Integra Lifesciences Holdings Corp (IART) 2012 Q3 法說會逐字稿

Good day everyone, welcome to the Integra Life Sciences third-quarter financial reporting conference call. As a reminder, today's call is being recorded. At this time I would like to turn the call over to Mrs. Angela Steinway head of Investor Relations. Please go ahead.

Good morning, thank you joining us for Integra Life Sciences third-quarter 2012 earnings results conference call. Joining me today are Peter Arduini, President and Chief Executive Officer and Jack Henneman our Chief Financial Officer. This morning we issued a press release announcing our financial results for the third quarter.

Certain statements made during this call our forward-looking and actual results may differ materially from those projected in any forward-looking statements. Additional information concerning factors that could cause actual results to differ is contained in our periodic report filed with the SEC. The 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.

Certain non-GAAP financial measures are disclosed in this presentation. A reconciliation of these non-GAAP financial measures is available on the investor section of our website at integralife.com. As we aim to keep are our prepared remarks short, we will reference the financial results of the press release and will not [receipt] individual numbers. As a result, you may want to keep a copy of the release handy during the call.

Further, given we will have the investor meeting shortly after the call here in Dallas, please focus your questions on our third-quarter results and 2012 expectations. During the investor meeting, which you may access to our webcast link found on our website, we will lay out our strategy and business outlook. We ask that you do for long-term and strategy related questions for the Q&A session at that time. This call will end by 9.00 AM. Eastern time. I will now turn the call over to Pete.

Thank you Angela. We're pleased with our performance this quarter, particularly in the context of a difficult economic environment. Our revenues were a little lighter than we expected a few months ago; however, they were flat compared to Q2, which is our usual summer pattern, and up 5% over the prior year on a constant currency basis. Earnings came in ahead of our expectations, mostly because our manufacturing operations continue to improve and because we spent less on our initiatives than we had planned. Looking ahead, we have variances that will negatively impact our gross margin in the next several quarters. We also plan to make additional investments in our systems and quality improvements. These internal and external considerations influenced our upward revised annual guidance, which Jack will walk through later in the call.

US Extremities increased significantly versus the prior-year period. Strong sales in our regenerative product lines were the primary contributor, followed by the impact of the Ascension acquisition, which closed in September of last year. US Extremities remains our strongest business, and regenerative medicine products continue to fuel our growth.

US Spine and Other, which includes our spine hardware, OrthoBiologics and Private Label products, increased slightly. New product launches had another strong performance in OrthoBiologics, overcame declines in spine hardware sales. Like many of our competitors, the Spine Hardware market was particularly tough this quarter. We experienced somewhat greater pricing pressure than in recent quarters, and our surgeon customers have not avoided the industry-wide phenomenon of procedure delays.

OrthoBiologics products, particularly Evo3 and Mozaik, experienced high demand, both through our existing base and through newly added distributors. This demand drove high teens growth in the third quarter. Private Label increased versus the prior year period. US Neurosurgery revenues increased slightly of the third quarter of 2011. Sales increases in our market-leading duraplasty products were offset by softer capital sales, which we believe reflect a somewhat more conservative hospital purchasing environment.

US Instruments revenue was essentially flat versus prior year. The Acute Care business posted another strong quarter, and lighting sales increased with the growth of our LED headlamp. Sales of the alternate site area increased sequentially, but declined versus the prior year period against a strong comparison. Sales of our products to end users were stable in the quarter, so we remain confident this business is on track.

International revenues in the third quarter increased 2% constant currency, but declined slightly on a reported basis, versus the prior year. Europe was up 4% in constant currency, but down about 7% on a reported basis. In our view, the constant currency growth in Europe reflects better execution by our European team. The rest of the world was roughly flat, with growth in Asia-Pacific, particularly Japan, and also in Latin America, driven by gains in Brazil and Mexico. This growth was somewhat offset by a few notable weak spots, including Canada and Australia, where we saw a deceleration in capital equipment orders.

Now I'll turn the call over to Jack to discuss the financial results in more detail and provide an update on our 2012 outlook, after which I'll update you on the remediation of our regenerative medicine facility and briefly discuss our progress on initiatives. Jack?

