Integra LifeSciences Holdings Management Discusses Q3 2013 Results - Earnings Call Transcript

| About: Integra LifeSciences (IART)

Integra LifeSciences Holdings (NASDAQ:IART)

Q3 2013 Earnings Call

October 28, 2013 4:30 pm ET

Executives

Angela Steinway

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

John B. Henneman - Chief Financial Officer and Corporate Vice President of Finance & Administration

Bob Davis

Analysts

Nicholas Nohling

Christopher T. Pasquale - JP Morgan Chase & Co, Research Division

Matthew S. Miksic - Piper Jaffray Companies, Research Division

Jonathan Demchick - Morgan Stanley, Research Division

Craig W. Bijou - Wells Fargo Securities, LLC, Research Division

Daniel Sollof - Barclays Capital, Research Division

Michael Rich

Operator

Good day, everyone, and 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 Ms. Angela Steinway, head of Investor Relations. Please go ahead.

Angela Steinway

Good afternoon, and thank you for joining us for the Integra Life Sciences 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 U.S. Neurosurgery. Just after the market closed, we issued 2 press releases announcing the acquisition of the DuraSeal product from Covidien and the financial results for the third quarter. Certain statements made during this call are forward-looking and actual results may 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 reports 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 Investors 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.

Peter J. Arduini

Thank you, Angela, and 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 increased profitability by every measure without introducing new complexity into our structure and 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've also turned the trajectory of our core business, notwithstanding the quality and supply issues we faced this year. This quarter, our revenues grew sequentially and year-over-year. We started executing on our long-term plans to improve our margin 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. But last week, we were pleased to report that we've started the process of consolidating 2 more of our manufacturing plants.

The buoyant [ph] demand of our 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 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're consulting with our employee representatives in accordance with English law to transition production into our Ireland facility. These 2 facilities, coupled with the 3 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 cost and regulatory load.

In addition, we've 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. And although we may win some back over time, our revenue from those customers will be significantly lower than has been historically.

We expect to report the revenues for the 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'm 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 capacity of our collagen products in Puerto Rico and 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 and Andover, England and Añasco, Puerto Rico manufacturing facilities. In Andover, we have met all of and reported all committed actions to the agencies and are awaiting a reinspection notification. In Añasco, the FDA began its first post warning letter inspection of the facility last week. This is an expected part of a follow-up to the warning letter. Remember that it took a couple of inspections to clear Plainsboro. So 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 and we will communicate to you after the inspection is over and we have analyzed the results.

Turning to the topline results for the third quarter. U.S. 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 topline growth, both in capital and disposable components.

Overall, sales of neuro capital products are 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%, but our hospital and surgeon customers reported fewer large burn cases than expected, which had an impact on our sales of large size skin. This resulted in a mid-single digit decline in Skin and Wound revenue, the largest component of the revenue of the Extremities segment.

While we're disappointed by the Skin weakness this quarter, our outlook for that product family hasn't changed. We're working to improve our Skin and Wound sale through targeting customers and channel enhancement and we'll 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.

U.S. Spine & Other, which includes our Private Label products, decreased by 5%. The Añasco-related supply shortage and long-term decline in sales at 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 recruitment 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.

U.S. 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 the segment allows our team to prioritize product lines that generate higher overall profit. Although in the near term, it results in a lower reported topline growth rate. In addition, Acute Care sales posted a modest decline against the 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?

John B. Henneman

Thank you, Pete. We met our guidance and expectations for the third quarter on both the top and bottom line. 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 improve 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 at 1.5 points versus the prior-year period to 61%, primarily as a result of higher ongoing quality cost, higher manufacturing cost and the Medical Device Excise Tax, which we report in cost of goods sold.

We calculated adjusted gross margin by backing out the adjustments to cost 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 be between 60% and 61%, and adjusted gross margin to be between 63% and 64%.

In the third quarter, R&D expenses remain 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 on 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 could talk to 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 U.S. Spine reporting unit, which is part of our U.S. 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 0 going forward. We ended the third quarter with an effective tax rate of 18.5%. The lower income within our U.S.-based operations, relative to 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 exempted 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 noncash 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 U.S. Neurosurgery revenues to be up low single digits, U.S. Instruments revenues to be flat to down low single digits, U.S. Extremities revenues to increase low double digits, U.S. Spine & 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 U.S. Neurosurgery to the center, U.S. Extremities to the lower end and U.S. Spine & Other to the lower end, from when we guided -- 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're 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'll 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.

