Integra Lifesciences Holdings Corp (IART) 2009 Q3 法說會逐字稿

Good day, everyone, and welcome to the Integra LifeSciences third quarter 2009 conference call. As a reminder today's call is being recorded. At this time I'd like to turn the call over to Miss Angela Steinway, Head of Investor Relations. Please go ahead.

Good morning, and thank you for joining us for the Integra LifeSciences third quarter 2009 earnings release conference call. Joining me today are Stuart Essig, President and Chief Executive Officer; Jack Henneman, Chief Financial Officer; and Gerry Carlozzi, Chief Operating Officer who is joining us from the Oppenheimer Healthcare Conference.

Earlier this morning, we issued a press release announcing our third quarter financial results, which is now available on our web site in the press release section, under investor relations. During this call, we will review these financial results and update our forward-looking guidance for 2009. At the conclusion of our prepared remarks, we will take questions from the telephonic audience.

Though we will try to keep the call to one hour, we would like to continue our tradition of answering all of your questions. For this reason please try to limit yourself to one question and one follow-up during the Q&A period. If you have additional questions, you may rejoin the queue.

This presentation is open to the general public and can be heard through telephone access or via a live webcast. A replay of the conference call will be accessible starting about one hour after the conclusion of the live event. Access to the telephonic replay is available through November 18th, 2009 by dialing 719-325-4863, access code 6739174. Additionally, a webcast replay will be archived 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, November 4th, 2009.

Certain statements made during this call are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Among others, statements concerning management's expectations 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.

These forward-looking statements are made only as of the date hereof, and the Company undertakes no obligation to update or revise the forward-looking statements, whether as a result of new information, future events, or otherwise. 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 30th 2008, and to information contained in our subsequent filings with the Securities and Exchange Commission. 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.

Additionally, in this press release and in 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.

Thank you, Angela. Integra delivered a quarter of solid financial performance, highlighted by top- and bottom-line growth and strong cash flow from operations. Our 4% constant currency growth in revenues reflects the diversity of our business and the strength of our orthopedic franchise.

We also posted double-digit growth in adjusted earnings per share. Cash flow from operations of $28 million reflects consistent operating leverage in the midst of a tough economic environment. Broadly across our businesses we saw improved execution, better margin mix and continued cost control, all of which drove these results. We report our revenues in three categories, Integra Orthopedics, Integra NeuroSciences, and Integra Medical Instruments.

Integra Orthopedics, which includes the products sold to foot, hand, spine, and orthopedic surgeons, represented approximately 37% of Integra's overall third quarter revenue. The revenues from products in this category increased 19% to $64 million from the prior-year period.

Seasonality influenced our third quarter orthopedic revenues, which are down sequentially in our spine and extremity reconstruction lines, but we expect the fourth quarter to be the strongest of the year. Extremity reconstruction, which is the largest component of our orthopedics business, again posted low with double-digit worldwide growth. The products used in more elective procedures such as forefoot, remain weaker than in our other product lines.

That said, we continue to experience strong growth in the rest of the business, especially mid and hindfoot products, and skin. Growth returned to our international business, which improved both on a dollar basis and in constant currency. Revenues from our spine and orthobiologics business also contributed substantially to our overall growth, as we continue to expand our distribution network.

The prior year period included a partial quarter of spine hardware revenues. Private label revenue increased in the third quarter versus the prior year, as demand for several of our important products has returned to a more normalized level.

Integra Neurosciences encompasses the products sold to the neurosurgeon and the neuronurse. The products in this category represented approximately 39% of Integra's overall revenues in the quarter.

Although Integra Neurosciences revenues in the third quarter declined 1% to $67 million versus the prior-year period, they increased sequentially $6 million over the second quarter. Notably, the launch of the CUSA NXT is progressing well. Overall, ultrasonic product line sales were flat, versus a strong prior-year comparison.

Implants and disposables posted double-digit growth in the third quarter. Other capital products remained weak, with several posting declines versus the prior year.

Finally, currency had a negative impact on the reported revenues.

Our final category, Integra Medical Instruments includes medical and surgical instruments sold into the hospital, and office-based practice channels, and accounted for 24% of Integra's overall revenue in the third quarter. The business continues to be negatively impacted by the overall US economy, although we're seeing some improvement.

Instrument revenues decreased 9% to $41 million versus the prior-year period, but have increased sequentially every quarter this year. Hospital sales were down because of reduced capital spending and the impact of winding down our distributed products. Our hospital customers continue to take a conservative approach to capital equipment and instrument purchases.

Office-based sales also declined, due to lower end-user demand. However we've seen some indications that the office-based business has stabilized and we expect our business to improve as the demand from the big distributors is now matching market demand. I'd now like to turn the call over to Gerry to discuss some recent developments across our selling organizations.

Thank you, Stuart. First I'd like to highlight the strong growth of our orthopedic business. In our extremity reconstruction business, we're investing in the expansion of our domestic sales organizations. We are on track to grow this team from 85 direct sales people at the end of 2008, to 115 by the end of 2009.

Additionally we're investing in product development to provide complete offering of clinical solutions for our expanded sales force. Examples of our activities include new product launches, the diabetic foot ulcer study, and the US total ankle strategy. We're entering the next phase of our recent product launches, the HALLU-LOCK Arthrodesis System, the Inforce Reinforcement Matrix, and a pre-mesh version of our popular Integra Skin. The HALLU-LOCK system is a unique next generation system that utilizes our Surfix Locking technology to provide improved patient care for the treatment of deformities caused by arthritis.

Last quarter, we introduced the Inforce Reinforcement Matrix to address the market for tendon and ligament injuries. We initiated our limited market launch last quarter and we are pleased with the early success of this product. We plan to launch the product to a wider surgical community in early 2010.

Inforce is a high strength scaffold that provides reinforcement and augments the tendons during the healing phase. This product will be a significant addition to our upper and lower extremity product portfolios. Industry sources estimate that there are approximately 700,000 tendon and ligament repair procedures in the US. We estimate the market opportunity for this product could be as much as $80 million.

In addition to new products, we're investing in our core collagen technology. Although Integra Dermal Regeneration Template has been on the market for over 13 years, it continues to be a core product with strong growth. We plan to initiate a pivotal clinical trial for the use of our Dermal Regeneration Template and the treatment of diabetic foot ulcers during 2010. This study is expected to take approximately three years to complete.

As an update to our ankle strategy, we plan to introduce a two-piece total ankle to the US market in early 2011. We are designing this product to have many of the same advantages of our three-piece ankle, which is currently in Europe.

Turning now to spine, this business continues to deliver strong revenue growth. To support and sustain this growth we're investing in product development and actively recruiting in key areas such as recruiting, marketing, and clinical research. We're also focusing our efforts on increasing our distribution network, having added over 15 new distributors this year to our US sales network.

