over prior year, the increased spending resulted primarily from acquisitions.

We saw a decrease in expenses within the Corporation as we implemented belt-tightening measures, especially in personnel costs, including the elimination of most cash bonuses for the year. We anticipate that SG&A will approximate 39% to 41% of sales in 2009 as we continue to leverage our selling organizations and limit corporate overhead cost.

That said, the inclusion of Integra Spine and the decision to go direct in Australia and New Zealand, and the planned expansion of Orthopedics sales organizations will put upward pressure on our SG&A expenditures.

Like many other companies, we're taking a hard line on compensation expense, severely limiting executive compensation and wage increases. We have limited our total 2009 compensation increases across the Company to less than 1% versus approximately 4% in prior years.

Indeed, most of the Integra executive management team, including Stuart, Gerry and me, are not receiving any cash bonus for the year 2008, despite having achieved most of our objectives, and anticipating another ambitious year of growth. Unless the climate improves significantly, we're unlikely to pay cash bonuses to executives this year either. We believe that this belt-tightening is prudent in the current climate.

Our expense for the amortization of intangible assets was $5 million in the quarter, of which $1.3 million is included in cost of product revenues. In 2009 we expect amortization expense of approximately $19 million, of which we expect to report approximately $5.6 million in cost of product revenue.

Operating income in the quarter was $25 million, an increase of 61% over prior year period. We reported a $1.6 million increase in net interest expense to $4.3 million for the fourth quarter of 2008, primarily from increased borrowings under our credit facility for general corporate purposes in November to fund the purchase of the Theken companies in August and the repayment of our $120 million convertible note in April 2008.

Other expense was $1.6 million, primarily the result of unfavorable foreign currency transaction losses due to the rapid strengthening of the dollar in the fourth quarter.

Let me take a moment to discuss our GAAP and adjusted tax rates. I recognize that they can be very complicated. Because of the number of acquisitions we have done, and continue to do so, the difference between GAAP and adjusted tax rate seems to always have a disproportionate effect on reported numbers. Let me first discuss GAAP.

In the fourth quarter a $10 million deferred tax benefit relating to the restructuring of one of our German subsidiaries significantly benefited our GAAP tax rate. This affects only the accounting treatment in the quarter and represents a onetime GAAP tax benefit. That said, we expect to see the benefit on cash taxes of the same amount over the next 15 years.

To calculate an adjusted tax rate we have excluded that GAAP benefit, as well as all the tax benefits from the purchase accounting and other special charges, [a gear] that we use to calculate our adjusted net income. These exclusions give us an adjusted tax rate of 30% for the full year 2009, which reflects the ongoing mix of our profitability around the world.

We reported net income of approximately $25 million or $0.85 per diluted share for the fourth quarter of 2008. When adjusted for acquisition related expenses and other special charges, as well as the tax adjustments discussed above, net income for the fourth quarter of 2008 would have been $15.5 million or $0.53 per diluted share.

The weighted average common shares outstanding used in the calculation of diluted earnings per share in the fourth quarter of 2008 was approximately $29 million for both GAAP -- or 29 million shares for both GAAP and adjusted calculations.

We generated over $27 million of operating cash flow in the quarter, a very strong result. For the full year operating cash flow was nearly $73 million, up 54% from full year 2007 results.

At the end of December we had nearly $184 million in cash on the balance sheet, and outstanding borrowings of $260 million under our credit facility. We believe that our cash flow, the availability under our bank line, and our cash on hand are more than adequate to meet all our obligations through 2011.

Integra did not repurchase any shares of its common stock during the quarter.

Finally, I would like to comment on the status of our material weaknesses. We have been working hard to remediate these weaknesses, and are pleased report that we have resolved all the material weaknesses in our internal control over financial reporting, with the exception of the one described in prior filings related to tax.

We're still assessing the controls around that weakness, and we will conclude our assessment prior to the filing of our 10-K. In the event we conclude that we indeed still have such a weakness, we have obtained a waiver from our bank group related to that issue. Therefore, there is no negative implication the ongoing weakness, should it persist, for our banking arrangements or other debt securities, including the convertible bonds.

We will pay a onetime fee of just under $1 million in the first quarter to obtain that waiver. We expect no change in our costs of borrowing.

Now let me turn the presentation back over to Stuart.

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're reiterating our 2009 revenue and EPS guidance provided in January. We are assuming a constant euro/dollar rate of approximately $1.30 per euro in those numbers.

Historically we have had quarterly fluctuations on our performance relative to our expectation. Thus we continue to believe that annual guidance remains the appropriate benchmark for our business. By focusing on annual guidance management and investors will be better able to focus on the full year objectives and less on the quarter to quarter variability that is inevitable in our business.

Although we are not providing quarterly guidance, we noted in our prior guidance that consistent with our historical seasonality, and in the absence of acquisitions, we anticipate first quarter 2009 revenues to be sequentially lower than the fourth quarter of 2008 by about 3% to 5%.

Further, the revenue impact has a disproportionate effect on the bottom line, as period expenses are much less variable on a quarter to quarter basis than revenue. When combined with our earlier comments on the impact of currency on our gross margin, we expect a steep quarterly progression in our earnings through the year.

Because of the current economic client, I would suggest that you be conservative in your estimates. I would also like to point out that some of the published analysts' estimates to not seeing to reflect the disproportionate impact that we have reiterated would be felt in the first quarter EPS.

For those of you who were still tracking the impact of FAS 123R, we expect the quarterly impact of share-based compensation expense to be approximately $0.08 to $0.09 per diluted share per quarter during 2009.

We look forward to continuing to meet with investors. We will be presenting at both the Raymond James and Lazard conferences later this month. And we will be exhibiting at the American College of Foot and Ankle Surgeons Meeting later this week in Washington DC.

I would also like to welcome [Angella Steinway] to Integra as our first employee devoted full-time to Investor Relations. Over the next six months Karen Mroz-Bremner will be transitioning out of Investor Relations as Angela comes up to speed.

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

(Operator Instructions). Glenn Novarro, RBC Capital Markets.

Two questions. One, just to clarify, I just want to make sure I heard your spine comment correctly. Are you saying that, one, the US in overall spine market is not seeing a slowdown from the economy, or are you saying that your business is not seeing a slowdown in the economy? That is question one.

Then question two. Obviously, in the last several days we have gotten some updates on Obama's policy. I am just curious, we have seen all those stocks sell-off. Stuart, if you can give us your insight into -- is Integra at all impacted by any of the this policy talk coming out of Washington?

Gerry will take spine, and I will take the overall economy and how we perceive the impact on Integra.

On the spine market, as you know, we bought a relatively small company growing at about 20% per year. As we evaluated that company and integrated it into the Integra portfolio, at that time we covered about 20 states in the United States, which had about 40% of the procedural coverage in the United States, and no distribution outside the United States.