Bob Davis

Thanks, Jeff. 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 grafts to help prevent cerebrospinal 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 within 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.

Peter J. Arduini

Thanks, Bob. And 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 and 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 and 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 compared to 3 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 2 site closures we announced last week and the discontinuations of nonstrategic, 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're already seeing the importance of having a complete system with both primary and reverse options. This has allowed us to approach surgeons who want to have multiple implant options for different scenarios in the operating room. And CE mark 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 reversed arthroplasty option. And overall, we're optimistic about our position to gain share in the shoulder market.

In spine, we introduced the 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.

So reflecting on the first half of the year, we had significant quality and supply challenges, but our teams rallied and we've logged important accomplishments across the board. We have more work to do with in these areas and commercially, but our progress to date has been real and we're gaining momentum advancing our strategy.

Fundamentally, our trajectory has changed and we're headed in the right direction on all fronts. I'm 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're executing on our objectives we've laid out a year ago.

Now, we'll be happy to answer your questions. [Operator Instructions] Operator, you may now turn our call over to our participants.

Question-and-Answer Session

Operator

[Operator Instructions] We'll go first with Amit Bhalla with Citi.

Nicholas Nohling

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

John B. Henneman

This is Jack. So we're looking at this from a number of angles. I think the first thing to remember is we don't ordinarily give guidance until February and the reason is, is because at this point in the year, we're not done with our 2014 operating plan. So that's point 1. Point 2, we don't know when in Q1 we'll be in a position to close this transaction. So that has an influence over the shape of 2014. And finally, we haven't settled on how the balance sheet will look after we've financed it and closed it. So 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 topline and adjusted EPS to take into account the puts and takes that we feel are probable but haven't settled on, given all those variables. So that's the philosophical approach. If you look at the business that we are proposing to acquire, we gave you information on the topline, 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. But 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.

Nicholas Nohling

Okay, and then one more for me. Maybe just big picture wise, what makes you -- what's changed in the business in the sense that there's a lot of moving parts in instance, in working through the FDA issues, working through the supply chain, optimization issues and then adding an acquisition and the integration into that. What has changed to realize, to take on this added acquisition into -- to do that currently right now where you -- have you seen an inflection point is some of these supply issues that you think going forward?

Peter J. Arduini

Nick, we're at execution. When it comes across the board from our sales team, clawing back share that we were down when we couldn't delever, 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 merchants team, being able to make the proper changes to be able to lift the warning letter. It's the things that we have been focused on and candidly there's not a lot of magic, it's just a lot of hard work with lots of smart people working as a team. And the timing on this deal I think is right. We're on the right trajectory as we commented on and from a standpoint of an 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 dural repair capabilities is kind of our sweet spot of expertise. And so we'll talk more about at the time of close -- again, this is just designing what our plans are from a go to market standpoint, but it fits in quite nicely well into the overall bag. And again, 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.

Operator

We'll take the next question from Chris Pasquale with JPMorgan.

Christopher T. Pasquale - JP Morgan Chase & Co, Research Division

Start off with the DuraSeal deal. Can you give us any color and what that product is on track to do in 2013 revenues or maybe how much sales were up during the first 9 months of the year?

John B. Henneman

We're not going to disclose that right now, suffice it to say that when those numbers become available, our due diligence suggests that they won't be surprising in any direction.

Christopher T. Pasquale - JP Morgan Chase & Co, Research Division

Okay. And then understanding that you're going to narrow down the 2014 outlook at some point, but can you quantify the kind of accretion you're expecting in year 1?

John B. Henneman

Well, we gave you the pieces to build up an accretion model under different scenarios. So 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. And 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're looking towards a package of different scenarios that we believe add up to landing within the ranges we've described.

Christopher T. Pasquale - JP Morgan Chase & Co, Research Division

Okay. And 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. So broadly, was there some place where you think Street models were too aggressive relative to the base business?