Thank you, Pete. I'm going to review the P&L in a bit more detail and touch on our updated 2012 guidance. For 2012, we expect reported gross margins to be around 62% and after adjustments, a little under 65%. On a GAAP basis, our third-quarter gross margin percentage improved 100 basis points over the prior year, but declined about 70 basis points from the second quarter. Expenses in our Plainsboro facility increased, primarily due to underutilization attributable to the FDA inspection in July and continuing remediation work, which drove the decline from the prior quarter. Last year, the gross margin was particularly weak because of larger than usual inventory write-offs.

We calculate adjusted gross margin by backing out the items to cost of goods sold detailed in Column A of the Adjustments table in our press release. Our adjusted gross margin of 65.6% was quite strong, relative to our expectations in prior year. We expect somewhat lower gross margins in the next few quarters because manufacturing variances incurred earlier in the year will go through the P&L and because of higher depreciation expense. For 2012, we expect R&D spending to remain between 6% and 6.5% of revenues. In the third quarter, R&D expenses declined slightly versus the prior year to just over 6% of sales.

For 2012, we expect reported SG&A to be in the range of 44% to 45% of revenues, and after adjustments, to remain at last year's level, around 42%. In the third quarter, GAAP SG&A increased versus a year ago, mainly because of an increase in selling expense driven by the shift to orthopedics and increased customer service and logistics expenses. SG&A adjusted for about $7 million of special charges as detailed in our press release was 41% of revenues, up versus the prior year. Most of the increase was in selling expense in logistics. G&A and marketing were flat to down as a percentage of revenue.

In the third quarter, our adjusted EBITDA margin was nearly 22%, up measurably from the prior year period. Our expenses during the third quarter came in lighter than we anticipated, and we do not expect adjusted EBITDA margin at this level in the next few quarters. We will have more to say on the progression of our EBITDA margin at our annual investor meeting and webcast following this call. For the fourth quarter of 2012, we suggest modeling approximately $8 million in depreciation expense, and $6 million in intangible assets amortization, $1.5 million of which will be recorded in COGS.

Interest expense net of interest income and adjusted for the non-cash portion of our convertible note interest was $3.7 million. Our quarterly cash interest payments will likely remain around this level. We recommend modeling total interest expense, including the non- cash portion around $5.5 million to $6 million per quarter. We finished the quarter with $322 million in borrowings under our credit facility and $196 million reported for our senior convertible notes due in 2016. We ended the third quarter with an effective tax rate of 7.3% and an adjusted tax rate of 30.2%. For the full year 2012, we expect our reported tax rate to be around 20.5% and our adjusted tax rate to remain at 30.2%. Our adjusted tax rate assumes the reinstatement of the R&D tax credit in the fourth quarter, but our GAAP rate does not.

We generated $27.9 million in operating cash flow during the third quarter. Capital expenditures in the quarter were about $19.7 million. We expect CapEx to be around $20 million in the fourth quarter and therefore about $65 million this year.

We are raising 2012 guidance for adjusted earnings per share to reflect the successful year to date results, not because we expect a strong fourth quarter. In fact, at least some of the upside in the third quarter reflects spending that was deferred into the fourth. Our expectations for the top line have not increased. We do not expect any fundamental change in the growth expectations for our segments. For the full year 2012, we expect US Neurosurgery revenues to increase low to mid single digits, US Instruments revenues to increase low to mid single digits, US Extremities revenues to increase low to mid 20s, US Spine and Other revenues to increase mid to high single digits, and International revenues to deflect up low single digits with a flat to declining business in Europe essentially offsetting growth else where in the world.

Finally, with respect to the impact of the Medical Device Tax on our 2013 results, we continue to expect the gross effect of the tax to be approximately $13 million. That number does not include offsetting Federal Corporate tax benefits of the Med Tech Tax itself, of which will have more to say when we give our guidance for 2013 on our fourth quarter call in February. We are still considering how we will reflect the tax in our financial statements, but expect to follow the practices of the large cap medical device companies. Now I will hand the call back over to Pete.

Thank you, Jack. We are certainly pleased with our performance in the third quarter, especially on the bottom line. That said, we still have much to do. We've set three major goals for the Company. The first goal is to improve execution on fundamentals, specifically in our operational areas.

Our highest priority is compliance. We are raising the bar in our quality systems, and we are in the final stages of our remediation program in both Plainsboro and other facilities. We do not expect the FDA to return to Plainsboro for another few months. We are on track with our remediation efforts, and we believe we will address each of the new observations we receive in the Form 483 in July during the fourth quarter. Importantly, we have been diligent throughout the Company, aggressively upgrading our quality systems and enhancing capabilities.

