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Integra LifeSciences Holdings Corporation (NASDAQ:IART)

February 26, 2013 3:00 pm ET

Executives

Peter J. Arduini - Chief Executive Officer, President, Director and Member of Special Award Committee

Angela Steinway

Analysts

Amit Bhalla - Citigroup Inc, Research Division

Jeremy Feffer - Cantor Fitzgerald & Co., Research Division

Nikhil Arora

Amit Bhalla - Citigroup Inc, Research Division

[Audio Gap]

Bhalla in Citi's life science tools and diagnostics team and we're happy to have our next presenting company, Integra LifeSciences, with us. With us from the company are Pete Arduini, President and CEO; and Angela Steinway, Director of Investor Relations. Pete joined Integra in 2010 as President and COO and was appointed to his current position as President and CEO of the company in January of '12 -- in 2012. For those of you who are not familiar with Integra, Integra's a medical device company with solutions for orthopedic, neurosurgery, spine reconstructive and general surgery market.

Before we jump into Q&A, Pete, I'd just like to ask you to take a couple of minutes give us an overview of the company, and then we'll talk in more detail.

Peter J. Arduini

Great, thanks. Yes, so look, Integra's an exciting company where we've got a lot of things going on. We're a diversified health care company that's global in scope. And that said, we've got a couple of different key segments within the business. Our Neurosurgery business. Orthopedics, which has 2 distinct areas, Extremities, as well as our Spine business. And then our Instrument as overall franchise. From a sales standpoint, we're in the $830 million overall range, growing at 5% to 7%, which is our target growth over the next 5 years. I think one of the key things with operating margins in the 16% range, we've got a plan in place to take that up to 20% over the next 5 years. So 400 basis point strategy on really optimizing the company.

We talked about our aspirations for the company to become a multibillion dollar medical technology company and leveraging our diversification to help us out really in the way health care is evolving. And the 3-prongs of that strategy are focused on execution, optimizing the company, accelerating growth. And the execution components, we've done a lot of work in 2012 around right people in the right roles, taking a look at actually how we run the company, our operating cadence and mechanisms, so that we can obviously execute consistently. Many of the things that we're doing to optimize the company are predicated on very good execution. And so optimization is really around how we get the structure in place to enable that growth. I mean, if you will, where I use the house analogy, a 2-story home, and we have aspirations to be 10-story building. And so a lot of the work that we're doing is shoring up the foundation to be able to do that, integrated one into ERP system, common quality system. Our discussions on taking our footprint of our facilities down significantly to simplify our overall structure. And with that, then, generating some leverage within the overall P&L.

From the growth standpoint, we've got a lot of good things going on. New products, this would be one of our biggest launch here with about 25 new products coming out across all of the product areas. Our Neuro business has had 6 launches, probably the first time in quite a few years. A new product coming out in our DuraGen franchise. We also have, in Extremities, we'll be having our first full integrated shoulder product with the reverse product coming out in that portfolio. So we're excited about that growth opportunity. As well as International, where we spent last year really kind of getting a lot of the items in place and now, we've got a plan with distribution structure, registration strategy of bringing new products in growth -- in many markets that we haven't competed in. So at that point, still about 77% of our sales are U.S.-based and lots of opportunity to grow outside. So I'll stop there.

Question-and-Answer Session

Amit Bhalla - Citigroup Inc, Research Division

Great. That's a good -- a nice overview. So just fitting with the theme of the conference, we're talking about value in health care, and ultimately, what we're seeing is decreasing prices of demand for more quality in the health care system. So when you think about the business against that backdrop, and you talked about 25 new products coming down the pipe, how do you -- how are those products going to fit in to a market where it's going to be tougher to get reimbursed and pricing is on a downward trajectory?

