Integra Lifesciences Holdings Corp (IART) 2013 Q3 法說會逐字稿

Good day, everyone, and welcome to the Integra LifeSciences 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 Ms. Angela Steinway, Head of Investor Relations. Please, go ahead.

Good afternoon and thank you for joining us for the Integra LifeSciences third quarter 2013 earnings results conference call. Joining me today are Peter Arduini, President and Chief Executive Officer; Jack Henneman, Chief Financial Officer; and Bob Davis, President of US Neurosurgery. Just after the market closed, we issued two press releases announcing the acquisition of the DuraSeal product from Covidien and our financial results for the third quarter.

Certain statements made during this call are forward-looking, and actual results might differ materially from those projected in any forward-looking statement. 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.

We will reference the financial results in the press release and will not restate the individual numbers. As a result, you may want to keep a copy of the release handy during the call. I will now turn the call over to Pete.

Thank you, Angela. Good evening, everyone. We're very excited to announce that we have agreed to acquire the DuraSeal product line from Covidien.

This transaction has significant merit. The DuraSeal product line fits extremely well with our neurosurgery growth strategy by providing a broader set of solutions for surgical procedures in and around neurosurgery.

In addition to its strategic value, this deal will add scale and increase profitability by every measure without introducing new complexity into our structure. We believe that it will create significant value for our customers, employees and shareholders alike. Later on during our prepared remarks, Jack and Bob will discuss the commercial benefits of the acquisition in more detail.

We have also turned the trajectory of our core business. Notwithstanding the quality and supply issues we face this year, this quarter our revenues grew sequentially and year over year.

We started executing on our long-term plans to improve our margins 300 to 400 basis points. As many of you know, we had delayed part of those plans so that we could focus on our supply chain. Last week we were pleased to report that we've started the process of consolidating two more of our manufacturing plants.

The Burlington and Andover manufacturing consolidations would together generate annual savings of about $4.5 million beginning in 2015, which would be an important component of our margin improvement. We have a focused plan and a dedicated team in place to carry out a smooth transfer from Burlington into our Cincinnati and York facilities, improving capacity utilization in both sites and advancing our centers of excellence strategy.

In Andover, we are consulting with our employee representatives in accordance with English law to transition production into our Ireland facility. These two facilities, coupled with the three locations we consolidated in Q4 2012, have us on our way to simplifying the footprint of the Company.

We also quantified the revenue impact of products we're discontinuing. We have eliminated these products to enable our teams to prioritize the ones that represent the most value to their customers, generate better growth and profit for Integra, and reduce the associated costs and regulatory load.

In addition, we have identified the revenue associated with the specific lost business in our private label area, which historically has had higher gross margins than the other products in our portfolio. Although we may win some back over time, our revenue from those customers will be significantly lower than it has been historically. We expect to report the revenues for this same group of products for at least the next few quarters so you can assess the growth in our continuing business.

Last month we announced that the FDA lifted the warning letter in our Plainsboro, New Jersey manufacturing facility after a good inspection in August. Our teams at the site and at the corporate level have made significant improvements, and our quality system and capabilities are in good shape. I am very proud of the teamwork and progress made in our New Jersey facility.

In addition to this success, our manufacturing teams in both Plainsboro and Puerto Rico have exceeded their production targets for our critical regenerative medicine products. We added a third shift and improved our yields to more than double the capacity of our collagen products in Puerto Rico. We are now building inventory back to targeted levels.

Great execution by our global operations and manufacturing teams resulted in a faster than expected production recovery in DuraGen supply. Now that supply has been restored, our sales team is regaining momentum in the market.

We still have two warning letters outstanding at our Andover, England and Anasco, Puerto Rico manufacturing facilities. In Andover, we have met and reported all committed actions to the agencies and are awaiting a reinspection notification.

In Anasco, the FDA began its first post warning letter inspection of the facility last week. This is an expected part of the follow up to the warning letter.

Remember that it took a couple of inspections to clear Plainsboro. While we believe that we're doing the right things in Puerto Rico, we also know that the FDA is especially careful in these circumstances.

We do not expect to comment on or to discuss that inspection until after it has concluded. We will communicate to you after the inspection is over and we have analyzed the results.

Turning to the top-line results for the third quarter. US neurosurgery revenue increased 4% over the third quarter of 2012.