We remain excited about the recent acquisition of the Paramount minimally invasive product line, as this will bolster our efforts to gain access to surgeons and distributors who prefer minimally invasive approaches to spine.

We are realizing synergies between our spinal hardware and orthobiologic product portfolios. A significant number of distributors carrying our hardware, also carry our orthobiologic products. We are continuing to recruit distributors that are interested in carrying both our hardware and our orthobiologics.

Significant growth in orthobiologic sales has enabled us to invest in the development of next generation technologies. As an example, we expanded our product offering this quarter, with the introduction of new configurations of Accell Evo3 to meet the specific needs of spinal surgeons with a bone-graft requirement.

Next week we will participate in the annual North American Spine Society Meeting. We plan to launch the Paramount Minimally Invasive System, which will be the first former IST product launched through the Integra spine distribution channel. Paramount MIS will be offered in a controlled market release to a selected group of Paramount users already experienced with the system. Integra Spines plans to fully launch the system to a wider surgical community in the first quarter of 2010. Finally, as previously recorded, we'll provide an update on an interim futility analysis of the data in our adhesion barrier trial before the end of the year.

In Neurosciences, we have been investing in our implant and disposable tissue ablation product portfolios where we have seen stable procedural growth trends. We introduced our next generation ultrasonic tissue ablation system, the CUSA NXT earlier this year. We are receiving favorable reviews on the new system, and surgeon support for the procurement of the system. In fact, sales have exceeded our expectations, despite the adverse economic conditions to capital equipment.

We also launched XR2 our next generation radiolucent cranial stabilization device on the third quarter. Additionally, ShearTip, a new handpiece for the CUSA ultrasonic aspirator, was launched at the recent Congress of Neurological Surgeons. This tip was designed to increase cutting efficiency by 50%, reducing surgeon and staff time per case, and also reducing the patient's intraoperative surgical time. This was well received at the meeting and amongst a small group of surgeons that have already trialed the product.

Turning to Medical Instruments, we will continue to expect a positive sales progression in the fourth quarter, consistent with our historical seasonal trends. Next year we will anniversary the discontinuation of most of our distributed product lines. Now I'll turn the call over to Jack for a review of our numbers.

Thank you, Gerry. We are pleased with Integra's financial performance in the third quarter. We grew our revenues and bottom line both year-over-year and sequentially, generated strong cash flow from operations, and paid down approximately $58 million of debt. Further, although the current environment is still uncertain, we remain confident in our forecast for full-year results.

We reported sales growth of 3%, or 4% on a constant currency basis in the third quarter. International sales accounted for 23% of revenues. US sales were up 3% and international revenues were up 3% as reported, and up 8% on a constant currency basis in the quarter.

In this quarter, we saw a negative foreign exchange impact to revenues of approximately $2 million versus the same quarter in 2008. If exchange rates stay where they are today, the impact of currency on revenues in the fourth quarter should be positive by roughly $2 million.

Gross margin on total revenues in the third quarter of 2009 was 63%, including a 1-point impact of purchase accounting from acquisitions and other special charges. This is an increase of 2 points in gross margin percentage versus the same period last year, and is half a point below the second. The slight sequential decline in our gross margin as a percentage of sales was a result of the relative strength in our neuro and instrument businesses, an increase in our excess and obsolete reserves, and an approximately $1 million impairment of intangible assets. We expect fourth quarter GAAP gross margin of between 64% and 65%.

Excluding last year's IPR&D charge, research and development expenses in the third quarter of 2009 increased $2 million from prior year to $12 million. We continue to target spending on research and development at approximately 7% of total revenues.

Selling, general, and administrative expenses in the third quarter of 2009 decreased from prior year to $70 million or 41% of revenue. Excluding a special compensation charge in the prior-year period, SG&A increased by less than $1 million. The increase was principally attributable to growth in our spine business, which carries a higher selling expense than our other product categories.

We anticipate that SG&A will approximate 40% to 42% of sales for the full-year 2009. In the third quarter, we generated $35 million in adjusted EBITDA, and $39 million in adjusted EBITDA, excluding stock-based compensation. These metrics were up 11% and 12%, respectively, over the prior-year period.

We provide these metrics because we use them to measure the performance of the business and for credit analysis. Adjusted EBITDA, excluding stock based compensation, approximates the EBITDA calculation used in the leverage and fixed charge coverage tests under our credit agreement.

We reported a $1 million decrease in net interest expense to $5 million for the third quarter of 2009. This decrease is primarily a result of our reduced outstanding debt.

Our income tax expense was $4 million in the third quarter, reflecting an effective tax rate of 20%. This rate was below our full-year rate, due to the release of certain FIN 48 reserves and the cumulative impact of our lower full-year estimated tax rate. We expect a reported GAAP effective tax rate for the full year of 2009 to be 31%, and adjusted tax rate of 32.5%.

In the quarter, we recorded depreciation expense of $4 million and expense of the amortization of intangible assets of $6 million. Approximately $2 million of the total amortization expense is included in cost of product revenues. This quarter's amortization expense was particularly high due to the impairment of certain intangible assets of approximately $1.5 million.

For the fourth quarter of 2009, we expect depreciation of approximately $4 million and amortization expense of approximately $5 million. Approximately $1.5 million of the amortization expense will be included in cost of product revenues.

We expect the fourth quarter impact of share-based compensation expense to be approximately $4 million or $0.08 per diluted share. We reported GAAP net income of approximately $14 million or $0.49 per diluted share for the third quarter of 2009. When adjusted for acquisition-related expenses and other special charges, net income for the third quarter of 2009 was $16 million or $0.53 per diluted share.

This quarter we're also providing a supplemental measurement for your analysis of adjusted net income, excluding amortization. This should make it easier for you to make an apples to apples comparison between us and a number of our peers who exclude intangible asset amortization expense from their adjusted net income and adjusted earnings per share. This measure for the third quarter of 2009 was $19 million or $0.64 per diluted share.

We generated $28 million of cash flow from operations in the quarter, another very strong result. Operating cash flow included $4 million used to purchase inventory in the IST acquisition, which was accounted for as a purchase of assets rather than a business. We generated trailing 12-month cash flow from operations of more than $120 million for the second consecutive quarter. This has enabled us to repay and repurchase debt.

At the end of September, we had $107 million of cash, outstanding borrowings of $160 million under our credit facility, $97 million outstanding of our 2010 convertible notes, and $165 million outstanding of our 2012 convertible notes. Together with the repurchases in the first and second quarters, our bond buy-backs will save nearly $500,000 per year -- per quarter, excuse me -- in cash interest. We remain confident in our ability to meet our financial obligations, including the earn-out payments in the fourth quarter the acquisition was taken and the maturity of the 2010 convertible notes in June of next year.