Peter J. Arduini

Yes, so I would say the first part is that I think it's a question of time here on how we think about health care reform. If I could, I'll back up just a point and say when we look at things that's going to happen in reform, clearly, we view that value and price, that composite is going to be a very, very important discussion in the future. In the short-term, right now, it obviously varies by the portfolios which we play. So if you look at our Instruments business, which has already been through a lot of price curbs at this point, it's a reasonably stable business that generates a strong amount of cash, and it's a strong service play. So when you're in 1 of 3 U.S. hospitals, you kind of are one of the core players that provide the goods to run the surgery, the service component becomes quite sticky, we believe. I think if you take a look at our Neurosurgery business where the cost of the actual goods used in the procedure is still a small percentage, the price components aren't as strong today. But we believe, obviously, in the future, that those will increase, whereas to contrast that with spine where we're already in the midst of combination of a changing market and price pressure is significantly higher levels. So the way we think about it is, clearly, the actions that we take are -- as we're looking at our R&D now, just even this past year, we've reduced the total amount of programs we're working on, we've kept our spend at the same levels and that additional money is actually now going in to more clinical-based studies than health economics would so that we can actually prove the value of the product. That's probably the first step that one would see. I think the second component of it is how we sell. Today, I think we have a very strong clinical call point. There is a hand and a feet, orthopedic call point, surgery, materials management to the hospitals. But if we were to add an aggregated IDN [ph] level, say, how do we want to bring Integra to that customer, we don't necessarily have an integrated strategic call point. And I think that's one of the other components that we're taking a look at, as well, as health care reform takes place, customers take a look at how they may actually bundle different products, how they take a look at, how they may adjust approached with accountable care organization. So that's how we've been thinking about it. I think the question is how fast that some of those stuff evolves.

Amit Bhalla - Citigroup Inc, Research Division

Fair enough. So what you said in your introductory comments about fixing the foundation certainly resonates with us given how long we followed the company, the changes its undergone. I wanted to just touch on 2 parts related to FDA. The recent Puerto Rico warning letter and then the progress you've been making on Plainsboro. So talk to us about what's happening in those 2 areas and as that pertains to shoring up the foundation of the company.

Peter J. Arduini

Sure. So as I mentioned, I think one of the key parts about shoring up the foundation is moving to one common quality system. And what I mean by that is, obviously, all of our locations have a quality system that meets not only the U.S. but global regs. But we may all have a slightly different approach to it, in this case, the 820 regulations for the FDA. Moving towards a 1 common approach, we believe simplifies, obviously, our overall structure. It also allows you to be able to run just a much, much tighter operation from that standpoint. So that's one of the broader macro pieces that we're working. We recently brought in a new leader to run up all of the quality who's had some very extensive experience dealing with warning letters, as well as and importantly, setting up common quality structures. And he's also brought in some really great talent for us over the past 6 to 9 months. So that's kind of the backdrop. Once we received the warning letter in Plainsboro, which really little over a year ago, last year, we assessed all of our other plants, really, around the world, and said where are we, what do we need to. And in many cases, we have had plans in other plants that we've been running through the P&L to work on different areas of our quality system all of last year and I think we've made some really good progress. If you take a look at the situation in Puerto Rico with the warning letter, the fact is, obviously, we have work to do. The other side of that one is the majority of the items that we have on there, we've identified and we have [indiscernible] open on and we're working on now. The fact that we're working on it gives me confidence that we know we have plans in place, we believe we know what it's going to take to close. But in all fairness to the point with the FDA, the fact is, is that we still don't have those items closed and hence, that's why we received the warning letter. So we take it very seriously. Plainsboro, as an example, which we had structural work that we needed to do in the facility. That's why it took a good chunk of time and also dollars to do so. We don't believe that we have the same issues in Puerto Rico. And again, we've been working on it for 12 to 18 months across-the-board, so we have a good handle on what are some of the things that we need to get done in both of those locations.

Amit Bhalla - Citigroup Inc, Research Division

So from the Puerto Rico side, you did put an 8-K out yesterday, so you are shipping product out there. How do you think about the overall impact that these -- the quality issues you've had on your growth rate, if any?

Peter J. Arduini

Well, I mean, clearly last year because of the major changes within the facility, we took parts of the plants down in a rotating fashion, if you will. So it clearly impacted our overall ability to maximize our supply. And so the effect on that is that from a sales standpoint, I think we did a very good job, our sales team, managing our current customers and in trying to maintain the current supply. But to seek out new growth areas, clearly that wasn't part of our strategy in '12. And it sort of enabled us -- we'll be enabled to do that more of that in '13. But the broader point is, there's obviously a distraction of these issues, management time and resources on them. I mean, it's the fact that it's put attention on that versus some areas of particular growth. So it's clearly to our interest and our focus to get these closed out and get them behind us as soon as we can and we think it's realistic that we can do all the right things we need to do in 2013.