The second goal is to optimize the Company, of which we will say much more at our investor meeting following this call. The most important thing that we can do to enable that optimization is to implement common information and quality systems. We expect to go live on our new ERP at our pilot site in the next few months and have kicked off our plans to implement a common global quality system over the next two years. Our third goal is to accelerate growth. Each of our businesses has been focused on evolving their R&D pipeline, as well as seeking business development opportunities that fit well into their portfolio.

In our international markets, we are making good progress on our plans, but results will be lumpy. Just two weeks ago at the CNS meeting, we launched some of the most significant new products in our neuro business in the last few years. DuraGen Secure, a new edition into our dural plastic franchise enabled surgeons to deal with more challenging dural repair cases. Flex Catheter is an advanced catheter that enables both CSF drainage and continuous intracranial pressure monitoring regardless of fluid flow. The new Mayfield composite head holder uses advanced composite material, which allows for more efficient sterilization and offers some ease-of-use improvements for clinicians. Lastly, the CUSA NXT Bone Tips allow surgeons to precisely remove bone near critical structures.

Here in Dallas at the North American Spine Meeting this week, we will be introducing five new products. In particular, we are expanding our current offering of our zero profile standalone interbody devices for neck and lumbar fixation procedures. These products help provide stability and spinal fusion after a diseased cervical disc is removed. In addition to these, our MIS and [deforming] systems launched earlier this year have performed well. The NewPort minimally invasive system has exceeded expectations and is now one of our top selling products. Sales of the Daytona and stainless systems picked up well during the summer scoliosis season.

At our investor meeting later today, we will discuss our long term plans, which will include our efforts to streamline our operations, processes and activities, as well as our plans to accelerate growth through new product launches, the expansion of our sales and distribution capabilities and strategic acquisitions. Each of these initiatives will continue to optimizing -- will contribute to optimizing and growing the Company. Now I will be happy to answer your questions. In an effort to accommodate a large number of requests, please limit yourself to one question and one follow-up. You may rejoin the queue if you have additional questions. Operator, you may now open up the call for our participants.

(Operator Instructions)

Matt Miksic, Piper Jaffray.

Good morning, Matt. Matt?

(Operator Instructions)

Hello, are you there?

Yes, we're here. Can you hear us okay?

Yes. Sorry about that. Just fidgeting with this headset. Thanks so much for taking our questions. Just one -- I guess on the acceleration in extremities, to focus on maybe the good news that that business seems to be doing quite well. Can you talk a little bit about is it products, is it the integration with Ascension that's sort of hitting its pace? Maybe if you could touch on some of the highlights about what's driving the strength there, and then I have one follow-up.

Okay, sure. Obviously we are quite delighted with the performance. I think it has been a good consistency across the board. I think if you look at our regenerative products, our skin products and tissue products have done well. A little bit of that has been some catch-up that we had relative to our manufacturing. However, we have had strong growth there.

In our upper extremities and lower extremities, we have done well. We've introduced some new products over that period. And clearly the synergy that we gained with the integration of Ascension, and what I mean by that is the combination of the new products, the combination of bringing new products from the Integra portfolio to doctors that were primarily using Ascension products and vice versa is really starting to hit stride. We feel good about that growth. And across the board, I'd say it was a solid quarter for us in extremities and really in all of our key areas.

Okay. And then on the neurosurgery side, the capital side of the business, and maybe this has impacted the instruments side slightly as well, but the other folks in the group with capital exposure have also had a tougher time in the back half of the year. I'd be curious -- it'd be helpful to hear what you are hearing from hospitals, what your customers are telling you or your sales reps are telling you in terms of the sluggishness there.

Yes, I think from a standpoint of capital, we are not seeing anything that is akin to what took place a few years ago where hospitals were putting the brakes on capital expenditures. But clearly, and it's similar to what we had talked about in our Q2 earnings call, that we see hospitals being more cautious. RFPs and RFIs taking more time to actually process, more steps and questions involved, and so we see our hospital customers just being more diligent relative to their overall capital, and that's primarily a US discussion, but as I had mentioned on the call, Canada and Australia is two other markets, similar items taking place. We do not project in the fourth quarter that we see any major downside from that as far as a reduction in overall, but we don't necessarily see any rates picking up. We believe it is still going to be about the same level of pace throughout the rest of the year.