As we talk about spine for Integra, we see two opportunities. One is a distribution strategy or execution, which is expanding distribution in the United States to go from 20 states to get to full US coverage. That will give us opportunity to get broader coverage in the market, and to be able to take market share from some of our smaller, less capitalized companies competing in the space.

In addition to that, being able to expand internationally using our infrastructure in Europe and Asia that we have established over the last two years, and being able to take the current spine products and putting it into that infrastructure and expanding distribution outside the United States provides an additional opportunity and a growth opportunity Again, this is mostly about execution of our distribution expansion strategy both in the US and globally.

As far as the overall market, there is a lot of discussion about pressuring on some of the larger companies in terms of procedural volume. But as we have talked to our salespeople in the field, we have not seen the impact of that pressuring, as we have been just penetrating the market and taking market share. So we have seen still strong growth in that segment.

And you have to also put it in perspective. It is not -- we're not the number 1 to 2 player in the spine market where we are controlling procedures. We are so distant from a number one or number two position in that market it is a totally different opportunity for us to go in and capture market share from undercapitalized small companies, which there are well over 100 of them in this marketplace, as well as some of the larger competitors.

One of the things that are driving our success in this space is also the addition of our OrthoBiologics platform to our spine channel. As the Theken companies when we acquired them had the Therics OrthoBiologics, there is very little, I would say, attention or focus on integrating the OrthoBiologics into that those spinal call points.

With the Integra OrthoBiologics and having -- both have a MOZAIK platform as well as our demineralized bone platform. In the Accell technology, we have been able now to integrate that into several of our strong spine distributors. And we're starting to see a lot of leverage in that channel by expanding our OrthoBiologics sales, and giving our spine people a competitive advantage in order to capture share and be able to provide a surgeon with both -- a full portfolio of fixation and metal reconstruction devices in instrumentation, as well as the OrthoBiologics to stimulate bone growth during the bone grafting and vertebralplasty procedures.

I think we're in a different situation than some of our larger competitors. And we have a real competitive advantage over smaller competitors in this space that has enabled us to really continue to grow this business. We see that continuing on throughout the year.

Net net, Gerry, can I just sum up what you said the year. Are you saying that, yes, there is overall pressure on procedure volumes, maybe not significant, but for Integra you are not seeing any pressures within your business. Is that fair to say?

That is fair to say.

Just one other thing. Would you be willing to give us your assumption of certain market growth rates this year? For instance, what do you think the OrthoBiologics market will grow? What do you think the fusion market will grow?

I have read the reports on some of the market growth rates. The spine market is still reported to grow at 10%. There is a lot of tempering of those numbers downward based on the economy, and just some of the pressures on procedure volumes. And I have heard numbers as low as 3% to 5% in the spine market. And OrthoBiologics at about the same rate, at about a 5% to 7% growth rate in OrthoBiologics.

Okay, great. Thanks Gerry. And Stuart?

Just to follow-up on some thoughts about the overall policy impacts on Integra, a couple of things first. You know well that we are a pretty broad-based Company. Our whole strategy over the last three to five years has been one of diversification into multiple hospital supply areas. And indeed, with only 10% of our revenues in capital, we are relatively less affected than certainly capital equipment companies.

Now if you think about what has been going on on the policy side, what has happened in there is some lack of confidence by hospital purchasing people, financial administrators, etc., in what is going on in the economy.

There is not a lack of capital; there is a lack of confidence. The lack of confidence then has caused conservative behavior. And that conservative behavior, for example, in the fourth quarter caused a slowdown in our capital productlines, simply because they can be postponed for a quarter or two as they are mostly replacement.

Now if you then look specifically at some of the topics that had been floated, the biggest target appears to be Medicare. And we have very little exposure to Medicare. Indeed, one of the opportunities under the Obama plan is the addition of some 40 million people under the Medicaid program, or under some form of program.

Now those people are not, not being served. They are being served at great expense to hospitals. So indeed much of what we provide, hospitals have to provide to patients. Brain tumors, burns, head trauma, there's no choice to turn those patients away from the hospital, so they then become indigent care.

And so there is actually an upside to the addition of these uncovered patients to the hospitals. Sure they would like it to be insured or Medicare, but even under Medicaid, given that a lot of our products are not reimbursed, are indeed covered under DRGs or covered under general hospital operating funds, there is actually an opportunity for them to be positively impacted.

Again, keep in mind while we have a very broad base of business, our overall perspective is we don't have high ticket products for the most part. We don't have products that are priced in the $10,000 to $15,000 range as implants or disposables. Indeed our typical implant is a $1,000 DuraGen type implant.

So in a way, and I guess it is in my nature to be optimistic, I am enthusiastic about the fact that people we care for, and I believe our mix of business, indeed could be positively impacted over time. The hospitals are certainly being conservative, and that is certainly impacting behavior, particularly on the capital side. But I think as things start to be clarified, maybe some of that uncertainty goes away as we get to the back half of the year.

Great. Let's just hope things get clarified. Thanks very much.

Matt Miksic, Piper Jaffray.

I had two questions, but if I may, I just want to clarify your comments just now on spine -- on the spine market in particular, less so on your business, Gerry.

So you have sort of officially entered the spine market, spine fusion market I should say, in terms of hardware and implants recently. Are you making the call here that based on what you are seeing that you see a deceleration from 10% to 3% in spine, Gerry, or are you talking more about reports that have been published, comments from the larger players over the past month or two as they put in their quarters. I just want to understand your view on spine, the market specifically.

Sure. It is mostly reports that had been published from some of the larger spine companies and some of the analysts in the market, who are covering the spinal space. We have read mostly 10% going into the year, and then as most companies have started feeling some pressure and reporting their earnings, as well as analysts reports out there, I have seen as low as 3% to 5%.

I will add -- and I think I have said this to you before -- we certainly do our homework, and we certainly talk to our sales team and we talk to our customers. But we cannot provide an unique insight into the overall spine market compared to some of the larger players.

What we can tell you is what our salespeople are saying to us. And that is that we are net share takers. And that there is that we are net share-takers, and that there is an enthusiastic embracing of our strategy of combining OrthoBiologics with metal. And there is an enthusiastic reaction to our building out of our geographic expansion plan.

In some ways we do have perhaps better insight than people on the sidelines, but I would not wish to take that point of view that we somehow know better than some of the larger companies. What we do know is what they are saying. And what we do know is what our salespeople are saying. And indeed we believe we're net share-takers over the coming year.

If you look across all our orthopedic businesses, I think that is true. I think -- none of our salespeople have reported a decline in procedural volume in any of the accounts that they support. Instead, they have actually reported increases in procedural volume as they have continued to improve the service levels to those customers and provided new products to those procedures.