Amit Bhalla - Citigroup Inc, Research Division

Now when we've -- when you've talked about the kind of long-term goals of the company, you've broken them down to 3 areas: New product launches, your sales and distribution channel, and the strategic acquisitions. I wanted to just touch on the last one first and get a sense of what your appetite looks like nowadays on the strategic acquisition side. And if there's some target businesses or target areas of your business segments that you'd need to fill any gaps in?

Peter J. Arduini

Yes. So '12 in many cases, 2012 obviously was my first year coming in. And also, the core was to get a plan in place on how we'd optimize the company. That was a big part of our focus. And so now that we have that in place, I also have, I think, the right leadership team in the right roles. So we're executing well against that plan. We are clearly looking towards not only just organic opportunities in ERP, but externally. And so I think the interesting thing is there's a lot of interesting opportunities that are out there. We clearly believe that scale and share are highly -- profitability and share are highly correlated so that scale actually makes the difference particularly in the industries that we play in. And the fact is with some of the increased regulation, that scale actually becomes to matter more now than it did maybe even 5 years ago. So that being said, I think across all of our different segments, there are some interesting opportunities. I think our Neuro world, probably more in the partnership area, but there's clearly some opportunities to do even broader appeal within our role within Neuro. Our Instruments area, I think, is quite an interesting area as well. We're really taking a look at our subsegments within our Instruments business about where we've been able to grow and actually maximize our profits and there are some particular areas there. But clearly, the biggest growth potential as far as acquisition area, as far as data [ph] are competing. So the 2 areas in Extremities, opportunities to fill out the portfolio. I mean, we obviously don't have a current angle within the United States nor external fixation. And so opportunities that would bring product into those areas are quite interesting. On the regenerative side in general, that would enhance platforms that would help all of our product lines. I think you'll see some increased focus in that area. And so, we've been looking in those areas. And then Spine, as I've mentioned before, we believe it's quite interesting. It's obviously a challenging market today, and we believe it's still going to be challenging in the next few years. But as you look at the long-term demographics, you look at potential disruptive technologies which we don't necessarily see that there's a lot, and if there is, we think it's going to happen in regenerative, which will be an area that we'll be investing in. We're quite intrigued by that. And so I think the consolidation that could take place in Spine in the next few years, our view is that we can play a role in that. And with the foundation that we're optimizing in the company by being able to bring those companies in, we believe we'll be able to get increased synergies and such by doing so. So those are some of the things and I would say, this year, our profitability, you'll see us doing some deals this year. Last year was probably more internally focused with me being new and also some of the plans that we had put in place.

Amit Bhalla - Citigroup Inc, Research Division

So just a -- let's round it out with just a discussion on size of acquisitions. How important is that versus the actual return on invested capital when you're assessing a deal.

Peter J. Arduini

Well, I mean, I think obviously, the return is obviously a pretty important component. But the fact is that finding the right just on the technology side or filling the gap, obviously there's those areas. If you take a look at the business like in Spine or Extremities, clearly, we believe in the size of the market we have to engage [ph] so you could argue with the Spine having the right price deal that could give us some significant scale as of today. We touched probably just about half of the Orthopedics Spine guys in the United States. So the right type of deals that could get broader distribution increase further option with the general portfolio, that alone as a scale growth would be quite important. It's difficult obviously at, say $150 million to $200 million, to have a major component of the scale to be able to leverage sourcing and things. So getting north of $400 million in sales, things of that nature can make a significant difference for us.

Amit Bhalla - Citigroup Inc, Research Division

And how do you think about acquiring International distribution to bolster your presence overseas?