We ended the quarter with 54 accounts receivable days sales outstanding, down from 56 days in the second quarter, and from 60 days in the quarter ended September 30th, 2008. We had 202 days of inventory at the end of this quarter, down from 212 days in the second quarter, and down from 218 in the prior-year period. We are ahead of our DSO objective of 60 days, and we are very close to meeting our inventory objective of 200 days.

In closing, I'd like to comment on our investments in our business during this difficult economic time. While we have initiated numerous cost-saving programs since the beginning of the year, we have not made cuts that we believe will hamper our able to grow and compete effectively in the long-term. R&D spending has come in at 7% of revenues and our SG&A expense has remained in the 40% to 42% range. Overall, I'm quite pleased with the discipline of our management and employees. Now let me turn the presentation back over to Stuart.

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

Turning our attention to 2009, annual revenue and adjusted EPS guidance remains intact. We expect to come in at the bottom end of the annual guidance we provided earlier in the year of $680 million to $700 million in revenue for the full year of 2009. The Company is guiding to GAAP earnings per diluted share of between $1.59 and $1.79. Further, we expect to finish the year toward the middle of the adjusted earnings per share guidance of between $2.00 and $2.20.

Based on our current mix of business we anticipate our longer-term revenue growth to return to a high single-digit growth rate. While we plan to provide 2010 guidance after we report 2009, our early thinking on 2010 is influenced by the fact we have yet to see any sustainable uptick in capital spending. At the moment we expect 2010 revenue to grow about 7% over 2009 reported results.

We expect to grow our bottom line even faster. In the absence of any future acquisitions, we anticipate a quarterly progression in our earnings throughout the year that is consistent with our historical seasonality.

In summary, we believe that Integra continues to perform well in a challenging economy. We remain confident in the underlying strength and resilience of our business. The diversification of our business has proven to be a real strength, particularly for our cash flow. While our economically sensitive businesses continue to be challenged, our procedure-based specialty orthopedics business continues to grow well. We are targeting our investments for 2010 towards those areas with the greatest growth potential.

We look forward to meeting with investors and Gerry will be presenting at the Oppenheimer Healthcare Conference later today. On our medical conference agenda we will be exhibiting at the North American Spine Society meeting in San Francisco next week.

One final note, I hope you can join us at our 2009 analyst forum which will be held later this month on November 16th, in New York City. Please see the press release published on October 15th for details. Now, we will be happy to answer your questions. Operator, you may now turn the call over to our participants.

Thank you, sir. Today's question-and-answer session will be conducted electronically. (Operator instructions). We'll take our first question from Matt Miksic of Piper Jaffray.

Hi, Matt.

Hey, good morning. Thanks for taking our questions. One question on the growth of the spine business. I don't know if you -- if I missed it, I don't know think you gave us a specific number. I'd love to have a little more color around the pace of that growth, maybe the drivers of that growth, and maybe, if you can, sort of -- just so we can help understand the impact of the instruments and implants business, maybe the proportion of that business that you would say is biologics.

Okay. Well, some general thoughts. First of all, our orthopedic business as a group performed well. There are generally three components to the business-- extremities, and we said extremities performed in the low double digits; private label, which we said was up over prior-year, which is a good result compared to the first half of the year; and the remainder is spine and orthobiologics.

Orthobiologics, we did own last year. Spine, we only reported a partial quarter last year. So the impact is obviously very significant simply because of reporting a full quarter of the acquired spine product lines.

Long-term, we continue to expect our orthobiologics and spine business to grow in the double digits. I think we've been saying consistently, we expect 15%, plus or minus, growth. I don't intend to break down the details between spine and orthobiologics, nor specifically provide detailed results for each of the businesses, but with that information I think you have a good sense of how the overall business performed.

Okay. That's fair. I understand you don't want to go into a ton of detail. If I could just push you a little bit on that, and then I have one follow-up for Jack. Is it fair to say that because this was a predominantly an instrument and implant business, that the contributions being driven year-over-year, granted we haven't gotten into sort of -- you haven't annualized it yet, but the add to your business is predominantly implant. This is fusion -- these are fusion products that are driving additional growth for spine. Is that fair?

Yes, and just to clarify, because different people use different terminology. When you talk about instruments in our orthopedic business, we don't really sell instruments in the orthopedic business. I know you understand that, but there may be others who would be confused by that. So in the part of our business we refer to as Instruments, we're talking about handheld surgical instruments that are used in trays. In our orthopedic business, we would generally provide the instruments on consignment, and not sell them. What we sell is implants, and then to respond specifically to your question, the dominant proportion of the business is, therefore, the implants.

Got you. Okay. That's helpful. One follow-up, Jack, on gross margins. We're clearly seeing some of the mixed positives, as you mentioned. But going forward, how should we be thinking about that impact? Is it sustainable? Is there any impact of recovering hospital capital or FX that we should be factoring in in the fourth quarter or going forward?

I think that our gross margins have always and will always continue to move up and down a little bit quarter to quarter, but the trend, which has been upward new for quite some time, is sustainable. Our higher-margin products are systematically faster growing.

And we have said that we have the target over the three to five-year period of getting gross margins over 70%. We think that's eminently achievable, especially as our orthopedics business grows as a proportion of the total. So that's absolutely where we are.

Great. Well, thank you again for taking our questions.

And we'll take our next question from Joshua Zable of Natixis.

Hi.

Hey, guys. Thanks for taking my questions here, and congrats on another strong quarter. Just a couple quick ones here. I know you guys have been eliminating product lines, which obviously has hurt growth in addition to some of the sort of macro issues going on. As we think out in 2010, are we pretty much clear on the instrument business, at least, or maybe across the board as far as eliminating products?

This year in particular, there was a significant impact from discontinuing product lines, these distributed product lines that we acquired as part of the Luxtec acquisition. So yes, we actually believe that next year, it will be a very small impact.

Okay. Great. And then, just in terms of maybe Gerry -- I know you talked about building the sales force, and you sort of said the goals. Could you just kind of tell us where you're at and sort of give us a little bit of a progression just so we know how to think about next year versus comps?

Okay. Sure. In the extremity reconstruction area, where we ended 2008 with 85 people and this year we had a plan to add an additional 30 sales reps in the United States, we're still on track to do that. We have a little over 100 people now in extremity reconstruction. And as we progress through next year, we continue to look at territories that get to our revenue point where it makes sense to split a territory and increase coverage.

It's very similar to what we did in Neurosciences during the first several years, where we continued to expand our sales organization to increase coverage and get more reps, participating in surgical procedures, and being at the hospitals and providing the higher level of service that the orthopedic surgeons demand. So we'll continue to add reps throughout this year and into 2010 and beyond in order to maximize our coverage and extremity recon.