DuraGen increased 8%, reflecting a successful campaign to win back customers negatively affected by the recall. Cranial stabilization and stereotaxy sales also contributed to the top-line growth, both in capital and disposable components.

Overall, sales of neuro capital products were strong. Softer sales in tissue ablation and peripheral products partially offset these increases.

All in, we're very pleased that the commercial team in neurosurgery delivered significant growth under very challenging circumstances. This is the same best in class team that will drive growth in DuraSeal after we close the transaction.

Our extremities business grew 2% over the prior period. Our hardware product lines grew about 10%.

Our hospital and surgeon customers reported fewer large burn cases than expected, which had an impact on our sales of large sized skin. This resulted in a mid single-digit decline in skin and wound revenue, the largest component of the extremities segment.

While we are disappointed by the skin weakness this quarter, our outlook for that product family hasn't changed. We are working to improve our skin and wound sales through targeting customers and channel enhancement. We will be adding selling resources this year and in 2014.

Longer-term, we expect our DFU study, which will complete enrollment at the end of this year or early 2014, will expand the market for our skin products. We're also excited about our hardware prospects, in particular our shoulder launch. The feedback from surgeons on the controlled release has been quite positive, and we expect the product line to start to take off in the first quarter.

US spine and other, which includes our private label products, decreased by 5%. The Anasco related supply shortage and long-term decline in sales of one of our larger partners continued to significantly reduce private label revenues. We expect both headwinds to persist into next year.

Our performance in spine hardware lagged the overall market in the third quarter, but we are making progress with new product launches and new distributor improvement that we expect will drive new momentum in the business. Increasing sales of our OrthoBiologics products offset some of the decline in the overall segment.

US instruments revenue increased 1% versus prior year. A strong performance in our lighting product line and a modest increase in alternate site drove the increase.

The discontinuation of low margin products in this segment allows our team to prioritize product lines that generate higher overall profit. Although, in the near term, it results in a lower reported top-line growth rate. In addition, acute care sales posted a modest decline against a strong prior quarter.

Revenues in our international segment increased 6% over prior year. Our spine and neurosurgery franchises drove that growth both in Europe and the rest of the world. This performance is in line with our expectations, and although we are dealing with planned changes within our distribution channels, we anticipate growth accelerating in 2014.

Now I'll turn the call over to Jack to discuss the financial results in more detail and provide an update to our 2013 and 2014 outlook. Jack?

Thank you, Pete. We met our guidance and expectations for the third quarter on both the top and bottom lines. In addition, we were pleased with how well our teams kept spending in check and managed working capital, which helped drive operating cash flow back up to historical levels.

That said, we have a lot of work to do in 2014 and do not expect our path to improved profit margins to be a straight line from here. Now, I will walk through the P&L results and our updated expectations for the full year.

In the third quarter, GAAP gross margin declined 1.5 points versus the prior-year period to 61%, primarily as a result of higher ongoing quality costs, higher manufacturing costs and the medical device excise tax, which we report in cost of goods sold. We calculate adjusted gross margin by backing out the adjustments to costs of goods sold detailed in column A of the adjustments table in our press release.

During the third quarter, our adjusted gross profit margin of 63.2% was down 2 points from the comparable measure in the third quarter of 2012. For 2013, we expect reported gross margin to between 60% and 61% and adjusted gross margin to be between 63% and 64%.

In the third quarter, R&D expenses remained flat versus the prior year at 6% of sales. We expect full-year R&D spending to increase a little over 2012 and to finish around 6% of sales.

GAAP SG&A during the third quarter increased significantly versus a year ago, mainly because of higher selling expense in extremities and neurosurgery, greater logistics costs and higher headcount. SG&A, adjusted for special charges as detailed in our press release, was 42.5% of revenues, up 1.5 points versus the prior year. For full-year 2013, we expect reported SG&A to be around 46.5% of revenues and after adjustments to be around 44% of revenues.

We conduct our annual impairment test during the third quarter. We reduced our expectations for the spine business because of continuing challenges in the market and some Company-specific issues. As a result, we recorded a non-cash charge of $46.7 million in the quarter to impair all the goodwill associated with our US spine reporting unit, which is part of our US spine and other reportable segment.