Peter J. Arduini

Yes, so we've done some in the past, and so obviously, we've got some very good relationships with different distributors. That's clearly, I would say, a mechanism that you will see us probably utilize as well to be able to bring some distribution in that way. But more so, I think, the opportunity to actually take a look up within the Orthopedics area, and I would say, there's obviously reasonable tuck ins are out there, but to do a deal at the right price at a little bit larger size is something that we wouldn't necessarily shy away from.

Amit Bhalla - Citigroup Inc, Research Division

Okay. Fair enough. So on the new product front, you said 25, but maybe boil it down to your 3 favorites. Three that you think will make the biggest impact.

Peter J. Arduini

Yes. So I think obviously, probably high on the list is the reverse shoulder. So and again, the importance there as we get a marginal product, which really puts us in a short list of shoulder players out there with the reverse now we've got the complete line and we'll be able to improve the right type of distribution to the other [indiscernible]. So that's again $700-plus million market that we fundamentally haven't had a position in. I think in the Neuro side, we've got a new version of our DuraGen product coming out that has some specific indications, like focus for more difficult cases that's quite interesting, and again that's a strong franchise for us and probably the first new launch we've had in about 6 years. And then I would say in the lower Extremities area, we actually have some new products coming out that are going to be quite interesting, that are going to enhance the bag. I don't want to go into some of the specifics for competitive reasons. But give us some interesting things that are going to help bring some new energy around some of the products in that area.

Amit Bhalla - Citigroup Inc, Research Division

Got it. If there's any questions out in the audience, you have to raise your hand, we'll get a mic to you.

Unknown Analyst

So I guess going back to M&A for a second. I know that this year is going to be year of investment and your CapEx [indiscernible] according to your guidance. How do you balance it out with what M&A [indiscernible]

Peter J. Arduini

Well, I think when you take a look at our recent we're generating some strong cash the question is about balance of capital versus M&A. We've got further investments this year to finish out our new manufacturing facility for regenerative and that's really kind of coming to closure for the most part this year, and also our ERP. So this is still a larger spend, probably about $20 million higher than our normalized plant run rate. But I look at those, I think as very discrete based on where we are relative to our debt, the ability that we have to draw and our certain lines that are out there. As much as anything with the activities we have going, it's probably more a function of how many different activities we have going relative to optimizing the company, and what type of deals we can bring in and integrate in making sure that we've got the right bandwidth to be able to do that. And we feel quite confident that we kind of know where that threshold is and that's part of how we're thinking about doing these deals.

Amit Bhalla - Citigroup Inc, Research Division

So the other part of a long-term discussion the expansion of sales and distribution. I know you're kind of using mix of direct sales force versus distributor sales force in a few quarters ago. The channel inventory levels were coming to a new optimized level. How efficient is your distribution -- your distributor channel today in terms of carrying your product portfolio and really achieving the levels of growth that you want out of them?

Peter J. Arduini

Yes, so let me -- I'd just kind of give a little overview because we do vary by channel. So Neuro's direct, Extremities is direct in the United States, except for the Shoulder. Spine is all through distributors. And then our Instruments business into the hospital is direct. Our Instrument business through doctor's offices is distributed. And so I think what you're referring to is last year's Q4, we had some correction relative to inventory levels in the Instruments. And at this point now, that is running at lower carrying level through the distributors that pretty much played out all through 2012 and we had a very strong year in Instruments. And I think from the standpoint of the systems and those levels, we believe they're probably going to stay at that lower level, which I think is actually healthy for us and candidly, for the distributors. So that's quite good. I think across some of our -- across some of our other areas, we've been focusing this balance. I think Spine's one of those interesting areas we have large consignment components as you grow. I think the team has done a very good job of really kind of getting a tighter alignment with each of our distributors on forecast and in how we ramp up the new product sets because obviously, that's a component of capital that you carry on your books as you grow. So I think we've done a good job there. In the direct world, we've actually spend a good chunk of time good looking at utilizing some outside eyes on how we're going to optimize the overall channel. What our ideal coverage level is. As you can imagine, if you're selling regenerative products that are stock and you're covering metal cases, there's a natural threshold of how many cases one can get to on a given day versus big sales. And so we've put a lot more science behind that so that's as we grow, we have a pretty good model now about how many reps we need to add to make sure that we're adequately covering our growth. And I think that's going to be a really important part for us with Extremities. We're here with the aspirations, obviously, to grow much higher in the share than where we are today.