Great, thank you.

David Lewis, Morgan Stanley.

Good morning, David.

This is actually Jon Demchick in for David.

Hey, Jon.

On a relatively in line I guess revenue quarter, you all had a pretty strong earnings beat, which was very much built on the margins. And looking at the updated guidance, EPS was rated as $0.05 at the mid point, I guess given the $0.08 beat on the quarter, that kind of shows some sort of a decline going forward. Is that really all driven by the manufacturing variances that you guys pointed out, or are there other factors to consider?

Jon, yes. As we mentioned on the call, there's a combination of some expenses that are moving out and some variations. But I'll let Jack Henneman give a little bit more color on that.

Yes, basically, as we said in the prepared remarks, the margins in this quarter, both gross margin and frankly the EBITDA margin, were higher than we would expect over the next several quarters. I think to some degree, I know for some degree, some operating expenses that might've been incurred in Q3 will probably be incurred, instead in Q4. Also we have manufacturing variances baked into our inventory that will be coming out in Q4 that will hurt the gross margin a bit. There is a little bit more depreciation coming on stream in Q4, so that adds up to somewhat lower margins overall, and I think that will be reflected in the adjusted EPS in Q4.

Thank you. Very helpful, and just a quick follow up on spine, given some comments from competitors, just wanted to see what you guys have been looking at with payer pushback and pods.

Yes Jon, I think -- we don't have a quarter on the market on information. I think we are experiencing the same information as other people have reported. I would say from the pod standpoint, it really has not been an issue for us. We really haven't seen any fundamental changes there. It has been more around the fact procedural approval has been taking longer for certain cases. That's what we really hear from our clinicians. How much of those are delays versus denials, I don't think we have any better insight. But clearly, there are some added steps that are taking longer to get procedures approved, and obviously that has an effect on our overall sales.

Thank you, very helpful.

Chris Pasquale, JPMorgan.

Good morning, Chris.

Thanks, guys. To start with, can you quantify the decline in spine hardware this quarter, was it down consequentially? It looks from the back of the envelope math that it might have been. And how much of that year-over-year decline was volume versus price?

This is Jack. Yes, if you sort of -- we don't break that number out. But if you sort of walk through the logic of our US Spine and Other segment, clearly the spine hardware was down. The effect -- it was down in price, particularly. So we are not going to break it out in full detail, but we definitely experience the pricing pressure that other companies have reported. It had a significant impact. OrthoBiologics number was pretty good, and our private label showed up as well. So that's how that segment lines up.

Okay. You mentioned some new product launches in neuro, growth in US neuro has decelerated each quarter so far this year, even though the OUS decline has moderated a bit. Can these new launches turn that trend in the US around and get that business back up into the mid single digits?

Chris, as consistent with what we've been talking about, really since the beginning of the year, we had a lot of launches that were backend loaded. And as I mentioned in the comments at the GNS meeting, we just really launched a lot of those products. And yes, do believe that we will see a pickup here in the fourth quarter on sales in the neuro business.

Okay. One financial detail, if I could. Could you just remind us what the impact of the R&D tax credit is for you, basically if the credit is not extended, what does that do to your guidance? And that's it, thank you.

Probably about a point, but we haven't precisely quantified that.

Thanks, Jack.

(Operator Instructions)

Robert Goldman, CL King.

Okay, thank you and good morning. A question and a follow-up. The question for Jack on cash flow, that $28 million of operating cash flow, Jack, is that a gross number or a net number? There are issues of accrued interest and some cash impact from executive compensation that you spoke about previously.

So the $28 million for Q3 is a straight up GAAP number. The accrued -- the accreted interest point was in Q2, and the executive comp point's in Q4. So Q3, that's a straight up GAAP number, operating cash flow.

Is that quarterly operating cash flow sort of the pace we should think of for the next couple of quarters?

Well, we don't give operating cash flow guidance, but yes, we did a little over $30 million in each of the first two quarters. Q2 was -- the business generated $32 million or so, was affected by the $30 million in accreted interest, round numbers. But this is, again, closing in on $30 million. It is not quite -- there's a certain amount of volatility in the number. How the cash flow actually comes through, obviously, depends as much on working capital items as it does on the balance sheet -- on the earnings. But I think that that is a good number.