John B. Henneman

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. So I think in this case, since we hadn't given any guidance, hadn't really talked about 2014, we've 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. But that had led to, call it a wide range, wide distribution among our various analysts. So I think looking at the consensus, and this one case might be -- not give a complete picture and rather, we would suggest that you take into account for the full picture of what we're seeing here and trying to work your way in the direction that we're proposing with a preliminary guidance for 2014.

Operator

We'll hear next from Matt Miksic with Piper Jaffray.

Matthew S. Miksic - Piper Jaffray Companies, Research Division

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

Peter J. Arduini

Yes, Matt. I mean, again, we haven't laid out what the channel will be. But in particular, when it comes to our U.S. 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 world where there are distributor structures that Covidien has already in place or we have, there's lots of opportunities to kind of take a look at different go-to-market plays. But yes, it is in the sweet spot, for sure, with what our core Neurosurgery channel does.

Matthew S. Miksic - Piper Jaffray Companies, Research Division

And there's no -- I guess you're taking into account -- and this is just a clarification, again, so on this is you take 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've given us, is that right?

Peter J. Arduini

Well, I mean, what we're thinking about when you think about revenues is less about channel, it's more about when the deal ultimately closes. There's also, relative to the product line, there's a few other products that come in this deal that aren't core around DuraSeal. Have we evaluated how we'll go to market with those, what value they would have. Those are some of the other items that we've taken a look at relative to how we thought about the projections. And yes, any transfer from one company to another, obviously, there is some level of minimal dis-synergies if you will. But as this lines up with our team, it's a very good fit and a strong alignment from how we go to market.

Matthew S. Miksic - Piper Jaffray Companies, Research Division

Great. And then just on Extremities, one clarification and maybe any color you could provide is -- is these -- I don't suppose there's much ascension in your Extremities number currently in the 10% growth you gave. And whether or not that's true, I'd love to get your sense as to what the 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 the market feels like, given maybe the tone of some of the other surgical and orthopedic markets that we cover?

Peter J. Arduini

Yes. I mean, let me just -- it's a good question, Matt. I'll just kind of frame something up for you and for everyone else that knows that. And just to keep in mind, our Extremities business versus other players that are 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 and a lot of the guys that are having larger growth, a lot of that's coming from the shoulder product. And so when I take a look at it that way, my comments on wound and big skin, they are driven by larger wounds, our clinicians have come back and actually said that it was actually a slow window of time. We don't think that market has changed much. But to your point on the hardware side, we still see quite a robust market. And in our world, there isn't an Ascension and legacy Integra business anymore. We've rationalized those lines so we have an upper and a lower. And combined, we actually had a very nice metal quarter. And keep in mind that's what very minimal shoulder business at this time. That's traditional rear, mid, hindfoot, forefoot business, as well as hand and wrist and minimal elbow and minimal shoulder within that number. So 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. But we're quite excited about to get shoulder into the mix. And we also have some new launches coming out within the Extremities line as well that we think are also going to help to even expand our growth going forward.

Operator

The next question will come from David Lewis with Morgan Stanley.

Jonathan Demchick - Morgan Stanley, Research Division

This is actually Jon Demchik in for David. So the 2014 guidance, if you back out, I guess about 3 to 4 quarter impact from DuraSeal, appears to factor in I guess, a good deal of organic acceleration beyond this 2012 number as to not include the impact from the Añasco recall. Even with some of these discontinued items that we've talked about, can you discuss the main drivers of this acceleration in 2014 and what kind of can get us closer to the top end of the range versus the bottom end?

Peter J. Arduini

Yes. Maybe I'll just make a couple of comments and then Jack, you can comment relative to that. I mean 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 '14 based on 1 item: the recall happened the first half of this year. Forced us in many cases, to delay some things 6 months to a year. Some items are probably 9 months, some items are 12. But obviously, we commenced most of that. The challenge with that is that pushed more expense into '14 that could have been taken in '13 and it moved most of the benefits from those programs out of '14 into '15. So that's 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, the leadership that John Mooradian and his team has brought in. We feel more confident about our ability to produce and meet broader demands. I also remind you that we've got a lot of new products that are coming in the portfolio. Shoulder by itself is a product that many cases is 6 to 7x the higher ASP than a traditional product. We think we've got 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 where we've been working on a lot of our registration. So the short answer is, good core organic growth. That's going to be able to get us there, but it's obviously operating on top of a higher planned cost base, then that cost base will decrease over time, but the majority of that obviously, is going to be landing in '14, not as we had planned, but as we had corrected for after the recall. So Jack, I don't know if you want to comment...