The third quarter, our adjusted EBITDA margin was 17.6%, down about 4 points from the prior-year period. For the final quarter of 2013, we suggest modeling approximately $7 million in depreciation expense and approximately $4.5 million in intangible asset amortization, $1.5 million of which will be recorded in COGS.

Cash interest expense net of interest income was $3.6 million in the quarter. For the last quarter of 2013, we recommend modeling approximately $5 million in total interest expense.

During the third quarter, we recorded about $300,000 of other expense. We recommend modeling this line item as zero going forward.

We ended the third quarter with an effective tax rate of 18.5%. The lower income within our US-based operations relative to our foreign operations creates a favorable impact on our effective tax rate.

On the other hand, the goodwill impairment has a negative impact on our effective tax rate because minimal tax benefit can be recorded on this charge. For the full year of 2013, we expect our reported tax rate to be about 36%. Our adjusted tax rate was 25.5% in the quarter, and we expect our full-year adjusted tax rate to remain around 26%.

We generated $31 million of cash from operations during the third quarter. The return of operating profits exclusive of the non-cash spine goodwill impairment drove the improvement.

We invested $13.5 million in capital expenditures in the quarter. We expect to finish the year with around $55 million in CapEx, down from $69 million in 2012.

I will now provide some color on the 2013 full-year guidance that we modified in the press release this afternoon. Within that guidance, we expect US neurosurgery revenues to be up low-single digits, US instruments revenues to be flat to down low-single digits, US extremities revenues to increase low-double digits, US spine and other revenues to be down upper-single digits, and international revenues to increase mid-single digits.

We have tightened some of our revenue ranges for the full year, moving US neurosurgery to the center, US extremities to the lower end, and US spine and other to the lower end, from when we last guided in August. All other segment ranges remain unchanged.

As Pete mentioned, we're excited about the prospects and great fit of the DuraSeal acquisition. The acquired product lines generated approximately $65 million of revenues for Covidien in 2012, have gross margins in line with our regenerative medicine products, and will come to Integra with relatively low operating expenses other than for sales and marketing.

We will not take on any new facilities, do not expect substantial capital expenditures under our ownership and expect to add fewer than 50 employees around the world. All in, this acquisition is a near-perfect fit for our customers, our organization and our shareholders.

We are considering alternatives for the permanent financing of the acquisition with an eye toward balancing financial flexibility and balance sheet efficiency. Because of the financial significance of the acquisition and its financing, we are going to depart from our usual practice and give some preliminary 2014 guidance with wide ranges.

Assuming the acquisition closes in the first quarter, taking into account both the accretion from the acquisition and alternative financing scenarios and considering the impact of the product discontinuations, we anticipate consolidated 2014 revenues of $920 million to $950 million and adjusted earnings per share of $3 to $3.30. The acquisition should also contribute to operating cash flow in the second half of 2014 after we invest in working capital and transition-related expenses.

Finally, the acquisition is very accretive and objectively attractive from an ROIC perspective. We expect it to reach or exceed our cost of capital in the third full year following the close of the transaction.

For 2015 and beyond, we expect the transaction to be substantially accretive to both earnings and operating cash flow. We will of course update this guidance and include more details on our fourth quarter call in February when we hope to have closed the acquisition and have completed our 2014 operating plan.

This deal combined with the increasing momentum behind our optimization plans has the potential to drive an even stronger performance in 2015. At that point, we will have had most of the year to hit our stride on execution with DuraSeal, which is just one of several growth opportunities we have ahead of us.

Now I'll hand the call over to Bob Davis.

Thanks, Jack. With the acquisition of the DuraSeal product line, we see a great opportunity to drive our neurosurgery growth strategy, aimed at providing a broader set of solutions for surgical procedures in the head. The neurosurgery product portfolio will now have products in both dural grafting and the very different indication of dural sealing.

DuraSeal is the first to market and only approved dural sealant for use in both cranium and spine. This is an important product for our neuro sales force, and no sales force in the world is better positioned to grow this product than ours.

The surgical approach a neurosurgeon chooses when closing up a patient often depends upon whether the dural defect is capable of taking a suture. Today, many neurosurgeons choose to use DuraGen collagen graft to help prevent cerebral spinal fluid leaks known as CSF, especially in patient segments where suturing the dura closed is not a viable option.

The addition of DuraSeal to our portfolio allows us to provide neurosurgeons with a new CSF leak prevention option for patient segments where they can suture the dura closed. We are now in an excellent position to offer surgeons both of these options and serve more patients than ever before.