In the area of spine, as you know, we manage it through a distribution network. We have two different distribution networks. One is our Integra Spine products, as well as our orthobiologics, and we're seeing quite a bit of synergy between our spine distributors and orthobiologics in being able to combine some distributors in areas where it makes sense. As we recruit new distributors to increase our geographic coverage in the United States, we're certainly looking for distributors who want to carry both our hardware and orthobiologics, and we're getting a lot of pull-through sales on our orthobiologics as a result of that.

And we'll continue to constantly look at, in 2010 and beyond, making sure that we're getting the right level of performance out of our distributors in those areas where we're not -- where we have no issue with turning over a poor-performing distributor and replacing them with a potentially higher performing distributor, as the year goes out.

The one area that we're still formulating and we're getting ready to initiate in 2010, is the expansion of our distribution network, both from an infrastructure standpoint and setting up a distributor network outside the US. We'll start rolling that out in 2010 in order to generate OUS sales of our spine products, which currently we sell no products outside of the US of spine. So we see a nice upside opportunity with a focus on expanding distribution outside the US next year.

And as a quick follow-up to that, in terms of gaining momentum, I know you guys have been looking at distributors and getting them to carry both product lines. Obviously you've had them for awhile now. I am just kind of wondering, have you sort of gained momentum in acquiring them more recently as you've had them under your belt and they've been out there, or was this just kind of, once you tucked everything in, you got a bunch, and now you're sort of looking for things?

It's kind of a mix. I mean, we have added several in the first half of the year, and we continue to add several more as we've gone out -- throughout the year. I think adding the Paramount MIS system, which gives us another leg of our product portfolio in a key growth area within spine, will give us even more advantage to attract what I'll call higher level or A and B player distributors, who have strong relationships in spine institutions. I think we'll be able to track a higher level of distributor in some geographic areas, and we'll certainly use the full portfolio to gain leverage in the distribution network and be able to put on higher performers.

Great, guys. Congrats again. Thanks for taking my questions.

Thank you.

We'll take our next question from Taylor Harris of JPMorgan.

Hi Taylor.

Hey, Stuart, thanks a lot for taking our question. I wanted to follow up on your comment about revenue growth in 2010. The 7% -- first of all, let us know how much foreign exchange benefit is in there, and then the difference between that and your longer-term upper-single digit guidance. Is that just the capital equipment environment, or are there still some other pressures that you think are hitting the business in 2010?

Okay. So we're trying to accomplish two things with the comment.

First, we're in the process of building our budget for 2010, and so we obviously have to base that budget on some expectations. The budget process, though, is not complete, and won't be complete until December, and our plan would be to provide formal guidance for 2010 after we report the fourth quarter. And that's particularly important, because the environment is in flux and it's a pretty complicated year to date. So what we don't want to do is provide early guidance that, in some way, is ill-informed.

That said, we know you guys are pulling together your thoughts for 2010, and so failing to give you some sense for where we expect to be, also seems foolish. So take the 7% with a grain of salt. It's our best estimate based on where we are at today.

That number is not constant currency. It's our best estimate of where we would perform next year based on finishing the year at the bottom end of the $680 million to $700 million number for 2009, and implicit in that is the current exchange rates. So we backed into -- and in answer to your question -- anticipating it, and it's about 1% driven by currency, based on current rate. So it would be 6% constant currency plus or minus 7%, as reported, assuming the rates stay where they are now and rates today are $1.47 on the Euro. We're clearly most sensitive to the Euro. We don't have a huge Yen exposure and we have some other currencies.

Okay. And you had mentioned you're still not seeing a real rebound in capital spending, which as I recall is maybe about 10% of your business. So is that the main factor influencing your thoughts on the pressure still hitting the business in 2010?

A couple thoughts -- first, yes, we have -- because the question has been so topical in the last three quarters, we tried to calculate what capital goods would be of our roughly 7 -- $680 to $700 million of revenue, and it's about 10% of overall revenues, and plus or minus 25% of the neuro business. So those numbers are still good. Nothing has changed in terms of our estimates.

And, indeed, we have not seen what I would want to call a sustainable improvement in the capital goods. Clearly, we had a decent CUSA quarter, and CUSA is a piece of capital. But then again, we have a new product which is pretty good. We have other capital product lines which are still down substantially over the prior year, and I don't think it's prudent to call a trend in this environment. So yes, when we look at next year's numbers, we're not assuming a significant uptick in capital. And so, if for some reason there was a dramatic uptick in capital, then there would be some upside in our numbers.

Okay. That is great. Then just my last one, and I'll hop back into line. I appreciate your comment on, in neuro, implant and instrument portion -- or implants and disposables growing in the upper single digits, I think you said, or maybe low double digits. So if you're to back out -- if you're to look at that across the business and you back out the capital pressures, you back out the distributor de-stocking impact that you've had in instruments, are you currently growing in that roughly 6% constant currency range?

Boy, that's a lot of ifs, Taylor. I don't want to take a guess at that. I just am thinking that would be a difficult thing to do.

I guess maybe what I'm asking is, how much of a stretch is it for the business to rebound in 2010, or is it really a pretty simple function of saying "Here's what the business is doing now. The capital environment stays the way it is, but we have easier comps in instruments because the Luxtec issue is behind us."

Well, again, in this environment, I think it's a bad idea to call anything easy. That said, the implant businesses and the orthopedic businesses are clearly growing in excess of the roughly 7% guidance that we were talking about. So there certainly is a strong basis for the expectation that we articulated of 7%.

That being said, there's a lot of factors that will affect the numbers. It is, in fact, true that the fact that we anniversary the discontinuation of those distributed product lines certainly helps. We were really up against a pretty hard headwind this year between both the capital environment, the economy, and many millions of dollars of discontinued products.

Right. Okay. That's helpful. Thank you, guys.

We'll go next to Spencer Nam with Summer Street.

Thanks for taking my questions. Just a couple quick questions. In terms of the overall demand, you guys clearly are sounding like the weakness in neurosciences and the hospital medical instruments side maybe somewhat plateauing or stabilizing, if you will. I was wondering if you could provide any additional color on how things are looking forward in terms of -- are you sensing -- is there any data point to suggest that maybe there is-- demand is ramping up and the inventory, some hospitals are thinking about increasing inventories and so forth?

Well, we certainly expect to grow our revenues sequentially, and I think we gave you guys some help in our guidance, so we certainly expect to grow revenues sequentially.

We believe that in particular in the instrument business, the physician-based part of the business, I think I've said on prior calls, we have some visibility into what our distributors both buy and sell, and the distributors are telling us -- and they're actually telling their own investors -- that they have plateaued, as it were, in that what they're buying is in line roughly with what they're selling. So the de-stocking that we saw in the first half of the year in the physician-based instrument business, we don't believe is going on anymore. So that's a good thing.