John B. Henneman

Yes. I mean -- so to talk about the organic growth, I'd say in 2014, we will have, for the first time in 2 plus years, the sales organizations across the company that have kind of a high level of confidence in supply. And we haven't had that for one reason or another, across the board for a couple of years. That's going to make a big difference for us from an organic growth point of view in a number of our businesses. That, coupled with the fact that as we've discussed ad nauseam, we've got a series of important project launches. The highest profile, which is the shoulder, we believe raised the significant prospect of pretty good year-over-year revenue growth in our legacy businesses.

Jonathan Demchick - Morgan Stanley, Research Division

And just a quick follow-up I guess, on some of the changes that were made towards the topline of 2013 guidance, you guys lowered a few, I guess, neuro, extremities and spine slightly. I just wanted to discuss if those I guess, lower growth profiles were more -- I guess Integra related, whether it's a supply issue or 2 discontinued items or if it was related more to the market?

Peter J. Arduini

Yes. I would say, Jon, when Jack commented about our Neuro businesses, it's in line with our recovery plans and in our Instrument business as well. For the most part, what these are, just tightening around those ranges, obviously, with where we've tightened on Extremities is tied to just the results here in with the skin on third quarter and not that much time left in the clock really, through the end of the year. And our Spine & Other, particularly on our items commented about some continued decrease on the Private Label partner, those are the particular reasons. So probably less specific market items and more specific things that are around Integra. And again, we wanted to tighten around our range here coming into the last quarter of the year.

Operator

We'll hear next from Larry Biegelsen with Wells Fargo.

Craig W. Bijou - Wells Fargo Securities, LLC, Research Division

This is actually Craig on for Larry. Just a quick question on the implied Q4 guidance. It looks like growth ramped substantially and I know prior in the -- or previously in the year, you mentioned that there could be some pent up demand that would impact Q4. So I just wanted to see if you could quantitate -- sorry, quantify that amount in Q4 and if there was any of this pent-up demand in Q3 results as well.

Peter J. Arduini

Yes, Craig, I'll make a couple comments. This is Pete, then have Jack maybe give a little more detail on it. So obviously, with the supply recovery that has been going on, a lot of that has been we've been really catching up in Q3 and so some of the effects that have played out into Q4 and 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 bit more of a step up than normal, I would say, from our normal run rate would be because we had a deficit, obviously, in the first half of the year. I don't think it's a whole lot more than that. Jack?

John B. Henneman

Yes. I mean, I think we are experiencing and we're in the middle of, call it a recovery from the first half. It's not compete but it's real. So make an observation about Q3. Rarely, what 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 in the back order from the end of June to the end of September. So if you think it through, there is some remaining opportunity for us to have incremental revenues in Q4, vis-à-vis the existing backlog. Now, we don't want to quantify that, there's a lot of moving parts involved. But the thesis that we anticipated when we guided people to the third quarter came through and some of that is still a factor in the fourth quarter in addition to the usual sort of traditional fourth quarter push that we get because of hospital budgeting cycles and all the rest of it.

Peter J. Arduini

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

Craig W. Bijou - Wells Fargo Securities, LLC, Research Division

Okay, that's helpful. A quick follow-up on the DFU product. I just wanted to get your sense of -- I mean, has your timing changed at all? I know you were looking to file in mid-2014, I believe, so I just wanted to get an update on your thoughts there?

Peter J. Arduini

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'd mentioned that we said Q1 or Q4 this year to have the study closed out and then 6 months follow-up, which would take us to midyear and at that point then, be able to commence actually, the submissions to the agency, which then can be a 9-month to 1 year process or more. But I would say the timeline that we laid out, we actually feel cautiously optimistic that we're on track and moving forward at a good clip.

Operator

[Operator Instructions] We'll go next to Daniel Sollof with Barclays.