And then if I could follow-up on the Plainsboro inspection with Pete. Pete, if memory serves, and correct me if I'm wrong, in the last quarterly conference call, the FDA at that point, I think was back in Plainsboro and from what you said today, they will be back again, perhaps in a couple of months. If all of that is correct, did they find something three months ago that they just again needed fixed? Did you receive another 483? Why the re-re-inspection?

Sure, so Bob, you're right. At the last call, I said that we actually had the FDA was in. Shortly after that, they closed out the inspection, and we actually made public the 483 that we actually had received. We received some observations within that 483. I think I would say the combination of news, some of the main items that we had, the top highest priority items in our warning letter were not cited as any of the issues. There were other issues relative to certain procedural items and such. And what I had just mentioned on the call was that we have actually addressed those items. We fundamentally had one other item that we're working on and that will really be closed out here in the next 30 days.

My comments about the FDA coming back are just the fact that to lift a warning letter in today's world, the FDA we believe is going to want to come back to do another inspection at the facility. My personal belief is I don't believe they're going to be back within the next few months, but it could be, obviously any time. And it could be out into the first quarter of 2013. And so, we have been in dialogue with the agency, we understand our priorities, and again, relative to the warning letter and the 483 we received in July, we are well on track to getting all of the items closed out.

Okay, excellent. Thank you.

Bruce Jackson, Northland Capital Markets.

Good morning. I was hoping we could get a little more detail on the Biologics piece of the spine business that has been strong now for a couple of quarters. Maybe you could tell us a little bit about some of the market conditions that are helping that growth?

Yes Bruce, I'll comment and I'll see if Jack wants to add any to it. We've obviously had some very strong performance really over the last year. As I had mentioned, two of our big product portfolios are demineralized bone products, and our synthetics continue to do well. We see a lot of the trends, obviously that our taking place in the spine market today are being advantaged by the use of the right type of Biologics. We also have multilevel tiered featured products, so we have third-generation demineralized bone product called Evo3, which as I said, for its price-performance point has been well received in the marketplace, versus other products that are more expensive out there. That is also complemented with the fact that we have been quite successful because of the portfolio of recruiting new distributors in.

And so we have been able to grow our distributor network over the last year, in fact starting in fourth quarter of last year, we had a big addition of new distributors brought into the organization. And so that has helped us out quite a bit with the stronger growth. The only comment that I would make is we will probably be lapsing some of the additions of some of the bigger distributors here in the fourth quarter. And so it is not that we necessarily see our procedure growth slowing some, but we actually see the lapsing effect of those new distributors will probably moderate some of the growth. That all being said, we are still quite bullish about OrthoBiologics, really out through the future. Jack, I don't know if you want to comment?

The only thing I would add is perhaps tempers expectation slightly, is that to the extent that insurers are pushing back on spinal fusions, that is going to eventually hit OrthoBiologics as a market. We think our product portfolio is very strong, and we are doing very well. But I think it would be a mistake to think that OrthoBiologics in spine and not all of these products are used in spine alone, but the OrthoBiologics in spine is immune from payer pushback elsewhere in spine.

Okay, that is very helpful. One other question on the extremities business. So in spine, there has been price pressure on the hardware side. Are you seeing the same kind of pricing dynamics in the extremity orthopedics market?

Bruce, it's Pete. Not anywhere to the level of what we have seen in the Spine Hardware market. But I would say in general, all of the hardware has some level of year over year price pressure. It is why new product launches are obviously a way of bringing in new products with some features that set a new price point. But relative to spine extremities is on a different trajectory relative to any type of price pressure. And I would note that our regenerative portfolio -- again, just to remind you that really half of our extremities business is regenerative products that are quite stable from a pricing standpoint.

Okay, great. Thanks.

You're welcome.

Dale Dutile, The Boston Company.

Good morning, just going back to Plainsboro. It sounds like things are in good shape; however, you have very doubled what you thought it was going to cost this year. Can you explain that?