I don't think it would be accurate to say hospitals are trying to stock up inventories, so no. I think the main thing that you'll see in our going-forward results is the fact that our implant businesses and orthopedic businesses continue to have very good strong procedure growth, strong market share, and strong new product launches, and that's going to help us grow our revenues and offset what is likely to be a continued weakness in capital. That being said, we don't see it getting weaker, but we're not prepared to call a trend that it's getting stronger on a sustainable basis.

Oh, great. And then, on -- just a quick question on the spine side. I was wondering how -- what kind of competitive dynamics you guys are observing out there? As you are trying to grow your business out to the rest of the country are you seeing a lot of resistance, or do you feel like you are winning many of the opportunities with relative ease, if you want to call it that, or do you guys feel like you have a pretty good handle against competitors in this space?

I'll give a short answer, and then I'll let Gerry answer on the tactical aspects. First of all, I believe our strategy is a good one. There is a substantial synergy between the neurosciences relationships that we have, neurosurgeons do approximately half of the spine procedures that are done out there, and many of our good neurosurgeon customers who use our cranial products and recognize the quality and service and relationships that we have, therefore, embrace the opportunity to work with our new spine division. So I believe that was very much intact.

I also believe that the concept of, in a very short period of time, bringing together orthobiologics, metal, and minimally invasive technology will allow us to rapidly become a very important player in the spine community.

Third we acquired a great company with great people about a year ago with the Theken acquisition, and those people are really doing a great job leveraging being part of a bigger and more sustainable infrastructure. So from where I sit, I'm pleased with how the strategy has played out, and that is paying off in dollars and cents and in procedures. Now, Gerry, maybe you want to talk a little bit about how we've been able to identify new distributors and bring on new people to work with us.

Sure. I think, from a competitive standpoint, when we acquired the business, we had a distribution network that was pretty limited in terms of coverage in the US. And our focus over the last year has been to -- how do we bring on higher level of distributors that could perform at a much higher level. As we did that, we realized that we had a good hardware portfolio, but what we needed to do was offer the orthobiologics and provide some competitive advantage to those distributors, and then also upgrade a number of the distributors to be more competitive in the space.

As Stuart mentioned I think the addition of minimally invasive surgery products will also give us an opportunity to get to a higher level performing distributor which will make us even more competitive.

If I look across the range of people that we compete with, we think mostly with the smaller companies, they're the companies who are, say, a $100 million or less, in most of the areas that we compete, and we're very competitive.

We have a broader portfolio. We have a highly focused specialist group that focuses on both orthobiologics to make sure the surgeons understand the advantages and competitive -- relative competitive advantages of our orthobiologic products, as well as the advantages of our hardware systems that allow the surgeon to perform the same procedures with fewer steps and makes it an easier procedure with good clinical outcomes.

I think that we're competing very effectively on a procedural basis by having a good product offering and combining with orthobiologics, and now adding the MIS, and we've continued to invest in product development and clinical development activities in order to continue to support some momentum of introducing new products and new techniques to the marketplace.

Great. Thanks very much.

We'll take our next question from Tao Levy from Deutsche Bank.

Hey, good morning, it's Tao Levy from Deutsche.

Hi, Tao.

I have a quick question on the spine business. So you mentioned that it was sequentially down. Do you feel like you're starting to bump up against the large number of distributors that you already had in terms of gaining new territories and distributors are becoming a little bit tougher to increase sales that way? It just seems like the spine market in the third quarter was sequentially flat to maybe up a little bit.

I really don't think so, Tao. I mean, I can't elaborate, because it would be just a series of details. But no.

Okay. And also, on the gross margin side -- and maybe I missed it, I think you said 64% to 65%. I think last quarter, you talked about a 65% to 66% range. Is that correct, or did I mis-hear?

This is Jack. This quarter, we talked -- I think the 64% to 65% was GAAP gross margin, and it may have been that -- and I'd have to go back and check this, that last quarter when we were talking about it, it was in the context of adjusted. So perhaps it was not apples to apples. We can go back and look at that, and Angela can clear that up for you later. But I'm pretty sure that's the difference you identified.

I think, in this quarter, you'll note we had an impairment of an intangible, it was a small number, but it affected the gross margin. Also the strength in the neurobusiness does change the mix slightly toward neuro with a slightly lower gross margin than orthopedics. So you did see a about a half a point of mix going against us as it were. We're quite comfortable with the fourth quarter number of 64% to 65%.

And that's a non-GAAP number, so we can be clear, the 64% to 65%.

That's a GAAP number.

And do you have the non-GAAP?

I don't think we have a non-GAAP expectation. But in all likelihood, it will be marginally higher, but we haven't, I don't think, articulated what that would be.

Okay. And a final question. When you talk about percentage of orthobiologics -- you talked about the orthobiologics business. Can you give us a sense of the use of orthobiologics in the spine market for you guys, how that percentage has trended just so we can get a sense of that synergy stew that you were talking about, how that's materialized over the last few quarters?

Yes. I think I'll let Gerry handle it, but the two big growth drivers in our spine business from an orthobiologic perspective are Mosaic and Evo3. Both are relatively new products, although Mosaic has been around for a few years, and both are used extensively in spine.

So if it's not obvious, to the extent that a sales rep is in a procedure with the nettle fusion products, then it's our objective to have them use our orthobiologic rather than a competing orthobiologic. One strength that we bring to the table versus -- I would argue -- any of the smaller companies is our GPO relationships.

Many years ago, I made the point that one of the hidden benefits of getting into the instrument business was building a huge set of relationships with GPOs, and when we acquired IsoTis several years ago, one of our first priorities was to get our orthobiologics on GPO. We now have pretty much all, or perhaps all but one or two, of the major GPOs have our orthobiologics on contract, which really makes it a door wide open compared to some of the smaller players for using orthobiologics.

So strategically we have a lot of the pieces in place to have an extensive use of our orthobiologics in the spine procedures. Now maybe Gerry -- I'm not sure we have metrics to provide you, but maybe Gerry you want to comment on that.

Okay. Yes. In terms of the orthobiologics, when we've -- over the last year, prior to owning Integra Spine and building out that distribution network, we were still predominantly bone graph substitutes of spinal fusion, which is the highest procedural volume of fusion in bone graft requirements in the US. And we've continued that.

We've actually skewed the sales more and more toward buying an Evo3, Mosaic, and other products, and the focus of our distribution grew. We still sell a fair amount of products into the extremity reconstruction and orthopedic joint reconstruction business, but it's a much smaller piece of the orthobiologics business. It's predominantly mostly a spine business.

Okay. Great. Thanks.

We'll hear next from Amit Bhalla of Citi.

Hi, good morning.