I would reiterate, and I know you know this, but I'll just make the point for others on the call, extremities is the largest part of our orthopedic business. Indeed, there we have a substantial growth, as we do in spine. And indeed there you again don't have the kind of high ticket products, but rather just a huge opening in terms of new procedures that are being supported, reaction and opportunity to treat diabetic and obesity conditions. And I think that strategy continues to play out very effectively.

That is helpful clarification. If I may, just two questions. One, drilling into your comments on the capital spending markets, in particular overseas. Just you talked about some of these international markets also showing pressure in addition to the US. I am just wondering if you could highlight where you are seeing and maybe where you expect to see that going forward? And then I have one quick follow-up.

I think you heard from our numbers that we reported that indeed currency is a significant impact. And it is worth highlighting that when you compare fourth quarter to fourth quarter, markets that we are direct in such as the UK, Australia, Canada, had currency declines of 20%. So people are very focused on the euro, but indeed a lot of other countries had major currency impacts in the fourth quarter.

Indeed some of those countries had their currencies nearly collapse, which basically put on hold purchases from manufacturers in the fourth quarter, because they had literally seen their currencies half. And these are developing countries.

In terms of capital, historically there was much more pressure outside the United States than in the United States on capital. So you did not expect the kind of growth that we had historically been getting in these capital products outside the US. But indeed some markets, for example, Canada, in the fourth quarter shutdown capital spending. The government basically said see you next year.

That doesn't go on forever. And indeed, again, because our products -- our capital products are really replacement and upgrade cycles on, for example, a 2000 box installed base for the CUSA, these things need to be bought. It is just a question as to how long they can be postponed. And certainly they can be postponed for several quarters.

But we're certainly not losing to other players. We're certainly not selling a product that is not needed. You have to use an ultrasonic aspirator to take out a tumor. Eventually they're going to buy the upgrade or replace the old product.

We're also enthusiastic about this new NXT. And I realize this is not the quarter where everybody wants to hear about new products. But it is worth pointing out after quite a few years of development, we finally launched this product. And we're enthusiastic that it will help us generate an upgrade cycle as we move through the year. It is very differentiated from either the other products on the market or our historical products.

That's helpful. The one last question here, just on acquisitions. Don't know if you are -- I didn't see it in the press release. If you could provide us with what was acquired in the quarter? And then just if there is any particular areas where we can look for you to tuck-in additional acquisitions going forward? Do you have a tendency towards instruments, a tendency towards implants and neuro -- any color would be of course helpful.

The small impact of our late December acquisition of Omni-Tract was a contributor to the quarter. In terms of our overall strategy, we intend to continue to be acquisitive. We think it is an appropriate strategy for the Company. Certainly in this environment we're much more focused on cash flow and on accretion and profitability. And I think all of our expectations are appropriately balanced to more conservative acquisitions.

I think you'll see us do acquisitions this year. I mentioned that in the fourth quarter we're able to get off a very conservative acquisition over this small company Omni-Tract. And I would point out we did it with a lower EBITDA multiple than we would have done in a different environment. We did it with a more conservative capital structure than we would have done in a different environment. But we've got some good expertise in getting deals done.

Certainly we have made it clear to all of the potential acquisition targets that given that the stock market, including ourselves, is down well over 40%, we certainly expect acquisition prices to be down a similar amount. And that takes a little bit of time to sink in and for people -- sellers to react, but they will.

So expect acquisitions this year. Expect them to be smaller than in the past, and expect the profile of these acquisitions to be more conservative.

Raj Denhoy, Thomas Weisel Partners.

I wonder if I could follow-up a little bit on that last question. You mentioned you are still looking acquisitions, but obviously you do have some cash flow obligations over the next year to two years. And with your stock price where it is, I doubt you're going to do much using equity as far as acquisitions. How do you plan to structure deals going forward?

Keep in mind our historical track record on acquisitions. We have generally used cash, and we have generally paid anywhere from 5 to 8 times EBITDA or cash flow.

We have done typically deals in the $10 million to $20 million range. Certainly in 2006 and 2007 we got several larger deals done, which dramatically increased our orthopedic business. And I certainly feel great about the fact that we have put together this now close to $0.25 billion orthopedic business with a great growth profile and good balance to our more mature instrument business.

We will -- to some extent it is a story of relative value. If our stock is down 40%, then we just need to be sure that our prices that we pay are conservatively down on the order of 40%. That just takes some getting used to for sellers. But the fact of the matter is most of the companies we buying are smaller private companies. The sellers aren't getting any younger, and that doesn't change as each year goes by.

I am optimistic we will be able to get deals done. And also while we do have cash obligations, we also have a lot of cash and a lot of cash flow. And so we fully intend to be conservative. But you've got reasonably experienced people here at Integra in getting deals done. And remember, the Company was built on $10 million, $20 million acquisitions, not $200 million, $300 million acquisitions. We certainly don't think in this environment we could do deals of that size. And we certainly, as you point out, would not be wishing to use our stock to do anything more than smallish transactions.

Just a couple on the orthopedic business. It is encouraging to hear you guys have expanded the Theken sales coverage by quite a bit. Where are you getting those distributors from? Are these folks that are experienced spine reps that are moving away from other companies? Is it from the Abbott Zimmer acquisition? Or just where have you been able to take these folks off from?

Historically we had -- I have to go back to our OrthoBiologics group at the same time. Historically we had, I will say when we acquired the IsoTis business and integrated it into Integra OrthoBiologics, I would say we had some C and D level distributors. And during the course of 2008 we turned over about 40% of the distributors in our OrthoBiologics group to really strengthen that group, and get to a higher level of distributor. Now we end up with more of the A, B players.

In the spine space as we continue to look at expansion in this space, we have also taken the same approach. By being able to have a full portfolio of spinal reconstruction, and then blending that with some of the OrthoBiologics products, gives us a lot more opportunity to secure a higher level of distributor.

What we're finding is there is a number of smaller companies -- I mentioned a little over 100 companies out there that some of those distributors were covering -- carrying multiple lines into the spinal surgeon. And those companies are just undercapitalized and cannot afford to continue to support the distributor networks like they did in the past.

They historically paid out high commission rates. They gave away instrument sets and tried to support the sales growth. We have taken a much more traditional point of view, where we are not paying outrageous distributor commissions. We have a reasonable loaner program and consignment program in our instruments. We are not giving them away. We're managing the distributor network, but what we are actually providing is a much higher level of service to the group with specialists, management support, and programs, as well as an investment in new product development.

We continually have new product introductions in both the OrthoBiologics and the spinal fixation devices. This enables you to just get higher level of distributors.