Shortly after the deal closes, I look forward to discussing our commercialization strategy with you. Again, we see this as a great fit into our neuro business.

As Pete commented earlier, we have a strong sales and marketing team, and I'm optimistic about our potential with this new line. With that, I'll turn the call back over to Pete.

Thanks, Bob. Let me echo Jack and Bob's comment, this is a really exciting deal for our team.

The DuraSeal product line fits right into our wheelhouse. It adds scale.

It is straightforward from an integration standpoint into our neuro business. DuraSeal with the PEG technology is also a platform expansion of our regenerative medicine capabilities.

As a reminder, we have the largest direct sales force calling on neurosurgeons in the United States and an extensive network around the world. They have the capacity and energy to drive value with the addition of this product line. I look forward to seeing what the product line can do in the hands of our global neuro team.

Switching gears to progress on our growth and margin improvement strategy. Execution has improved a great deal in our quality organization and in our supply chain. We now have supply and safety stock for nearly all of the DuraGen SKUs and can then meet the needs of the customers that are still affected.

In Q3, we were able to begin converting new accounts again. We believe DuraGen revenue is down by low-single digits as compared to pre recall levels, and we have identified the accounts where we've lost orders. We have specific programs in place to win back customers, and the sales team has begun to retake lost ground in the first half.

Progress along our optimization strategy is coming into view with the two site closures we announced last week and the discontinuations of non-strategic, low-margin products. This was also a good quarter for new products. We began our limited release for the reverse shoulder system in mid August.

Shoulder surgeons have been commenting positively on the simplicity of the system and the benefits of the platform stem design. We are already seeing the importance of having a complete system with both primary and reverse options. This has allowed us to approach surgeons who wanted to have multiple implant options for different scenarios in the operating room, and CE marked and a full domestic launch of the reverse shoulder are expected in Q1 2014.

We also recently initiated a full-market release of the Proximal Humeral Fracture Plate system in the United States and are preparing for an international launch. The system has some nice advantages over market leading competitive plates, and this system rounds out our portfolio for fracture treatment, which includes a hemi- and reverse-arthroplasty option. Overall, we're optimistic about our position to gain share in the shoulder market.

In spine, we introduced a titanium-coated version of our Hollywood device, Hollywood NanoMetalene, which will primarily be used for TLIF procedures. This great new product provides surgeons and patients the surface characteristics of titanium and the radiolucency of PEEK-OPTIMA. We also introduced the Integra Laminoplasty system, a comprehensive, easy-to-use solution for treating spinal stenosis.

Reflecting on the first half of the year, we had significant quality and supply challenges, but our teams rallied. We've logged important accomplishments across the board.

We have more work to do in these areas and commercially, but our progress to date has been real. We're gaining momentum advancing our strategy.

Fundamentally, our trajectory has changed, and we are headed in the right direction on all fronts. I am optimistic about our potential to grow and the impact our cost saving initiatives can have, particularly in 2015 and beyond. Integra has a great future in front of it, and we are executing on our objectives we laid out a year ago.

Now we'll 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 turn our call over to our participants.

(Operator Instructions)

Amit Bhalla, Citi.

This Nick Nolling, actually, in for Amit today. Maybe first to talk about 2014 guidance, I appreciate initial color you gave there. Can you just talk a little bit about the underlying growth and looking at EPS and what is the impact, too, from DuraGen in 2014 -- or from the DuraSeal acquisition in 2014? Just to parse out where we can see an underlying EPS growth from the acquisition?

This is Jack. We're looking at this from a number of angles. The first thing to remember is, we don't ordinarily give guidance until February. The reason is, is because at this point in the year we're not done with our 2014 operating plan. So, that's point one.

Point two, we don't know when in Q1 we will be in a position to close this transaction, so that has an influence over the shape of 2014. Finally, we haven't settled on how the balance sheet will look after we have financed it and close it.

When you take into consideration all of that, we felt that it would be useful to give a consolidated result that encompassed a wide range in both the top line and adjusted EPS to take into account the puts and takes that we feel are probable but haven't settled on, given all of those variables. That's the philosophical approach.

If you look at the business that we are proposing to acquire, we gave you information on the top line. We gave you information to estimate gross margin. We told you that operating expenses were relatively low.