Hi.

Stuart, I wanted to go back to your comments around the 2010 top line of 7%. It looks like the street consensus is looking for about 2X leverage to the bottom line, and I know you're not going to go into the actual expectation for quantitatively putting EPS out there right now.

But maybe qualitatively, can you give us a sense of your early thoughts on SG&A leverage that you're looking for in 2010? In gross margin, I think you said, you're looking for upward trends that are sustainable in gross margin. So how much do you think you're going to get out of leverage in SG&A; and if you want to comment on the consensus, 14%, that would be good, too.

Yeah. It's probably early to comment on the consensus. We wanted to make sure people were building their models off of roughly the revenue that we anticipate. I think we need to go through the budget process here to ultimately figure out what we're going to bring to the bottom line.

Big picture, we continued to work to improve our gross margins by a point to a point and a half a year. So we have encouraged people for many years to build that into their models, and we continue to model about a 7% R&D at about a 40% to 42% SG&A.

To your point, the challenge will be, well, where do we invest in particular in sales and marketing next year? We mentioned on the call, it's our intention to invest in the fastest growth markets, so you would be thinking, then, spine, orthobiologics, extremities, and perhaps international. Coming with that is slightly higher SG&A.

So as usual, there's going to be some trade-off between investing in the highest growth markets and bringing more or less to the bottom line. So, I guess the only other qualitative comment I'll make is we certainly are working to get people to have reasonable and achievable estimates and conservative estimates out there.

Thanks. And on the extremities side you mentioned there was some variation in terms of the foot products, the forefoot didn't perform as well as mid- or hind. I'm just wondering if you could give a little more detail? Were there any product issues, or why the difference?

Well, no product issues. None at all, actually. What's driving it is that the forefoot is predominantly elective procedures. I think we talked about this on the Q1 and Q2 call as well.

The Company Integra doesn't have a lot of elective surgery. We're not used to dealing with that, certainly from an investor question perspective, since most of what we do is trauma and tumors and that sort of thing.

That being said, in the extremity market, the forefoot, in other words, the toes and the front of the foot, are things that patients can choose to postpone. In the first quarter, we commented on some substantial decisions to postpone forefoot surgery, so our rep's response to that was to spend more time in places where you have to have the surgery, which is, for example, in the foot, the structural part of the foot, which is the mid- and hindfoot. They also moved to spend more of their time in trauma and burns and ulcers, again things that it's much harder for patients to postpone and, therefore, the return on a rep's time is more favorable.

If the economy comes back, we would then expect to see an increase in the forefoot procedures for the very reason that patients will -- they still have these problems with their forefeet and will need to have the surgeries. So that's probably the most elective or most vulnerable part of the extremity business is the forefoot procedures. By the way, a lot of them are done by surgical podiatry, as opposed to orthopedic surgeons, and so again, they're much more subject to the economy.

Okay. Thanks. Just the last question on CapEx. I know you're not stepping out on a limb and making any major calls on CapEx; but in terms of your sales rep's discussions with purchasing managers, is there at least a change in tone from maybe the midsummer to where we are today? Thanks.

Again, it's not that I don't want to step out on a limb. I don't think there's a consensus yet on what's sustainable. I can tell you most of our capital sales this quarter were replacement products.

It's not hospitals starting up new surgery centers, it's not hospitals doing build-outs, and I think hospitals are, again, are concerned about their own financing sources, concerned about what reimbursement is going to look like, and waiting to figure out what if anything the impact of Medicare changes and health-care reform are going to look like.

So I think what we've tried to be is very responsible with our hospital customers and certainly try to be on the top of the pile for whatever capital requests are approvable in the hospitals. So again, it was an okay quarter for CUSA, which is good. But we had others that were just as bad in Q1 and Q2.

Thanks, Stewart.

We'll go next to Amit Hazan of Oppenheimer.

Good morning. It's actually Jeremy Feffer for Amit this morning. How are you?

Hi, Jeremy.

I wanted to take a step back. You guys are ones again posted a very strong cash flow quarter, which you used for debt repayment. And I know it's something we talked about on last quarter's call. But can you provide any updates on thoughts about free cash flow going forward, debt pay-down versus acquisitions. Now it's been almost a year now since your last acquisition. I'm wondering what you're seeing out there and if you have any updated thoughts on an acquisition strategy/

Well, Jack will talk to the debt pay-down because it's a really good story, and we're doing, I think, all the right things. On the acquisition front, we may have just done the best acquisition we have done in years. We bought in bankruptcy a company with $70 million invested in it for an MIS system that's competitive with the best MIS systems on the market. So just because it's small doesn't mean it doesn't matter.

The Paramount system which we expect to launch at NAS, is an extraordinarily simple and elegant system that allows spinal MIS procedures to be done, and we hope will make us a stand-out player that surgeons and distributors will want to work with because of access to this technology. So you're right that in the last 12 months, we've done smaller acquisitions, but they are -- we've been very active in the market nonetheless.

So on a go-forward basis we do expect to be in the M and A market. We are currently looking at acquisitions. We will look at acquisitions in the future; and while they will be smaller than historical, l simply because of the environment, I don't think you should count us out at all, and we'll definitely follow our traditional pattern of looking at smaller company acquisitions that add to either our sales and marketing platform, or provide a unique technology.

So none of that has changed. I think we've been naturally conservative in the first half of the year. I think the Paramount system is going to prove to be an excellent acquisition. And, Jack, do you want to talk about our free cash flow?

Sure. And as a reported operating cash flow was a bit over $28 million. The other thing we said for those of you who might have missed it, for the second in a row, trailing cash flow exceeded $120 million. That's roughly roughly at twice the level that prevailed a couple of years ago.

There's a couple of things that might be said this quarter's as a result. It is actually -- actually, two things might be said.

One, if you look at the ins and outs on working capital, really didn't make much out of the balance sheet this quarter. So that's not a bad number for our operating cash flow, as the business is currently configured. It does move up and down quarter by quarter, as you can see from just looking at it. But that's not a bad number.

The second thing that is worth pointing out is that the IST acquisition, which Stewart just looked at, was actually accounted for as a purchase of assets, not as the purchase of a business, and so the consequence of that is that the acquired inventory in the IST transaction was actually taken out of operating cash flow, if you will.

So there's another way of looking at that. Had we bought a business, our operating cash flow might even be several million higher than the $28 million reported.

Rolling forward, we have continued to pay down, as it makes sense to do so, our revolver and our buy-in convertible notes, particularly the 2010s so far, which do mature in June. We do the buy ins when it is economically advantageous to do so, and there's no reason why we wouldn't couldn't to do so if the opportunities arise, recognizing the maturities are getting closer and closer to the maturity any way.