I don't want to talk about the actual names of the companies where we are taking them from. But it is -- it is apparent from the surgeons and the hospitals that we're doing business with now, we're picking up much better distributors, who are much more established in the market, and have the presence in the territories in which we're now expanding into.

Then one last one on the extremities business. I think most of us just got back from the Academy needing last week. The booths of the independent extremity companies keep getting bigger. And a lot of the larger companies now are starting to call out extremities as an area that they want to focus on.

I am curious if you could just talk a little bit about what is going on as far as the competitive dynamic out there? Are you seeing more -- is it tougher to get new accounts? Just maybe some comments about that would be very helpful.

I would say right now we have about 85 direct reps in the US. And we have a number of specialists covering some of the wound centers and burn centers. As we expand our coverage out to 115 people in the US, we believe, and we have seen it through the expansion from 75 to 85 in the fourth quarter, that there is opportunities in the marketplace to continue to expand our penetration and growth in that market, by just providing better coverage and better service to our customers.

Some of the dynamics competitively that we are seeing, again, it goes back to the economy where some of the smaller companies in this space are being pressured right now to continue to provide a higher level of service, and they just cannot afford it.

They can't afford to put more instrument sets in the market, because it is cash flow. They can't afford to continue to invest in their sales organizations. They're holding back on some of the new product launches. And I would say it is probably most of the bigger competitors that we have. There is only a couple of them, as you know, that are out there in the space who are growing in excess of 20% a year. Where we have been continuing to put our money into distribution to get -- and value-added services for the customer.

We have heard lots of discussion about some of the larger orthopedic companies entering this space. That is not new news for us. That has been happening over the last couple of years. And we still feel very comfortable with continuing our strategy of having a direct focused sales organization focusing on this market.

And we believe we can provide a much higher level of service to those accounts than some of the larger orthopedic companies, because this is our business. This is the only thing our salespeople think about every day. They're not thinking about should I be in a total knee or a total hip case today, or should I be in a $400 or $500 foot reconstruction or hand reconstruction case.

That is their only option. And we have been very successful. And we believe by continuing to expand in the sales organization we will continue to expand our penetration and grab market share from both larger and smaller companies in the space.

It is also worth pointing out that when we talk about extremities, it is hands and feet. When the larger companies talk about it they are often talking about shoulder. And so, again, we tended particularly in this market to go after niche market opportunities. And the challenge the larger guys always have is it is always still better to put a guy into a hip or a knee or a spine procedure thyan it is into a foot procedure.

Some of the extremity numbers that you see for the larger companies in their breakout are disproportionately weighted to shoulder, which we don't play in.

David Roman, Morgan Stanley.

Just a couple of follow-ups here. On R&D, when you take out the IP R&D charges from last year, it looked like a pretty healthy increase in the quarter. Can you give us a sense as to what the key projects are driving that increase then? I know on the call you said you wouldn't focus a lot on new products, but could you give us a sense as to what we should expect in 2009?

Just keep in mind that in particular one of the biggest step ups that you're seeing in R&D comes from the acquisition of Theken. So Theken historically has spent more than 10% of sales on R&D. We intend to continue that trend. So that is an important piece of it.

In addition to that, we continue to grow our spending on clinical activities. The DuraGen adhesion barrier trial continues to move apace. And that continues to enroll patients and move them through the process. And that adds to the R&D spend. Then in 2009 we are excited about our wound care trial. And that adds to the spend in the clinical area on R&D.

So all positive things for the long-term investment in the Company, and consistent with our commitment to grow R&D as a percent of revenues. Gerry is going to talk now about some of our product pipeline activities by our sales organization.

We have tried to make sure we continue to invest in our higher margin products in the areas where we are seeing strong growth in the marketplace. And as we look at that, we started investing heavily into the OrthoBiologics space. We have several new products. We have taken the Accell technology and we have continued to invest in the Evo3. We also have several productline extensions that we will introduce over the next year based on the Accell technology for demineralized bone graft matrix products.

In addition to that, we have also had some of the MOZAIK platform, which is our collagen and ceramic products in the Therics products, which are ceramic products as well. And we started looking at how do we continue to expand the portfolio to further differentiate ourselves and provide a real clinical advantage over some of the synthetic and nonsynthetic bone graft substitute materials. So as we have continued to invest in that area, we will launch several new products during 2009 in OrthoBiologics.

As Stuart mentioned, in neurosurgery we have the adhesion barrier trial we have invested heavily in. We have continued to invest in our DuraGen family of products and looking at next generation product to further differentiate our products from potential competitors that may come out into the marketplace.

And then we are also looking at our monitoring system. While we're not introducing new capital to our ICP monitors, we're looking at catheter systems to make it easier for the surgeon to insert them in a tunnelable fashion, as well as in a bolted fashion. So it allows more utility for the same piece of capital purchase that they have by providing a single use catheter for patients that allows them to use one piece of capital for multiple catheters to achieve what they're trying to achieve, rather than buying a second piece of capital equipment.

Then you talked a lot about some of the smaller players in spine being under capitalized. Can you give a sense for what technologies you think you're missing in the spinal area and where you think you would like to get bigger?

I think in the spinal area, as I said, we have continued to invest in our internal portfolio, mostly for reconstruction. And as you look at the spine market, certainly in motion preservation area, as well as dynamic stabilization, and minimally invasive, those are areas where we have products either in development or on the horizon right now.

But we are also looking at how do we expand our offering in that space to adjust the growing trend in minimally invasive surgery. That is probably the number one focus is how do we accelerate our opportunities in minimally invasive surgery as the market trends in that direction.

We feel we are positioned pretty well with the portfolio that we have and the products in development that will be coming out over the next year or so. But we're still looking at how do we accelerate that? How do we add differentiation between some of the products that are currently on the market, or have been projected to come out on the market in the area of minimally invasive?

And that is all to minimize tissue and muscle disruption, to get patients back to normal activity in a shorter period of time. And being able to do that in a way that is unique and innovative that it provides a better clinical result for the patient.

Lastly, you talked briefly about taxes in the quarter. Can you just give a sense what the cash flow impact was of the tax benefit of the quarter?

We may be able to pull that up while you're talking here. The $10 million had no cash flow impact in the quarter. Indeed, the point is it is a GAAP impact for the quarter because it is considered a temporary impact. And the cash flow benefit will happen over the next 15 years. That cash flow of $27 million, which we think is very positive, included zero having to do with the $10 million onetime -- sorry, the $10 million GAAP benefit.

Then lastly, on the change in accounting on the converts. I assume the way you are going to report that going forward is like a onetime item or non-GAAP adjustment?

Yes, and indeed, I know you know this because I have seen your note. It is posted on our website. It has been for several, I guess, months now are two. And so the detail is there. We have actually gone ahead and calculated the impact through the life of the converts, which go out another several years.