So, you can model up to your own conclusions as far as that goes. We'd like to leave it at that for now given the range of possible scenarios we're looking at. We'll tighten it up in February when we report Q4.

Great. Okay. Then one more for me. Just big picture wise, what's changed in the business in the sense is there is just a lot of moving parts in this business of working through the FDA, issues working through the supply chain, optimization issues, then, adding an acquisition and the integration into that?

What has changed, just realized to take on this added acquisition into, do that currently right now? Have you seen an inflection in points in some of these supply issues that you think going forward?

Nick, in a word, execution. When it comes across the board from our sales team clawing back share that we were down when we couldn't deliver to our supply chain, being able to double the output to meet the increases that we need, to our quality team in concert with our operations team being able to make the proper changes to be able to lift a warning letter. It's the things we have been focused on. There's not a lot of magic, it's just a lot of hard work with a lot of smart people working as a team.

The timing on this deal I think is right. We're on the right trajectory as we commented on.

From a standpoint of a organization that could fit this into the bag, again, from a call point standpoint, it's dead on. Our understanding of, obviously, all of the types of dura repair capabilities is our sweet spot of expertise.

We'll talk more about at the time of close. Again, this is just assigning what our plans are from a go-to-market standpoint, but it fits in quite nicely, well into the overall bag. A lot of the work that we've been focused on the past few years, we're really starting to get some good traction on.

Okay. Great.

Chris Pasquale, JPMorgan.

Start off with on the DuraSeal deal, can you give us any color on what that product is on track to do in 2013 revenues? Or maybe how much sales were up during the first nine months of the year?

We are not going to disclose that right now. Suffice it to say that when those numbers become available -- our do diligence suggests that they won't be surprising in any direction.

Okay. Understanding that you are going to narrow down the 2014 outlook at some point, but can you quantify the kind of accretion you're expecting in year one?

Well, we gave you the pieces to build up an accretion model under different scenarios. That included estimates for revenue. That included some direction on the gross margin of the product line. And that included some vehicles for thinking through what the operating expenses might be.

Obviously, the total accretion is partly a function of the financing strategy that we end up pursuing, the timing of the close and so forth. So, rather than give you the specific bridge, as I said to Nick a moment ago, we are looking toward a package of different scenarios that we believe add up to landing within the ranges we've described.

Okay. The reason I ask is that your preliminary 2014 outlook basically brackets where consensus was coming into today, which obviously didn't include any accretion from the DuraSeal deal. Broadly, was there some place where you think street models were too aggressive relative to the base business?

Well, we haven't developed or finished our 2014 operating plan, but suffice it to say there was quite a wide range in the street numbers. I think in this case, since we hadn't given any guidance, hadn't really talked about 2014, we said things like, our footprint initiatives have been delayed. We had a sustained potential impact on certain of our business from the supply issues in the first half of the year, and so forth. That has led to, call it a wide range, wide distribution among our various analysts.

I think looking at the consensus, and this one case might be, not give a complete picture. Rather, we would suggest that you take into account the full picture of what we are saying here and try and work your way in the direction that we are proposing with a preliminary guidance for 2014.

Okay. Thanks.

Matt Miksic, Piper Jaffray.

One, on the DuraSeal acquisition and then just a follow up on extremities. As I understand it, it sounds like you're -- is this going to be able to be sold directly through the field force you have in place, the folks selling DuraGen currently? Is that one of the elements of the story here that makes this such an attractive acquisition in your view?

Yes, Matt, again, we haven't laid out what the channel will be. In particular, when it comes to our US selling force, yes, it is a direct fit within that channel. It fits well in many other places, particularly as you think about spine and you think about around the world where there are distributor structures that Covidien has already in place, or we have.

There is lots of opportunities to take a look at different go-to-market plays. Yes, it is a nice sweet spot for sure of what our core neurosurgery channel does.

And there is no -- I guess you're taking into account, and this is just a clarification, again. So, on this, as you're taking into account some transition of that product line away from the current field force or distributors into your channel and baking that into the revenue estimates you have given us. Is that right?

What we're thinking about, when you think about revenue is less about channel it's more about when the deal ultimately closes. There's also, relative to the product line, there is a few other products that come in this deal that aren't core around DuraSeal. Have we evaluated how we'll go to mark with those, what value they would have, those are some the other items that we've taken a look at relative to how we thought about the projections.