Amit Bhalla - Citigroup Inc, Research Division

Sure. I want to come back to the shoulder. Talk to us about the differentiation for your shoulder products and how you're going to go about playing against other competitors that are here.

Peter J. Arduini

Yes, I think the first part is showing up is sometimes have to gain. So I think we got to have a competitive product. And part of the many players that are out there, the 20-some that have some level of a shoulder, it's a much smaller subset that has a real modular scalable product. And the products that we picked up from and had a very nice margin and structure with different levels of stems has the components around that. So you give the surgeon a broader set of options not only for the initial case, but if there actually needs to be some revision work done. So that's step one. And on the reverse, which we didn't have, and which has just been submitted to the agency, we believe that will fill out our offering. And so challenge with shoulder is just I understand from the team, there's many cases, in the United States in particular, post the diagnostics, the study is still a question mark when the surgeon goes in meetings. Is it going to be a traditional or is it going to be reverse. So you really need to have that full line before you enter. So that's a big part of getting that done. From a longer-term of why partner with Integra, we talked about, obviously, the investments that we're making in regenerative that play around in this area, but the pyrocarbon investments that we picked up in Ascension is quite exciting. We've got clinical studies going on in PyroCarbon based shoulder in Europe based on the success with that, we're going to take a look at what that means in the U.S. But I think the other aspects are a humeral head that is actually baked out of PyroCarbon is in the works and what that obviously brings is some differentiation, weird characteristic things of that nature, which we think are going to be exciting. So again, step here to have a complete operating this very competitive versus what people are just bringing out today and which is a modular product. Bring with that some regenerative offerings, and then really around the pipeline of having something in PyroCarbon, which is really only one other player the market that has access to the technology, show that we might be able to do there -- change the game and again, a big part of that PyroCarbon play is the ability to reduce friction and wear and be able to use better life out of the product. Jeremy?

Jeremy Feffer - Cantor Fitzgerald & Co., Research Division

Can you talk about what might be the challenges to achieving the 20% operating margin goal that you set? And then with respect to the warning letters, I guess, you talked about some of the challenges, some of the impact that, that had in terms of management focus and supply issues, but what was the kind of the hard costs that we're associated with, or has been associated '12 and '13 with addressing the warning letters?

Peter J. Arduini

Yes, so your first question about 300 or 400 basis points, what could get in the way. Well, obviously the majority where that's coming from is roughly a couple points associated with our facilities in our manufacturing consolidation pieces, a big chunk of that. Obviously, being able to execute that on time, getting that done is an important part. And we think we've got the right folks in place to be able to do that. My leader of the operations world ran a $5 billion operation in a prior life and had actually had gone through this exercise a couple of times. So that was a critical parameter for bringing him into the job. The other is on the sourcing side. We feel quite good about that. And again, if you look at about another 1.5 point to potentially 2 points, is our whole sourcing strategy. I mean, we've done sourcing plant by plant. Part of the centralized and aggregated approach is that we can actually get some substantial savings. We already generating about $1.5 million in the last part 2012, which will roll through this year. And we have another couple of million dollars that we're going after this year. So again, that's all about execution. The other component of it is associated with the growth in the mix. So we believe that on the low end of the range, the 5% growth with the mix characteristics of Orthopedics growing faster and a focus on our channels on selling the more profitable products that we have in our portfolio. Those are the things that are going to drive it. So what's the risk, disruptions that enable not to be able to get that done. Candidly, we have to get our warning letter and quality issues behind us. There's currently not a distraction for the sales force we can shift, but obviously, if things escalated at any level, that would create a challenge. And so hence why we take it very seriously and we've put a lot of funds and people behind it and the game here is to try to make sure we get everything done the right way in the FDA's eyes this year to get this closed out. So your point about FDA and suspend fees, look, Plainsboro was, I would say, more of a special case in some ways because we had observations that we deemed we actually needed to do construction work within the facility to effectively mitigate those. And so in some rooms, we actually updated clean rooms and things of that nature. Update the facility. And so that was a large chunk of spend over like 12, 18 month period, $12 million, $13 million of spend in that area. Throughout the other [indiscernible] that's actually -- yes, that's actually behind us. There's actually some depreciation that's coming into the capital investments we put, but fundamentally that's done. And through the P&L last year in numerous other sites, we spent increased spend on quality as we assessed all the sites. And in the case of Añasco, even we were -- we had incremental heads working on changes that we saw that we needed to make based on what took place in Plainsboro. So some of that will continue going through the P&L. But the point is once we get to our stable state level, will that decrease? Yes, the plan would be that would actually decrease back to a more normalized level. Yes?