And so if you're building a long-term model and want to model out the GAAP impact, it is actually all posted on the website by quarter. And also the historical impact is posted. So that data is all done. We got that all calculated and available for your review. And as we have done with other items, we will show the different -- we will reconcile it between GAAP and adjusted, as every company will.

Amit Bhalla, Citi.

I wanted to ask you a couple of questions on the neuro business. Historically this is not necessarily a discretionary type procedure, but the capital equipment portion certainly is weak, as you mentioned in the prepared comments. Can you just walk us through the components that actually are doing well? I think you had mentioned that neuro monitoring was a little weak, which I was a little surprised about. But talk to us a little bit about the dynamics within the neuro business and your growth rate outlooks within the segment.

I don't think anything has changed in our perspective on neuro, first of all. So it is indeed the fact that the business performed not poorly in the quarter, but it was a result of capital and also currency.

And the business is composed of a number of different productlines, ultrasonic aspiration or CUSA being one big component of it. And there we saw a significant both growth and good performance of the disposable part of the business, the procedure-based part of the business, which is literally tied to the number of brain tumors that are treated on a quarter by quarter basis. Obviously, that is not an economically impacted part of the business.

So disposables were up consistent with prior quarters. But the capital was just not there. Certainly not there compared to prior quarters or prior year. And we gave some statistics on capital overall for the quarter being down 18% year-over-year rather than growing in line with the rest of the business, as has historically been the case.

DuraGen, we said was again good growth year-over-year. Again, negatively impacted by currency, but still strong. Our neuro monitoring business again has a capital component and a disposable component, and again the capital component is -- I think we have something on the order of 3,000 monitors. They tend to break down after five to seven years. They can certainly be repaired. They can certainly postpone the replacement cycle. And so I think we saw that going on in the monitoring part of the business.

And then the last major part of that business is Hydrocephalus, which again is not really a choice on the patient's part. And that has been -- that performed consistent with prior trends.

As you heard from our talk, international was tough in the fourth quarter. And that is a combination of currency and conservatism in particular, again, places where there is opportunity to postpone capital purchases.

Then in terms of the cost structure of the business going forward, I appreciate that you had mentioned that you're not taking cash bonuses. But what kind of leverage is there in the overall cost structure? Because you aren't really talking about making much in the way of changes there, and you certainly are investing on the salesforce side. But if trends get much more -- much weaker or just significantly different from what you are expecting, what kind of leverage do you have on the cost structure?

As you know, we generate a very strong EBITDA. And while it is not always what the investors are focused on, it is something we are focused on quite substantially. And so we are a company that tries to balance driving our operating cash flows, delivering on earnings objectives and growing the top line.

I think in 2009 we see some really good opportunities to grow the top line in orthopedics. And we will continue to do things, like expand the extremity salesforce, where we see a direct correlation between heads and performance.

Less of an impact in spine, because we go through dealers, and therefore if they generate a dollar of revenue, they generate a commission, and if they don't, then they don't, and so there is a less overhead or fixed cost attached to that.

We really do have, in my opinion, a lot of flexibility in our SG&A, in our R&D, and in the longer-term in our gross margin. The real question, and I know every company you cover is probably saying the same thing, is to balance the short-term with the long-term.

We don't want to disinvest in our business in this twelve-month period by cutting critical programs that will benefit the long-term. On the other hand, we fully intend to deliver on our operating performance and our operating profit and EBITDA. And we've got quite a few levers, and I don't believe we are close to cutting fascia or bone or muscle. We are cutting fat.

The fact of the matter is that our people have performed well in the last several years, and have certainly earned cash bonuses. And in this environment that is not the thing to pay. There has been substantial wage inflation over the past several years, and we know that is not the case any longer. So we communicated the reality of that to our people several months ago.

I think people embrace it. Nobody likes to be told they are not going to get a cash bonus. And nobody likes to be told they're not going to get an increase, but it is a hell of a lot better than being told, you're going to lose your job. So we're trying to do the right thing for our people and make sure we are appropriately prudent in certainly things like compensation. And we're certainly looking hard at underperforming people or underperforming particular areas. And we will take advantage of the fact that there is a lot of good people on the market who are being made redundant at other firms, and give us an opportunity to recruit.

But we don't have yet built into our plans any significant changes in the way in which we are strategically driving the business. But if the economy were to perform dramatically worse, well, then we could react. The good news is that the Company generated well over $650 million of revenue last year, which means we spent $0.5 billion, and there is certainly roam to spend less should we need to.

I would -- this Company has done a great job over the years as a cost cutter. In the last several years we have tried to balance the general approach of being a cost cutter with the desire to buildout these several strategic franchisees. I think as we go into the next couple of years, I'm actually quite eager to make sure we improve our cost structure. And I actually think a number of the changes we're making will position us for the long-term. Although I know a lot of people are very focused on the short-term. But will position us for the long-term as a more profitable and well-run company.

Just a last one. Can you just provide us the number for the revenue that was from acquisitions over the last 12 months that contributed to the quarter? Thanks.

Yes. We, as you know, have asked people to focus on the different sales categories that are provided in the appendix or the addendum to the press release, and have not broken out acquired versus other revenues. I don't have that number for you.

Not even for just total company?

No.

Tao Levy, Deutsche Bank.

Just a very quick question. Generally what are you seeing on the pricing front? Are you seeing hospitals try to put greater pressure on you guys? And if you look specifically at the fourth quarter were things generally stable there?

I will react and maybe Gerry has been a couple of comments as well. Anticipating that question, we did whatever we could to try to get an answer to that question by talking to salespeople internally, looking at our different productlines. And we have not seen an impact on pricing.

Now we want to take advantage of any sensitivity to pricing that customers may have by trying to drive them to buy our bundle, as it were. We have many different neuro productlines, for example, many different instrument productlines. And so trying to get volume in a cost sensitive environment is a strategy.

Again, keep in mind, we are a little bit different than many of the companies that you and many analysts follow. Our instrument business, for example, in particular Jarit's business, is 85% GPO. You don't get much pricing. We never did.

In the neuro business we have historically gotten some pricing, and don't expect that to change. And on the orthopedics side we have been seen it in pricing at all. We're certainly watching for that and trying to be sensitive to it, as that is a topic of some discussion in the analyst community, more than amongst our salespeople. Gerry?

The analysts have to look at it in two pieces. There's a capital budget within the hospital, and then there is an operating room budget in the hospital. Most of our implant products in the products that we're selling into procedures are coming out of the operating budget.

The capital equipment is what is under pressure, and that is in a different budget within the hospital system. As Stuart mentioned, pricing on a per procedure basis for the products that we sell to do those procedures, we are not seeing any pricing pressure in those.