And yes, as any transfer from one company to another, obviously, there is some level of minimal dis-synergies, if you will. As this lines up with our team, it is a very good fit and a strong alignment from how we go to market.

Great. On extremities, one clarification and maybe any color you could provide. I don't suppose there is much ascension in your extremities number currently, the 10% growth you gave?

Whether or not that is true, I would love to get your sense of what that tone of that market on the metal side looks like? Understanding you had some skin product line issues that impacted the total number, but, maybe just what the tone of that market feels like, given maybe the tone of some of the other surgical and orthopedic markets that we cover?

That is a good question, Matt. I will just frame something up for you and for everyone else so they know.

Just to keep in, mind our extremities business, versus other out there, about 60% of our extremities business is soft tissue for the most part, 40% is metal. Where a lot of the people we compete against, 90% of it is metal. A lot of the guys that are having larger growth, a lot of that is coming from the shoulder product.

So, when I take a look at that way, my comments on wound and big skin, they are driven by larger wounds. Our clinicians have come back and it was actually a slow window of time. We don't think that market has changed much.

To your point on the hardware side, we still see a quite a robust market. In our world there isn't a ascension and legacy Integra business thing where we've rationalized those lines. So, we have an upper and a lower, and combined we actually had a very nice metal quarter.

Keep in mind that is with very minimal shoulder business at this time. That is traditional rear, mid, hind foot, fore foot business as well as hand and wrist. Minimal elbow and minimal shoulder within that number.

We feel quite good about how that core business is growing. At the same time, is competition picking up? Are we actually seeing more procedures because of the category growth? In general, yes.

We are quite excited about to get the shoulder into the mix. We also have some new launches coming out within the extremities line, as well, that we think are also going to help even expand our growth going forward.

Thank you.

David Lewis, Morgan Stanley.

This is actually Jon Demchick in for David. The 2014 guidance, if you back about three to four quarter impact from DuraSeal, appears to factor in a good deal of organic acceleration beyond the 2012 number, as to not include the impact from the Anasco recall, even with some of these discontinued items that we have talked about.

Can you discuss the main drivers of this acceleration in 2014? What can get us closer to the top end of the range versus the bottom end?

I'll just make a couple of comments and then, Jack, you can comment relative to that. Overall, from a standpoint of our business, I think the first part is, as Jack was framing this up. We have actually moved more expense into 2014 based on one item.

The recall that happened the first half of this year forced us in many cases to delay some things six months to a year. Some items are probably nine month. Some items are 12 months. Obviously, we commenced most of that.

The challenge with that is, that pushed more expense into 2014 that could have been taken in 2013 and it moved most of the benefits from those programs out of 2014 into 2015. So, that is a framing point.

Now, your point about the accretion, it's a fair one. I think we've got some good momentum, we believe, in our neurosurgery business. Across our operation relative to supply with a lot of changes to leadership that John Moratey and his team have brought in. We feel more confident about our ability to produce and meet broader demand.

I also remind you that we have got a lot of new products that are coming into the portfolio. Shoulder by itself is a product that in many cases is six to seven times a higher ASP than the traditional product. We think we've a very unique product that's going to help drive growth.

Our neuro business as well, we haven't talked a lot about it, but has new products into the bag, as well as international. We've been working on a lot of our registrations. The short answer is, good core organic growth that's going to be able to get us there.

It's, obviously, operating on top of a higher planned cost base, and that cost base will decrease over time. The majority of that, obviously, is going to be landing in 2014. Not as we had planned, but as we had corrected for after the recall.

Jack, I do know if you want to comment?

Yes, to talk about the organic growth, I'd say in 2014 we will have, for the first time in two plus years, a sales organizations across the Company that can have a high level of confidence in supply. We haven't had that, for one reason or another, across the board for a couple of years. That is going to make a big difference for us from a organic growth point of view in a number of our businesses.

That, coupled with the fact that as we have discussed, ad nauseam, we've got a series of important product launches. The highest profile of which is the shoulder. We believe it raised the significant prospect of pretty good year-over-year revenue growth in our legacy businesses.

Thank you. Just a quick follow up on some of the changes that were made towards the top line of 2013 guidance. You guys lowered a few, neuro, extremities and spine slightly. I just wanted to discuss if those lower growth profiles were more Integra related, whether it's a supply issue or to discontinued items, or if it was related more to the market?