Daniel Sollof - Barclays Capital, Research Division

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

Peter J. Arduini

Yes, Daniel. Let me comment and I got Bob Davis in the room, who's the President of our Neuro business, maybe to add some more color to it. So I think in the last call, you might remember, I had mentioned that about 85% of our customers, we've been able to stretch and do the right things to be able to take care of them through this recall. But about 15%, we were short and they had to go with other players and I can't necessarily give you the specifics, but it's a rather small market. So it's the usual suspects that people went to be able to get what was the right supply they needed to meet their needs. And then the interim, a big focus has been by Bob and his team here coming into Q3, when we had supply at adequate levels, which is what we reached in the second part of Q3. Is to go back on offense and bring customers back in the fold. And I think Bob and his team I think, have been very successful taking that 15% risk down to really low single digits and that's been part of really, the brand and the capabilities. But Bob, maybe you want to share kind of how we think about the universe of accounts and maybe what we've we're down to and what we've been doing?

Bob Davis

Dan, this is Bob. First off, again, there was a really obviously, a strong effort there and a lot of trusted relationships over the years. So the first thing we did was really get in there and understand the individual account needs around their surgery volumes so we could literally move supply around to take care of those customers that needed it to try to minimize any customers going without. So there's 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 strengths of the brand and the clinical papers with over 10 paid clinical studies and over 1,400 patients to really stretch the brand of that. So when the product supply came back, customers were waiting. So right now, in about plus or minus 1,800 customers or 1,800 accounts in the U.S., we have about plus or minus 50 customers to win back. So we're really focused around them on an individual basis to win them back and move forward. So overall, just a really good effort by the team to make sure that we got those customers back.

Peter J. Arduini

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

Daniel Sollof - Barclays Capital, Research Division

And just one quick follow-up if I could, on Titan Reverse. So obviously before you guys had this on the market you just had I guess, the primary system so that's lacked to gain -- that did not gain I guess, too much traction. But I guess -- so you've had the product I guess, commercial lease since I guess, the beginning of 3Q. So why is it like it's 6 months late til we actually see like some type of contribution given that you had a low revenue base to begin with? Or I guess asked differently, is the launch progressing any differently than what you were thinking through 6 months ago?

Peter J. Arduini

Yes. Let me just correct a couple of points. So 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. And so we've added a partial offering. And again, the reason that is a partial offering is that as you probably well know, is that most surgeries still go in with a question mark even after advanced imaging, meaning as a surgeon, until they're in there, they may determine is it a traditional or is it reverse. And so without the reverse, it's difficult to kind of go into this. Now that we have that, our full release isn't until Q1. And the reason it's not until Q1 and we're in controlled market release right now is 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 and we'll have that group fully on board up to speed, trained, set, all those things. And really, our official launch of full market release is really at the beginning of the year.

Operator

[Operator Instructions] We'll go next to Jayson Bedford with Raymond James.

Michael Rich

This is Mike Rich calling in for Jason. My question is related to DuraSeal, specifically. First, I know you mentioned that the gross margins are in line with regenerative medicine margins, but can you quantify that a little bit further, please?

Peter J. Arduini

Jack, you want to take that?

John B. Henneman

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

Michael Rich

And then as a follow-up, can you give us an idea what the mix is for the business in terms of U.S. versus International and then how DuraSeal fits into your International strategy?

Bob Davis

I can certainly -- the mix is around 3/4 domestic, 1/4 outside the U.S. and 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 and this is an -- as an important addition to what we're doing there is what we're doing in the United States.

Operator

And with no questions remaining, I'll turn the call back over to management for any additional or closing comments.

Peter J. Arduini

Thank you. So 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's a great time for Integra to do this acquisition. Three, we've accomplished a lot. We've made a lot of progress across the board: quality improvement, supply, the new product launches that I've mentioned and the optimization plans and 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 topline growth with DuraSeal in low double digits and our adjusted EPS growth in the high teens to 20s for 2014. But lastly, our 5-year plans are really intact. The plans that we laid out, at our strategic meeting over a year ago, are on track to accelerate our growth and our leverage and our margin in 2015 and beyond. So we're very excited about the plans, how things are coming together. I thank you for calling in this evening, and the meeting is now adjourned.

Operator

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

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