In fact, that is one of the reasons we started offering our sales and repair service contract, because it comes out of the operating side of the budget, not the capital budget. It allows the hospitals to maintain their equipment, and it allows us to continue to establish a strong relationship and be in there on a regular basis. So when they are ready to go to an upgrade, which maybe out a quarter or two, we're hey there, in place, we still have that relationship, and then we can offer an upgrade option for their capital. But so far on the per procedure basis we have not seen pricing pressure effective, any more than it would normally have been in as we do business.

Just lastly, you talked about the diabetic foot ulcer indication for the artificial skin. Why is that a three-year trial? Why isn't it sort of 12 months? We have seen similar products be able to get a product on the market in less time, or at least an extended indication in less time.

Currently we have the product on the market. We have the Integra Dermal Regeneration tablet, and it is improved under a PMA primarily for burn patients. In addition to that we have the Bilayer Matrix Wound Dressing, which is approved for chronic and acute wound, which is currently used to treat some of the diabetic foot ulcers.

There is a piece of the market that we just don't have access to, or we have access but we don't have much sales in, and that is in the outpatient surgery centers. The reason we're going through a clinical trial right now, and we have many years of clinical data to support the safety and efficacy of the product. We have many years of data that show that this product actually works in treating diabetic ulcers. And it is used currently today to do that, as well as other tissue regeneration applications in both hand and wrist and foot and ankle procedures.

What we're really fighting with or addressing is the reimbursement issue for the product in outpatient surgery centers. There is a number of surgical podiatrists. There is about 6,000 surgical podiatrists in the US who currently treat these patients in wound centers.

Because of the way the reimbursement structure is, right now they are looking for -- there are only a few product that have gone through the PMA, or controlled clinical trial period that show safety and efficacy with clinical outcomes on a randomized controlled clinical trial. And that is what the insurance companies require to support a reimbursement decision.

We've gotten denials on some reimbursement decisions in outpatient clinics. We believe that there is about a $300 million market opportunity, if we can expand our coverage and get reimbursed -- a positive reimbursement decision for this product in outpatient.

To go back to your original question, why three years, why not 12 months. It is a process. We go through an FDA pre-IDE and pre-clinical meeting. We have to compile our data on all of the pre-clinical results. Prove that there is minimum safety issues, or there are no safety issues using this product in the trial. We've gotten through that stage.

Now we are at a point where we have to do a pilot study according to the FDA protocol to show that if we follow the protocol that we're going to submit in our IDE, and we follow up on patients for a six to nine month period, and then make sure there is no reoccurrence of the diabetic foot ulcer out over a year.

So there is an enrollment period, there is a follow-up period. And you have to wait until the majority of the patients pass over the halfway point of your follow-up period before you can get to anything conclusive. So based on the size of the trial, the negotiations we have with the FDA, the follow-up requirements, and the follow-up to make sure there is no reoccurrence, which is the most important part of the trial, it just takes time.

It will take about two years to do a trial. it will take us another year almost of completing the follow-up and statistical analysis and filing. And we anticipate that the FDA will take approximately six months to approve the supplement to the PMA based on the new trial data.

Now this is a supplement to our existing PMA that we currently have, so does not a question of our manufacturing processes. It is not a question of design of the product. It is not a question of safety. It is a question of making sure we can prove efficacy in this application, and then use that to support a positive reimbursement decision to allow us to sell it and expand our applications into the outpatient clinic.

Taylor Harris, J.P. Morgan.

Stuart, good use of the word fascia earlier. I just wanted to compliment you on that.

I know you are surprised I even know what it means.

I had to look it up. But seriously, a few questions here. First, on the acquired revenues, are you guys going to be disclosing that in your Ks and Qs still, or is this just a change in disclosure policy?

I think we want to focus on what management is focused. We want investors to focus on what management is focused on. Our view is, for example, we fully intend through our efforts to meet our objectives of generating $720 million to $740 million of revenues in 2009. And we don't want to be distracted with chasing an organic growth number based on having given out these numbers.

What we want to do is put our resources against the most important and fastest-growing parts of the business, some of which were acquired this year. And so I think our approach is going to be to give annual guidance, provide an annual revenue number, and do our darnest to hit it.

It just seems really hard -- I realize you guys disagree with the Street on the way we look at organic growth. I just think it makes it really hard for us to analyze how the base business is doing. So I would encourage you to continue providing it, for what it is worth.

Just moving into the orthopedics business, the extremities business, you said the US portion had grown 20%. What was the total worldwide growth there?

Gerry?

Total was at 20%.

The US was at 20%. I think the total worldwide was mid teens.

Private-label, you --.

Again, mostly driven by currency, as we've got a significant international business in extremities.

On the capital equipment side, when did you see that during the fourth quarter sort to deteriorate? And then is the same trend in place so far this year?

As you know, we were surprised. We were tracking well through the end of November, and we really were only convinced that we had had a slowdown when we had our final numbers. Keep in mind, the final numbers were below the Street, but modestly below the Street. So we didn't really -- and below our guidance. We didn't really expect to miss the guidance. It was really late in the quarter or even into the new year that we had any inkling that the capital was going to be affected.

I think it is the same as fourth quarter. In other words, we brought down our numbers principally when we gave our preannouncement just before your conference, based on capital. I don't think it has changed. It certainly hasn't gotten better, and I don't think it has gotten worse. It is sort of where it was.

If the month of December caused a $3.5 million decline year-on-year, should we read into a full three months' worth of capital equipment weakness being closer to a $10 million year-over-year decline?

I think implicit in our -- we brought our -- I have to think about your question. We brought our topline down approximately $15 million, some of which was currency, some of which was our expectations on capital, for the year. Said differently, we have told you we have got about a $70 million capital number for the year, and that we don't expect growth. In fact, we have expected capital to be down year-over-year in our new guidance.

That is now anticipated in the guidance. So I think the expectation, and certainly the way we are resourcing the business, is that capital will not recover, certainly until the back half of this year.

But I guess the -- I'm sure that generally capital sales pick up in the last month of the quarter. But still it would seem that if December caused an 18% year-over-year decline for the fourth quarter, then the runrate is a lot more than that. Is that right or are we just looking at the numbers wrong?

I think our expectation in the capital -- I don't really know how to answer the question. Only to say that we are expecting capital down year-over-year, and we built that into our guidance. I think December is indicative of the slowdown, but I don't think -- I certainly wouldn't take $3.5 million, multiple it by 12, and assume that is the impact on the year, because that is just not the way it plays out. Maybe that is what you were getting at.

That is what I'm asking.

No, I don't think that -- it is not that bad. But I think we have assumed that it is down year-over-year, and particularly in the first half of the year. And then we will just have to see how the economy plays out. There comes a point where I believe these things have to be bought, because they don't last forever.