People should also remember that our borrowing costs are at the moment quite low. So we even though we have paid down a lot of debt and have tremendously improved our leverage situation, the actual impact on interest expense isn't that high, because we're not paying very much to begin with on our various outstanding instruments. So with that progress this year, we feel good from both the internal management perspective and from the leverage perspective.

Okay. That's actually very helpful. My other questions have been answered. So thank you, so much. For your time.

We'll move next to Jayson Bedford of Raymond James.

Hi, Jason.

Hi, Stu. Just a couple of quickies here. On the instrument business, can you contrast the growth rates in the physician office segment versus the OR-based segment in the quarter, and then looking at growth going forward you mentioned the de-stocking, but what are the key factors in driving growth going forward in the instrument business? Is it new products or more of a function of just kind of macro trends? Thanks.

Okay. So a couple of things. First the physician office business performed better than the hospital business, again, not wishing to provide specific details. But that's consistent with the theme of an improving overall economy, but continued uncertainty in the hospital sector. So that was not really surprising.

Keep in mind, in Q1 and Q2, it was the opposite, because you saw a substantial de-stocking in the physician office part of the business, and we talked about that being driven to a great extent by the cash flow management our distributors rather than what was going on with the end dollar customers. So both were down year over year, but hospitals performed worse than physician office.

On a go-forward basis, physician office will be driven almost completely by the overall performance of the economy. Historically, why we were able to achieve excellent performance, was driven by taking market share and the fact that our physician office-based business is an excellent one with great brands and great people. Last year swamped that; but as we return hopefully to a more normalized economy over the next several years, we'll be back to demographics driving that product line as well as our ability to take share from competitors. So a more normal situation.

I think, in the hospital base side, again, historically, we were able to grow that business often in an 8% to 10% range. To grow it at that level meant we were taking share from our several competitors in the market; and again, this year I think, how well we did versus competitors is really swamped by the overall performance of the hospitals and their buying patterns and the economy.

I would say, competitively, though, we think we're in really good shape. I continue to believe that we're one of the few companies out there that take an active interest in the instrument market that are working to expand the various product lines, introduce new products, add to the sales and marketing organization. Many of our competitors view this as a business to shrink or to harvest; and while we will treat it appropriately, and it's not the biggest receiver of resources in the Company, I would say we like the instrument business in a way that maybe some other companies don't.

Okay. That's helpful. And just lastly for me, we haven't talked about this in a while, but can you walk us through the P&L impact of a weaker US dollar going forward?

I what we've said on the top line, as we said in the script, if exchange rates remain where they are today through the quarter, we expect about a $2 million top-line advantage from currency. So that's the first thing.

Beyond that, we have never done anything more but speak in generalities about the structure of our business. And the main things we've said is that, given that we both manufacture and sell in Europe and in the United Kingdom, and we make products here, sell them there, make products there, sell them here. A way to think about it is -- the main difference is we purchased quite a few of our surgical instruments, a pretty large proportion of them in the Euro zone and sell them, then, almost entirely in the United States. So that means we have in that business significant Euro expenses and significant and dollar revenues.

The impact there is delayed over time as instruments we purchase at different Euro rates go into inventory, and come out of inventory and therefore through the P&L, five, six, seven months later, depending on turnover. So you can map it out that way, making some assumptions about the size of our instrument business and so forth, and we have talked about it before, but that's the main -- those are the two main things we've said about the impact to currency. I'm not sure we have much more to say beyond that.

Okay. Jack, just simplistically, do you have more non-US dollar-denominated costs you do revenue?

I'll try to take a cut at -- this is Stuart -- cut at it a little bit differently.

Sure.

We are, in a given year, benefited like other US medical device companies, by a weakening of the dollar. It clearly helps our top line, and for a full year is good for the bottom line. The more challenging thing to describe is how it plays through the turnover in the inventory.

In the short-term, we're benefited, but then we give some of it back later. That's probably the way to think about it most simplistically. So we're -- in a way -- mostly hedged, because our Euro revenues exceed our Euro costs, but the timing is challenging. And we get a short-term benefit as the dollar decreases, but we give it back down the road.

Okay. That's helpful. Thanks, guys.

We'll go notation to Bill Plovanic of Canaccord Adams.

Thank you. Good morning. A couple of questions here, just some simple follow-ups.

First of all, your inventory reserve went up about $4 million, as did your accounts receivable reserve. What was the driver of that?

One point, I think that's versus end of year, not quarterly. So those would be big numbers for a quarter, but that's really the cumulative three-quarter impact, Bill. So it's sort of a normalized -- there's nothing that extraordinary about it.

Okay. And then, Jack, how do we think about, in the acquisition of taken, I think it was the general rule of thumb is whatever cash you pay for that it's roughly two and a half times the trailing revenues _ is correct if I remember that correctly?

Yes. So here's a way to think about the price of the transaction. The price is two and a half times 12-month trailing revenues as of September 30th, 2010. Now that's the price.

The payment of that occurred in phases. So we paid around $75 million at closing. It was a working capital adjustment subsequently that resulted in another few million dollars -- I can't remember exactly what it was. $4 million. We then have our first earn-out payment due in Q4, that is this current quarter, based on 12 trailing month sales at the end of September 30th, 2009.

So what you do is you take that number, you multiply it by two and a half, you subtract everything paid up until now, and that gives you, in effect, the earn-out payment to be made in Q4, and then we're going to do that same exercise again next year, and then we're done, if that was clear to everybody. So, to that end we booked a liability of $52 million for the fourth quarter earn-out, and we will proceed accordingly.

Okay, great. And then on the instruments, the Luxtec that you discontinued -- I know that you said 2010 will be a better year, but specifically what quarter do you hit that inflection point? Is that a Q1 2010 event, or does that happen more towards the back half of 2010, for that discontinued product line becoming non-material?

I think the best way to think of it is Q1. It should be pretty small in Q4, but I think the right way to think about it is it's completely gone, starting the first quarter of next year.

So Q1 2010, that's it, you're on a zero to zero comp, so we get to see the pure growth rate versus yet a little left in the Q4 that's coming up?

Yes, there's a few hundred thousand in Q4, depending upon how the numbers play out. But I think Q1 is a nice clean number.

Okay. And then, on the spine distributors, can you just give us a little color -- this is probably for Gerry -- on the mix. How many of the reps/agents, whichever way can slice it up, are carrying both biologics and metal at this point in time?

Gerry, why don't you take that?

Okay. We have at least 15 of our current distributors were carrying both orthobiologic and our spinal hardware products. We also took a number of dealers who were evaluating the orthobiologics product line, as well as a number of orthobiologics dealers evaluating our spine line. So it's sort of a moving target right now, but we've already got a good start with some of our high volume distributors carrying both, and we're continuing to progress to add either orthobiologics to our spine dealers, or spine hardware to our orthobiologics dealers.