Unknown Analyst

In a lot of discussion that we've had so far, talking about new products coming to market and developing existing channels, in your strategic reviews of the business, how much of a discussion do you have around potentially divesting assets and consolidating product lines.

Peter J. Arduini

A reasonable amount. I would say in the hierarchy of things that we've been focusing on, again with a focus on execution, the optimize and accelerate growth, that is clearly also in sequence. And so the execution piece of being able to have the right folks in place kind of stabilized. Part of the optimize, it's making sure that we do things for simplify having to run the company and how we can make sure that we have a plan in place for 400 basis points increase. So that's key. The other aspects we talked little bit about that we haven't had as many external discussions on how we really pan through the whole portfolio. One of the things that's helping drive some increased margin even this year and all of our divisions has done a really nice job with SKU rationalization. So that's just kind of elimination of lower margin products. But I think more particularly, they've done a very nice job of kind of smart positioning. So as you all know, you have products in your portfolio, you may have 10 that are very similar, 2 of them may have higher margin than the other 8, just running promotions in your training on focusing the sales team of those as a stronger mix and we've done that. And the next level of discussion has been taking a look at other areas that maybe someone else could do something with. And some of those were actually just taking a look at end of life. I mean, you've probably seen through our quarterlies that we've actually had some discontinued product line areas that we decided ultimately it's easier to shut down than to say is there some value selling. And clearly, there probably are some items that you may see from this. And wouldn't say don't expect to see big chunk of the business sold off. But the franchises that as we get these plan to stabilize, that we would bring in and would help accentuate the overall profitability of the company. But I didn't want to build our core plans to say, here's how we are going to do it, we are going to divest to get there. We think with the plans that we have, we can build and then we'll supplement some of those things with some divestitures. But I think most of these are smaller components within the portfolio. Nik?

Nikhil Arora

Okay. Could you talk about puts and takes between M&A and added to the portfolio and building scale and also be in my opinion, it seems like it's still too early for these restructuring initiatives of leverage will be limited in 300 to 400 basis points over the next 4 years. How do you balance between optimizing the portfolio and getting that streamlined and then adding scale to it going forward.

Peter J. Arduini

Sure. Good question. Look at it is early. We just announced the plans. We got a little bit of a running start, so we've already closed 3 facilities down in the fourth quarter as of $3 million benefit. We had about a $1.5 million in cloud savings from purchasing. So we're having a good $5.5 million tailwind coming into this year, but the real heavy lifting, you're going to hear more things coming this year and next year around that. Look, part of this is as we do take an extensive look about just the bandwidth of the overall leadership team and capabilities on how much we can bring in. So the way we've scaled it this is that there is added capacity the way we fund it be able to manage and integration of the rightsized deal. Again, not all deals are created equal. I carve out from someone, it takes a little bit more energy obviously then stand-alone business. And so how do you think about some of these deals in some of these areas, we think about that way. There's certain part of the business that's completely less affected by a lot of the optimization and is also how we set up the structure with an integrated global manufacturing team that has the right capabilities to focus on that, the commercial positions to focus on their R&D and also selling. And so some of these acquisitions we can actually partition who's working on what gives -- so that the long answer or short answer to that we think we can do both. But we're very much reflecting on how much capacity as far as acquisitions that we bring on an any given time. But the way we look today, could we do couple of medium-sized deals in a given year? Absolutely. But again, I think based on which business and where. Doing 2 in the same business in the same year is very different than doing one in Extremities and one is Instruments as an example we actually spread out the amount of work that we have going on. I think the part that I'm quite encouraged by it, we actually have a very good handling on all these call our work flow demand and what type of people are needed in each area. So if we look at those types of deals, we can make a real clear assessment, can we integrate that in and we have a bandwidth to do that. That's what I think about more so than anything. As far as the financial capabilities, we're in really good shape with the balance sheet, the money that are available, it's making sure that we get the right people at the right level of quality.