The Luxtec business, you guys --

One thing, Jack pointed out, -- well, anyway, I think we have said enough on the topic. Sorry, yes.

So Luxtec, you said I believe was down $3.2 million year-over-year, or distributed -- third-party distributed products fell off $3.2 million. I believe we had had it at about $9.7 million in the fourth quarter of last year, WHICH would put a $6.5 million or so for the fourth quarter this year. I want to confirm that that is about right. And is that the right runrate for the business going forward?

That feels about right, without having the specific number right in front of the. We're planning to get the business down to running at about $20 million. So I think the lines that we had acquired to keep were about $20 million. We expected some of the distributed products to be maintained for a period of time. And we are reaching the point, or have reached the point, where we have virtually no distributed products as of the fourth quarter.

So we continue to see difficult comparisons in that business for another several quarters, until we're down to just the Luxtec productline, which we acquired the business for. Again, it makes for tough comparisons and makes it challenging to articulate the various performance of the business.

I hear you. So you think that Luxtec component is going go down to about $5 million a quarter though?

Yes.

But what that means is that either Jarit or Miltex is doing pretty well, or at least did in the fourth quarter to compensate for that. (multiple speakers).

Jarit and Miltex continued to be -- and we said this I think at our analyst meeting -- we expect Miltex to be generally a 5% or so grower. And we expect Jarit to be generally a high single digit grower. And there has been periods Jarit has grown 10% to 15%. Luxtec, that productline it synergistic with both. And Omni-Tract, our recent acquisition, is synergistic with both. And we have had an opportunity to both take costs out of all those acquired businesses and also buildout the salesforce to approximately 60% of the country direct.

It makes for really messy reported numbers, but on the other hand, the strategy is unambiguous, and you will see the results as we anniversary the discontinued productlines.

Then just a couple of cost questions. So SG&A was down sequentially from the third quarter. And it sounds like that was a lot of corporate overhead and compensation expense. Did you reverse some accruals for bonus compensation in the fourth quarter? It is just seems like a very -- it was a very meaningful decline sequentially, and so how exactly did that occur?

A number of things were cut and we did indeed reverse some accruals for bonuses, so that is true. And we also come, as we give our forward-looking guidance, are not planning to accrue bonuses other than for our lowest level people next year. Hence, the expectation of a reduced SG&A into the next year.

Then one final question from me on gross margin. If I look at gross margin year-over-year in the back half of 2008, it was about flat year-over-year. Yet the productlines you acquired were in orthopedics. I would say Theken is probably above corporate average. IsoTis maybe close to in line with corporate average. So the acquisitive impact should have been a benefit, and yet gross margin was about flat. So I realize currency was a hit to you. Anything else, any other reason we're not seeing more of a gross margin increase?

Yes. You pretty much covered it with currency. And we have reiterated this point, but I will just make it again. If you recall, and we will just use the euro/dollar rate. For the first half of the year it was close to $1.50. In the third quarter I think it was $1.46 or so. In the fourth quarter, plus or minus $1.30.

So if you figure we have eight or nine months of inventory, which we by the way have been bringing down, and that is part of our process, then it takes that amount of time to turn those inventories. In particular, in the fourth quarter, and we pointed out for first quarter as well, we are bringing in revenues at $1.30 or so, but we are stuck with the costs at $1.45 to $1.50. That starts to diminish and match themselves in the second half of next year -- sorry, second half of this year. So Q3 and Q4 of '09.

That is not insignificant for us, because we have so many foreign expenses, in particular, our instrument productlines and our manufacturing in Europe. As I said mentioned in the past, we are a little different than other companies in that regard.

We are, I believe, well-positioned in the back half of the year, assuming again the currencies don't change dramatically, to be then back to matching $1.30 revenues with $1.30 inventory. And then seeing the impact of these orthopedic businesses, which are unambiguously higher than, in particular the instrument business, but overall corporate gross margin.

Do you feel like 100 to 150 basis points of improvement, excluding acquisitions and foreign currency, is still the right target?

Yes.

All right, that's it for --.

That is going to be sequential through the year. You'll see it as we get through the year, and particularly anniversaring the purchased inventory.

Joshua Zable, Natixis.

Congrats on a great year. I know it has been a long call, so I will try and be quick here. First, I know a lot of people kind of got around this. But just to be clear, the environment obviously you preannounced in -- actually in January really through December. We now have seen obviously some more. Just be clear, I think you said relative to what you were seeing in December things are improving. Things are at least not getting worse. Can you just quickly give us just clear color. I know you talked about pricing. You kind of got around it, but I'm just trying to get my arms around it.

I think where we are in the first quarter is -- I don't think that anything has changed from where we were in the back half of the fourth quarter. In other words, we are not -- certainly, I mean, look around, you're not seeing an improvement in the economy. But on the other hand, we haven't seen a deterioration in the various trends, whether it be in the orthopedic lines or critical care products or instruments, etc. We are certainly not seeing an improvement in capital. But we haven't seen a worsening.

So sitting here two months into the quarter, I think we feel real good about our guidance and real good about our understanding of 2009. Recognizing these are unprecedented times, and anybody who would tell you they've got tremendous visibility, I think doesn't really -- is not close to their business.

but I think we feel like there has not been any deterioration. The reality will be -- again, a lot happens in the last month of the quarter, but where we stand now there is not anything new.

Then just on the CUSA launch. Obviously what has going on with equipment, I know you have talked about it a lot, so I don't need to get into that. But can you just help us understand exactly when your launching at? I know you talked about it, and you sort of talk about it throughout the year. Is it this quarter? Is it next quarter, just in terms of timing when that new product will launch?

The good news is we quite deliberately held off on this until we actually sold one. It has launched and we have sold one. And the field -- it was trained at our international sales meeting in February, and is off to the races with this product. And it has been a long time in coming. So we're certainly not approaching a robust capital market with it. But on the other hand, we've got something differentiated to talk about. Gerry will give you more detail.

We did a lot of controlled sales releases, market evaluations during the first couple of months of this year. We did a number of cases and surveyed the users of that equipment, just to make sure that we -- it was going to be a well accepted product. And it would actually service the market in the level in which we believe it should be serviced. What we found is we got just outstanding comments and results from the customers who used the product.

And we brought it into customers who had never used a CUSA before. And we brought it into existing CUSA and Selector accounts. And what we found is, we had just tremendous response from those customer base. So much so that some of the original evaluators wanted to buy a piece of equipment and do an upgrade.