And Gerry, can you remind me when you acquired Theken, what was that mix at that time of how many metal guys were carrying orthobio, and vice versa?

Very few, carrying the Integra orthobiologics, very few were taking spine hardware and Integra orthobiologics. I don't remember the exact number, but it was somewhere less than three.

Fantastic.

Bill, let me follow up. I've been corrected by my finance team here, in Q1 we'll still be anniversarying about $0.5 million of discontinued product lines. So I said 0. Compared to this year -- it was many millions of dollars -- but I'm wrong and I want to correct it. Q1 and Q2 there's still about $0.5 million of discontinued product lines that will be an unfavorable comp in next year Q1 and Q2. So, my mistake.

Okay, but it's getting a lot closer. Then -- actually that's all the questions I had. Great, thanks a lot, guys.

Next is David Toung of Argus Research.

Yes, good morning, Stuart, thank you for taking the call. I want to dig a little deeper into guidance for 2009. Since you've progressed from the second quarter, third quarter, I was wondering why you may not have tightened the guidance. And I know you've talked about guiding to the lower end of it. Just, what you're thinking on what visibility you have on the 680 to 700 number.

Okay. First of all, I would say the reason for not tightening is philosophical. We moved at the beginning of the year to annual guidance. And so to the extent that we can maintain annual guidance and we feel comfortable within the annual guidance, that's our objective.

Our business is complex enough that we learned, in prior years, that micro-managing it quarter to quarter and upping and lowering and changing it by a few million dollars, rather than adding light, adds confusion to an understanding of our numbers. So we quite deliberately didn't change it in the past and quite deliberately haven't changed our annual guidance this quarter.

That said, I think we were -- I tried to be as clear as I can be that you should be at the low end of the 680 to 700 So although we didn't change the range, our words were clear is that our expectation was to be at the low end of the 680 to 700, which is helpful information about where we expect to come in in the fourth quarter, recognizing that we're only providing annual guidance. So I am in no way trying to be cute or clever.

We just want people to understand that the best way to look at our business is on annual basis and a couple million dollars in one direction or the other, from one quarter to the other, is not necessarily useful information about the overall performance of the business. Similarly, on the earnings per share, we know enough based on the three quarters to feel comfortable at around the middle of the guidance range, which provides helpful information on where we would expect to be in the fourth quarter. But micro-managing it, we don't think is helpful in terms of really getting an understanding of how we manage and view the business.

Great. Thanks for that. I have a follow up on a different matter. This is anecdotal evidence of talking to some hospitals, and they are saying that they're -- because of the way the reimbursement is moving, that it sort of favors the hospitals over the the free-standing surgical centers. And some of the surgical the centers may be open to being acquired by the hospitals, or in closer alliance. Do you see that as -- affecting your business, since you, I think you mentioned earlier about physician office environment.

I think also the anecdotal is that some of these hospitals see the surgical of a way of attracting patients, especially the high tech surgeries, and are doing some things to increase investment in the surgical treatment. Not necessarily heavy capital equipment, but at least sprucing up the surgical suites. I don't know -- any more perspective you can provide on that.

I don't think I'm prepared to call a direction as to whether the surgeries are moving toward inpatient or toward outpatient. What I can tell you is that strategically our sales organizations are trained to be available to both.

So in particular, for example, our extremity organization is very cognizant of the need to be in both surgery centers for foot and ankle procedures, as well as skin and wound procedures. They do, in fact, manage, in a given territory both the surgery centers and the hospitals. So they are geographically focused, and are trained and knowledgeable to work in both locations.

Similarly, in our instrument business, I would venture to say we're the only instrument company with such a broad continuum of care. The whole strategy of having both a hospital-based and physician-based practice allows us to flexibly move from hospital to surgery center to physician office and follow the practice pattern. So I would say, we're probably unique in our access and ability to participate in all of them, and I do not think we've chosen size as it were. So we can definitely move resources amongst the different places that one would do surgery.

Our neuro business and our spine business for the most part is all inpatient. So I don't think there's really any significant exposure to surgery centers or outpatient, or if there is, it's trivial.

Okay. Great. Thank you, Stuart.

(Operator instructions). We'll take our question from Matt Miksic from Piper Jaffray.

Hi, Matt.

Hi. Just one follow-up on -- again, not to focus too much here on spine, but I think it is interesting and important to see how that business is developing for you. Could you talk a little bit about, you know, where you see IST, this MIS Paramount product fitting in? Not to -- it would be very helpful, actually, if you could frame it against sort of the competition. You know, where does it fit in the realm of MIS? What do you think will be attractive about it and help you get traction with surgeons outside of the current the user base?

Gerry, you want to hit that, please?

Sure. The Paramount system allows the surgeon to access the spine using a minimally invasive approach, which is minimal incision to getting minimal tissue and muscle disruption during the surgery. The system is designed primarily for discectomy and fusion procedures, and allows the surgeon to access the spine on a lateral approach. So competitively, it's allowing the surgeon to perform a minimally invasive approach to the spine to do be able to do both a discectomy and a fusion.

It's a very simple system to use, so from a user standpoint, it has an advantage, because it is an easy to use system, it provides good access to the posterior side, spine from a lateral approach. I think as we continue to develop the system, as we go through the launch of the product that was developed by IST, with some minor modifications, and we'll continue to develop that product offering that provides pretty much a full range of MIS approach and implants that allow you to do a fusion procedure.

So I think we're positioned pretty well against the competition to be able to provide the instrumentation, the implants, as well as the bone-graft substitutes to do instruments -- the hardware fixation as well as fusion procedure.

And if you can give us a sense maybe the folks who are using it now, is it primarily for, you mentioned micro discectomy, but sort of like T lift procedures, minimally invasive posterior procedures, or are you getting a lot of folks using it laterally now also?

Matt, let me make a point. No one is using it now.

That's a good point. I guess my question --

What Gerry will talk about is the product was launched before the company went into bankruptcy. It had a small number of users, and Gerry should probably tell you what they did, and the plan would be, after we launch at NAS, to go back to those users, have them go back to using the product and then to move to a full launch in the New Year. So let's -- just so there are no confusion, there are zero sales, and one would expect that for the year .

Thanks for reframing it, yes. That's the question I was asking.

And the surgeons primarily who developed it and started using it ,and we'll re-release it to this smaller group of surgeons as we go through the fourth quarter, but before we launch it to the broader surgeon community, they were primarily using it for a lateral approach and doing fusion procedures.

Okay. That's helpful. Thanks, Gerry. Thanks, Stuart.

(Operator instructions). And we have no further questions.

Well, thank you all very much. And we look forward to further reporting on our results over the coming month and quarters. Thank you.

This does conclude today's conference. Thank you all for your participation.