So I'll comment a little bit and then, Jack, maybe you can fill in some of the other comments. So yes, we've made some good progress overall. One is addressing the FDA items. And then, secondly, taking a look at the overall plant from the standpoint of certain capital investments and other expenses that we put in the facility that deal with two things. One is, obviously, addressing the FDA items. The second part is really about our overall yield and capacity. And so, we believe right now we are in good spot. And as we have been doing all year with the continued growth we are having in our regenerative products is to be able to get more products out to deal with that overall demand. Jack, you may want to comment on just where we are from an expense standpoint.

The only other thing I would say is the number we call out includes a significant piece of underutilization in the facility, essentially the period costs associated with running at less than full capacity. And so that, and we detail that in our Q each quarter; when we file the next one, it will show up there as well. And that increased frankly because we produced less during the period in June and July when we were under FDA inspection. So that was an impact in Q3 that showed up. It's a little hard to forecast that element of it. In fact, that's a significant part of the increment. It's not all of the increment, but it's a part of it.

I have just never seen people -- someone try to back that out. How do you quantify the impact of -- I understand discrete expenses related to an FDA inspection, and the capital costs Peter just mentioned, I assume, are not in that number, they're capitalized, not in period expense. How do you quantify an under-absorption?

Well, I mean, we have a sense of the fully absorbed running of the facility. And the extent to which we produce under that level, attributable to this exercise, we deal with it.

So that would include foregone revenue of some sort? You make some estimate of what you could have sold?

No, we don't look at foregone revenue.

Primarily the cost of products that obviously the cost of goods would go up if the utilization in the plant is lowered. And then that product takes, obviously, an amount of time to work its way through inventory and show out and come out in sales.

Just to put a finer edge on it, we measure it by looking at the delta between normal and actual production hours. So we have a budgeted level of production hours for producing the--

Standard, if you will.

And if we are way below that, that gives us a sense of the cost -- the variance in effect.

Okay.

And it runs through in that period.

You don't expect this to be at zero going beyond fourth quarter? We won't be talking about this anymore? Is that fair?

We'll obviously be talking about what we're doing in Plainsboro, relative to FDA. And we are stepping up supply. And so you're going to hear from that aspect. I think from the standpoint of overall expenses and costs as we have communicated that we believe that most of the substantial investments and cost that we've already put into the facility. Jack, I do not know if you want to elaborate on that.

We expect that the underutilization component will be down a lot in Q4.

Okay. So the FDA will be back in a few months, things will be cleaned up, hopefully, and so you will be fully absorbing everything. And that number should be zero. And if not, something has changed.

Correct.

Okay, fair enough. You mentioned something about a new quality system that will be implemented over the next few years, I guess, globally it sounded like. Is that correct, and could you elaborate on what you are referring to?

Yes, and what I'm speaking to is not necessarily a new quality system, but we are actually creating a common quality system structure throughout the company. Obviously we have compliant quality systems throughout all of our plants and facilities around the world, but as an example, how we may approach [CAPA] or certain parts of the [820] regulations, there might be slight differences and nuances. And what we're going to move to is what a lot of other companies have done, is that we will do that consistently in all places around the world. Why is that important? The more that it's simplified and consistent, we will believe will be able to execute it more effectively as we move people around to different parts of the company. We have actually more common systems that makes us more effective. And ultimately we think we can deliver higher quality at a better cost point. It's not necessarily new systems, it's actually our processes on the systems and tools we already have.

The large expense side, or was something in the normal course of business?

It's pretty much within the normal course of the business is how we see it.

Okay. Thank you.

Thanks for your questions.

Amit Bhalla, Citigroup.

Hi, this is Nick in for Amit. I have a few questions for you. One on your legacy foot and ankle business and in extremities, how is the competition impacting performance in that? Thanks.

Well, I think as we reported a very strong quarter in overall extremities, we clearly are seeing more players in the market, I think that's no surprise. We've talked about many folks have had out there, but what really helps us differentiate ourselves is our broad portfolio, the addition of the Ascension products, having some new technologies such as PyroCarbon and a lot of our soft tissue products help us to differentiate that way. That being said, we are clearly seeing more people, more competitors showing up in podiatric as well as orthopedic centers that we didn't, say three or four years ago. What we have been focusing on is obviously bringing new products out and being able to really have a focused sales force that calls on many aspects, specifically in the upper, the lower extremities, as I had mentioned.