Yes, I would say, John, when Jack commented about our neuro businesses is in line with our recovery plan and our instrument business as well. For the most part, what these are just tightening around those ranges. Obviously, with where we have tightened down extremities is tied to a result here with the skin in the third quarter and not that much time left in the clock, really, through the end of the year. Our spine and other, particularly, on our items commented about some continued decrease to the private label partner.

Those are the particular reasons. Probably less specific market items and more specific things that are around Integra. Again, we wanted to tighten around our range here coming into the last quarter of the year.

Thank you, very helpful.

Larry Biegelsen, Wells Fargo.

It is actually Craig on for Larry. Just quick question on the implied Q4 guidance. It looks like growth ramps substantially, and I know previously in the year you mentioned that there could be some pent up demand that would impact Q4.

Just wanted to see if you could quantify that amount in Q4? If there was any of this pent-up demand in Q3 results, as well?

Yes, Craig, I'll make a couple of comments. This is Pete. Then if Jack -- maybe give you more detail on it.

Obviously, with the supply recovery that has been going on, a lot of that has been we've been really catching up in Q3. Some of the effects that have played out into Q4 in some different product lines throughout the Company.

On top of Q4 we traditionally have a reasonable ramp up over Q3, and with the effects of the recall it creates a little more of a step up than normal, I would say from our normal run rates, because we had a deficit, obviously, in the first half of the year. I don't thinks it's a whole lot more than that. Jack?

I think we are experiencing and we're in the middle of, call it a recovery from the first half. It is not complete, but it is real. To make an observation about Q3, rarely, -- well, we've never really had a big increase in our baseline revenues from Q2 to Q3. This year we had a significant one and it almost exactly matches the reduction and the back order from the end of June to the end of September.

If you think it through, there is some remaining opportunity for us to have incremental revenues in Q4, vis a vis existing backlog. We don't want to quantify that, there is a lot of moving parts involved. The thesis that we anticipated when we guided people to the third quarter came through. Some of that is still a factor in the fourth quarter, in addition to the usual, traditional fourth quarter push that we get because of hospital budgeting cycles and all the rest of it.

The only other point I'd add is that we're having a nice ramp of some new products. The one, again, that Jack commented in our prepared points was about shoulder. We've got neuro monitors within our neuro business. We've got selective other products that were launched mid year and then by fourth quarter we start actually picking up some additional volume, which gives a little bit more growth in Q4 versus prior quarters as well.

Okay. Thanks. That's helpful. Quick follow up on the DFU product.

Just wanted to get your sense, has your timing changed at all? I know you were looking to file in mid 2014, I believe. Just wanted to get an update on your thoughts there?

Yes, so I would say, Craig, the short answer is no, not a lot has changed. We actually feel quite good to be on track, as I think I mentioned, that we have said Q1 or Q4 of this year to have the study closed out and then six-month follow up, which would take us to mid year. At that, point, then be able to commence actually the submissions to the agency, which then can be a nine-month to a year process, or more. I would say the timeline that we laid out, we actually feel cautiously optimistic that we are on track and moving forward at a good clip.

Great. Thank you.

(Operator Instructions)

Daniel Solis, Barclays.

Just a quick one on DuraGen. Can you discuss the customers other use competitive products then when you guys were off the market? I know addressed on the call that you've identified some of the accounts. Can you talk about your level of confidence that you can get these accounts back, or what can you do to incentivize these customers to come back?

Yes, Daniel, let me comment, and I've got Bob Davis in the room, he's the president of our neuro business, maybe to add some more color to it.

In the last call you might remember I had mentioned that about 85% of our customers, we've been able to stretch do the right things to be able to take care of them through this recall, but about 15% we were shorted and they had to go with other players. I can't necessarily give you the specifics, but it is a rather small market. It is the usual suspects that people went to, to be able to get what was the right supply to needed to meet their needs.

In the interim, a big focus has been by Bob and his team coming into Q3, when we had supply at adequate levels, which is what we reached in the second part of Q3, is to be able to go back on offense and bring customers back into the fold. I think Bob and his team, I think have been very successful taking that 15% risk down to really low-single digits. That's been a part of really the brand and the capabilities.