Amit Bhalla - Citigroup Inc, Research Division

How much of what you're doing right now in terms of restructuring and optimizing the company do you feel like you're doing, you're running the playbook from Baxter MG from your days there?

Peter J. Arduini

I would say not a significant amount. And would say the tools we're using are very familiar. So if you say the playbook some of the approaches and the plan and how we're approaching things, there's obviously a lot of retained knowledge there. But how are you thinking about what we've done at Integra I think is unique at some level, maybe because of how the company was brought together with acquisition that we have. And then also, some of the opportunities that exist that way. But really, when I look at our operations leads, quality leads, different business leaders in areas, part of the folks that we put in the right roles had this experience and have gone through this experience not just once but multiple times. And to me that's quite important, you have to see at least 1 it's not the first rodeo as we say so is.

Amit Bhalla - Citigroup Inc, Research Division

So I wanted just to talk about the capital equipment environment. And it really kind of impacts your Neuro business. What are your latest thoughts on the CapEx environment and what you're seeing in the hospital level in purchasing?

Peter J. Arduini

Yes, I mean in the United States, it's been pretty stable. Again, our capital spend on a product from those customers is $100,000, $150,000. So we're not talking 0.5 million devices. And in 2012, I think it was a reasonable replacement and new product market for us. We have a new monitor coming out in our NeuroCritical Care area were we're seeing some good response to that. And so I don't see major changes -- I don't see really an major changes in '12, up or down pretty stable, but so far I believe as '13 is starting up the same way. Now Europe as an example, clearly had pressure last year, and we continue to believe that there would be pressure this year. I mean that folks are in this case, living longer with the same capital equipment they have, looking to see what they can do to extend service and components on it -- and more effected in Southern Europe than Northern Europe. So I think no major surprises, but I think that's kind of how we see it at this point.

Amit Bhalla - Citigroup Inc, Research Division

Got it. There's no -- let's take one.

Unknown Analyst

It's just going to o-U.S. guidance for this I know it's accelerating from 2012. So maybe you can point 3 specific product categories or geographies or where you're going to really see the majority of that acceleration?

Peter J. Arduini

So o-U.S., kind of tale of 2 worlds. Europe growing but quite slow, rest of the world in the upper teens kind of scenario. Last year, we spent a good chunk of energy putting actually new registrations in place. So we got multiple markets now with new products, and as you guys know, certain countries in 6 months, some countries it's 18 months, so we have that happening this year. We also are registering in a bunch of products this year that are going to affect the following year. So that's a part of it. So just new launches and product based on that and some of these are just products that we've had and again products that haven't been available in other market. Our skin products in Brazil, things of that nature. We have a flowable [indiscernible] repair matrix that is in Europe and going out to other markets through the Latin America as well. So those are some of the products, so that's 1 side. The other side of it is on distribution and market change. So I commented on this in the past that many of our markets, our distributors own the registration of our products, and we usually had a mother distributor, a core distributor that kind of manage the core distribution. Part of our strategy now is actually going to flattening that out some and having actually a country manager that manages multiple distributors as we have better control over that, as well as owning registration on the key product. So China is a good example because last year, we did a lot of changes in the first half of the year. That had affected actually downward pressure on our sales. I actually get the new structure in place and registration, now we're seeing a much more increased uptick and we think we'll benefit from that in '13. And I would say that same model we plan on rolling that out across different markets this year and really over the next 3 years.

Amit Bhalla - Citigroup Inc, Research Division

Great next, did you have one?

Unknown Analyst

No [indiscernible]

Amit Bhalla - Citigroup Inc, Research Division

Great. Well, we're out of time here on the sessions. Thanks a lot, Pete. Thanks, Angela, for taking the time for being with us today.

Peter J. Arduini

Thank you.

Angela Steinway

Thanks.

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