Again, to remind you, we have a direct sales force out there that reaches all of those areas. And we feel quite good about where we are at. The fact is, though, because of the growth in extremities, it is an interesting areas for many folks. And so we are seeing increased competition. At this point in time, we are doing well. And as I mentioned earlier, we really haven't seen any major impacts at this point on overall price within the segment.

Okay, that's helpful. And then one last question. On your recent shoulder product that came out, how is the recent launch going with some of those?

Yes, so -- if you remember, we purchased a shoulder platform, really; it came part of Ascension. That really brought us into the overall shoulder market. The key with that product is that we still have a few components that are in the R&D land that are going to be coming out here, really within the next six months. One of those is a reverse shoulder to really supplement the overall portfolio. Quite candidly, it's a rather lukewarm at this point in time. But, then again, that's pretty much as we had expected. And as we fill out the portfolio, particularly with the reverse and some other products, we think we are going to have a very good opportunity to take advantage of this $700 million market.

Okay, great. That's helpful.

David Toung, Argus Research.

Yes, good morning. Two questions that I have is on your -- if you can comment on the competitiveness in the spine market. We've had some players who have under performed; you talked about the insurer push back. Given that with the acquisition you made last year, you clearly see the opportunity to gain share in a highly fragmented market. So given that, how do you see -- a little more details on how you see the competitive landscape. And where are your opportunities?

Yes, so David, this is Peter. I will make a couple comments and then, Jack, if you want to jump in. I'd also comment for everyone, we're going to spend some time on this as well, later today at our Investor Day. So we will talk. Fundamentally, if you look at spine, and I just want to rebounds, why we move into spine? It is still a very large market with we believe a lot of potential for a company like Integra over the mid- to long-term range. We think about that over the next three to five years.

As far as the aging population, where it is headed, technologies that are out there, really what leading technologies are going to evolve. Those are primarily going to be regenerative, which is one of our core competencies. That being said, to your question, David, the market now, we don't think it's going to change in any quarters anytime soon, are going to be rocky. And so what we have seen as I commented in my prepared notes is very consistent with what you heard with other folks so far from some of the earnings reports, that a lot of the procedures, the demand has been out there. But a lot of the procedures are getting added questions, added components that either are delaying or having surgeons specifically have to address the payers' needs that in many cases they haven't had to do in previous quarters. That results either in procedures being delayed, and potentially cancelled.

I don't have any facts relative to what that mix is between delays or cancels. I think that Jack's point is well on OrthoBiologics. We have done quite well, but the phenomena also can affect the biologic the same way it can a metal implant. Clearly, the metal implants have had a bigger impact, mainly because of pricing pressure and the combination of these, where we haven't had the same type of pricing pressure in overall orthobiologics. Jack, any other comments you'd add?

No. I think we will have more to say at the analyst meeting. I hope people dial in for that starting at 9.00 Eastern. Excuse me, 9.00 Central, 10.00 Eastern.

All right, it's great. Looking forward to the -- to that portion of the meeting. Thank you.

Thanks, David.

Michael Rich, Raymond James.

This is Michael in for Jason, congrats on the nice EPS lead this quarter. My first question is for Jack. I was wondering if you could elaborate a little bit on the manufacturing variances that are going to cause gross margin to come down in the fourth quarter?

Yes, I mean, these are just variances that went through -- recall we operate through a large number of plants. We have a complicated supply chain. And when we don't produce as efficiently as we expect in a particular plant, those extra costs will go into the inventory and then they come out of the inventory according to the pace at which those products are sold, in effect. And the consequence flows through the P&L. The flip side is if you do better than you expect, the benefit flows through. We therefore know we will have somewhat higher variances and therefore, somewhat lower gross margin in the fourth quarter, based on costs that are already in the inventory.

Understood. Just a quick follow-up. Apologize if I missed this. But could you quantify the impact from Ascension on revenue this quarter?

No. We did not quantify the impact on Ascension. What I can say though, is when we file our Q, there will be pro forma numbers in there, and you can take a look at that. We report pro forma numbers, which are not actual results, but rather pro forma for our acquisitions every quarter in the Q, and you can go there.

Great, thanks a lot.

We have no further questions in the queue at this time. I'd like to turn the conference back over to management to offer any additional or closing remarks.

Great, thank you very much for joining the call. And again, the webcast of our investor presentation will begin at 10.00 am Eastern and you can get the link on our website, www.integralife.com. Thanks.

That concludes today's conference. Thank you for your participation.