Bob, maybe you want to share how we think about the universe of accounts and maybe what we're down to and what we have been doing.

Dan, this is Bob. First off, there was a really, obviously a strong effort there and a lot of trusted relationships over the years. The first we did was really get in there and understand the individual account needs around their surgery volume. So we could literally move supply around to take care of those customers that need to try and minimize any customers going without. There is a big strategy around that down to the account level.

We also had a various amount of win-back programs in place to help the customers' understanding around strength of the brand and the clinical papers with over 10-paid clinical studies in over 1,400 patients to really stretch the brand of that. When the product supply came back, customers were waiting. Right now, in about plus or minus 1,800 customers, or 1,800 accounts in the US, we have about plus or minus 50 customers to win back. We're really focused around them and an individual basis to win them back and move forward. Overall, just a really good effort by the team to make sure that we get those customers back.

As I commented on, I think this is really in the sweet spot of our expertise of our over 120 folks that are out there, that not only have strong relationships, and relationships are quite important, but these guys are real pros when it comes to the clinical expertise. I think that coupled with the strength of the brand has made a difference for us.

All right. Thanks. That's helpful. Just one quick follow up, if I could, on Titan Reverse.

Before you guys had this on the market, you just had the primary system, so that did not gain too much traction. So, you've had the product commercially released since the beginning of 3Q. Why is it a six-month wait until we actually see some type of contribution, given that you had a low revenue base to begin with? Asked differently, is the launch progressing any differently than what you were thinking three or six months ago?

Let me just correct a couple points. To your point about having a total shoulder and no reverse, in the United States in particular and really around the world, it isn't a complete offering. We've had a partial offering.

The reason it is a partial offering is, as you probably well know, is that most surgeries still go in with a question mark, even after advanced imaging. Meaning that the surgeon, until they're in there they determine is it a traditional our is it a reverse? Without the reverse it's difficult to go in to this.

Now that we have that, our full release isn't until Q1. The reason it's not until Q1 and we're in controlled-market release right now, as we refine instrumentation and also bring on our distribution channel.

Keep in mind we are not going direct on this. We actually are having a dedicated group of distributors that we're bringing on board. We'll have that group fully on board, up to speed, trained, sets, all those things and really our official launch of full-market release is really at the beginning of the year.

Great. Thanks. Appreciate it, guys.

(Operator Instructions)

Jason Bedford, Raymond James.

This is Mike Rich, calling in for Jason. I don't know what is wrong with my headset, sorry about that.

My questions relate to DuraSeal specifically. First, I know you mentioned that the gross margins are in line with regenerative medicine margins. Can, you quantify that a little bit further, please?

Jack, do you want to take that?

Sure. They are high. They are well above our corporate average, consistent with products like DuraGen, the other collagen products that we produce. They are substantially above our corporate average.

Okay. That's helpful.

As a follow up, can you give us an idea what the mix is for the business in terms of US versus international? Then, how DuraSeal fits into your international strategy?

I can, certainly -- the mix is around three-quarters domestic, one-quarter outside of the US. DuraSeal fits within our international strategy because it is a significant addition to our neurosurgery product offering. Neurosurgery is, by far, the most internationalized of our target markets. As an important addition to what we are doing there, as what we are doing in the United States.

Okay. Great. Thank you very much.

With no questions remaining, I'll turn the call back over to Management for any additional closing comments.

Thank you. In closing, I'd like to just leave you with a few points.

First of all, we had a very solid quarter for the Company. I hope you see as well that the DuraSeal acquisition for us is a great deal and it is a great time for Integra to do this acquisition.

Three, we've accomplished a lot and have made a lot of progress across the board - quality improvements, supply, the new product launches that I mentioned, and the optimization plans. All that comes down to the focus that we've had on improving our overall execution is really making an impact.

2014 is a transitional year and we're working through many of our optimization plans that are in place. As Jack said, we see top-line growth with DuraSeal in low double digits and our adjusted EPS in the high teens to twenties for 2014.

Lastly, our five-year plans are really intact. The plans we laid out at our strategic meeting over a year ago, are on track to accelerate our growth and our leverage in our margin in 2015 and beyond. We're very excited about the plans, how things are coming together. I thank you for calling in this evening and the meeting is no adjourned.

Once again, that does conclude today's conference call and we thank you for your participation.