So we have -- CUSA, we have started to sell the product. We have trained our sales organization. We have limited inventory because we are controlling our cost of inventory. The turnaround cycle on the manufacturing side is not very long. So we will be able to control the inventory levels. We don't have to make a high cash investment to support the market launch of the product, as we continue to grow that business throughout the year, or be able to place these units in upgrade programs throughout the year, we should be in very good shape.

I would just reiterate, we have really -- we have pointed out to you guys an objective of reducing our inventory days and reducing our receivable days. And we made a lot of progress this year and expect in 2009 to make more.

Again, one indicator of the economy is AR and whether it has been increasing. And candidly we have been able to bring down our AR days, just through better management. I haven't seen them deteriorate at all. And I say we will be filing our K and you'll see our AR days have actually come down. So that wasn't about the CUSA, but just sort of a general view on managing our balance sheet.

Great.

One other -- I just want to add one other important feature of the new NXT is that we were very sensitive to the hospital environment, their cost structure, their expenses, and as we developed a piece of equipment we made sure that we were upgrading the capital or console unit of the system. But also being sensitive to the fact that they have tips and handpieces and other products that they have used from their existing CUSA Selector model. And so we have made this forward and backward integratable with, or interchangeable, with their current handpiece and tip design.

So the hospital can actually upgrade the capital, get a lot more features and benefits out of the system, without going out and repurchasing handpieces and tips. So a lot of the hospitals have reacted favorably to that because they're not making another complete investment. And is the disposable side of the business that they can continue to use, and when they deplete that they can upgrade to the new disposables.

Great. That's helpful. Just some housekeeping. I know you guys made $1 million donation in February, I think. Just how is that going to play out in the P&L when you report Q1?

The donation was a product that had already been classified as excess and obsolete, so it has no P&L impact, either in Q1 or actually in Q4. It is just stuff in the warehouse that when we give it away, we can actually also take our tax deduction.

Great. I'm sure you won't give this to me, but I figure I will ask. Obviously, you guys talked about Q1 being lower. I know you gave some sort of relative on the top line 3% to 5% down. You didn't say anything on the bottom line. You said obviously we can figure out it is going to be lower than that or more than that. Is there any sort of range you want to give, just because I know obviously you gave preannounce and the numbers seemed to be too high still. I am just trying to get some understanding of maybe a range, if you're willing to give it.

I think, A., we're not going to give it. And is not because we're not trying to be helpful, but we found in the past that we have been reactive to trying, in the process of being helpful, to give estimates on quarterly guidance, particularly on earnings, that turn out to not be right. And we don't want to do that.

Fourth quarter is a good example. We had a great third quarter. It seemed logical to therefore include that in the full year number. And indeed we gave it up in the fourth quarter. And had we not changed our annual guidance, we actually hit our annual guidance last year.

So I just think particularly in this economic environment, but also as just as a better approach to how we want to manage our Company, we think the annual guidance makes the most sense.

What we were trying to do in terms of being helpful to say, A., be conservative in your numbers. We gave a range of revenues. Be conservative in how do you interpret them. And also keep in mind that, while we do have the opportunity to bring down our period costs and our fixed costs, A., it happens over time, and B., we are trying to not disinvest in the future. So if indeed the top line is down Q1 to Q4 by 3% to 5%, there is going to be a disproportionate impact on the earnings line. And you saw some of that in the fourth quarter.

Okay. I figured I would ask. Thanks guys.

Bill Plovanic, Canaccord Adams.

Actually two quick questions. One, the 10-K filing, when is it officially due to be filed? And do you think that will be filed on time?

It is Jack. It is due to be filed today. And we are working to tie everything up. It should be filed today.

Is there any reason it wouldn't be?

No, we were working hard all weekend, and we're tying stuff up, and I have learned a hard lesson that I don't want to make hard and fast promises I can't keep. But that is -- in the abstract we're doing great. We're heading there.

I think the fact of the matter is we have released our numbers, so the numbers are final.

Of the charges left are does all going to flow in the first and second quarter or is that going to be rolling through the year?

Which charges?

Acquisition related charges, facility consolidation charges.

It is principally in the first half of the year, because of the take in inventory step up. There's certainly some in the back half, but it is very front-end loaded. And as you know, we don't put any acquisitions that haven't closed, so in principle by the end of year there is nothing in there.

Spencer Nam, Summer Street.

I just have one quick question about acquisition outlook for 2009. Do you guys have a specific guidance or some additional details on what areas you guys may be looking for in terms of padding some extra assets here? Historically it seems like the orthopedics has been the key target. I was wondering if you guys are looking into neuro or instruments this year?

I think we're looking across the board. It is interesting, in orthopedics the prices tend to be a little higher, but there are some really good deals out there now because of some of the phenomenon Gerry is talking about, a lack of liquidity in the smaller companies.

In instruments, the instruments tend to meet our EBITDA objectives in terms of pricing and the like. And neuro is still our largest salesforce, and therefore we are always looking for neuro acquisitions.

I realize that was a very general answer, but we are looking in each of the areas, and it is unpredictable with one comes first, simply because it is hard to predict how deals get done, but we're looking in all of the areas.

What I would say is we're not looking outside of the core areas at the moment. That was something we did several years ago to get to the diversification that we've got now. But we would not be expecting diversified acquisitions in the next 12 months. We are much more focused on stick to the knitting.

Jayson Bedford, Raymond James.

Just a couple of quickies here. You mentioned that Theken exceeded your expectations. What were Theken sales in the quarter? And did the Omni-Tract acquisition contribute to fourth quarter?

Again, we're not breaking of the sales of the acquisitions or our various productlines. But what I can tell you is Omni-Tract was trivial for the quarter. I think we only owned it a few days. And our general point is that our orthopedic business is outperforming.

Then just switching gears, on the neuro side, how much of this segment, of this business is capital equipment related?

It is disproportionate since there is no capital equipment in the orthopedic. So the bulk of the capital impact that the Company saw is in the neuro business. We mentioned there is a small amount that is in instruments coming from Luxtec. But so to the extent that we talked about capital being soft, you are seeing pretty much all of it in the neuro segment.

Then just lastly, I guess, operating cash flow, you highlighted that for the year. When you look to '09 is your expectation that operating cash flow growth will be similar to your EPS growth?

It might even be better than our EPS growth. Remember, our EPS -- and I realize it is to many of you an important number -- but there is so much that hits our EPS. There is close to $20 million of goodwill. There is close to $20 million of depreciation expense. There is FAS 123, which is close to $20 million. Our cash flow -- our operating cash flow and EBITDA far exceeds our net income. So I would expect to significantly outpace our earnings per share growth.

At this time we have no further questions in the queue. (Operator Instructions). It appears we have no further questions.

Thank you all. I realize it was a long call. I hope you got all your questions answered. We look forward to reporting next quarter. Thank you.

Once again, that does conclude our conference today. Thank you all for joining us.