Integra LifeSciences Holdings (IART) CEO Peter Arduini on Q1 2016 Results - Earnings Call Transcript

| About: Integra LifeSciences (IART)

Integra LifeSciences Holdings Corporation (NASDAQ:IART)

Q1 2016 Earnings Conference Call

April 27, 2016 08:30 AM ET


Angela Steinway - Global Head of Strategic Initiatives & Investor Relations

Peter Arduini - President, Chief Executive Officer & Director

Glenn Coleman - VP, Chief Financial & Accounting Officer


Travis Steed - Bank of America

Jonathan Demchick - Morgan Stanley

Raj Denhoy - Jefferies

Larry Biegelsen - Wells Fargo

O'Brien - Piper Jaffray

Mike Weinstein - JPMorgan

Steven Lichtman - Oppenheimer

Jason Bedford - Raymond James

Matt Taylor - Barclays


Good day everyone, and welcome to the Integra LifeSciences First 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 Angela Steinway, Global Head of Strategic Initiatives and Investor Relations. Please go ahead, ma'am.

Angela Steinway

Thank you, Erika. Good morning, and thank you for joining the Integra LifeSciences first quarter 2016 earnings results conference call. Joining me today are Pete Arduini, President and Chief Executive Officer; and Glenn Coleman, Chief Financial Officer.

Earlier this morning, we issued a press release announcing our first quarter financial results and updating full year 2016 guidance. We also posted a presentation on our website, which we will reference during the call today. You can find this presentation at under Investors, Events and Presentations in the file named First Quarter Earnings Call Presentation.

If you would open that file up to Slide 2, please reference our Safe Harbor statements covering the forward-looking statements we will make on today's call. As well, please reference the reconciliations of non-GAAP financial measures at the end of the presentation beginning on Slide 13.

And now, I will turn the call over to Pete.

Peter Arduini

Thank you, Angela, and good morning everyone. Turning to Slide 3, let me begin with some of our financial highlights. We are off to a strong start in 2016 as our first quarter sales increased almost 17% to $236.8 million.

Organic growth in the first quarter was nearly 9%, the momentum within our Regenerative product lines remain robust and these products once again contributed the majority of the organic growth.

Our adjusted Net Income grew 15% over the first quarter of 2015 to $27.6 million $ million. Strength in our top line and improvement in our adjusted gross margin, which achieved a record high of 69.2%, drove this growth.

Our out performance in the first quarter was achieved despite higher selling and marketing investments, which were necessary to ensure commercial readiness for upcoming product launches. In our February earnings call, we indicated that our spending on new product introductions, licensing opportunities and R&D pipeline projects would be front-end loaded in the year.

As a result, while earnings increased year-over-year we continue to balance the right level of investment in the business to sustain long-term organic sales growth of 6% to 8% with double-digit earnings per share growth.

Turning to Slide 4, some of our recent accomplishments. Following the first quarter’s strong growth performance we are raising our full year guidance for organic growth to approximately 8%, up from our February guidance of 7%. The integration of the Salto ankle is essentially complete. We are pleased with the progress we have made to stabilize this product transition, and expect to see growth later this year.

We also began the controlled market release of Cadence, our internally developed two piece ankle during the first quarter. The differentiated anatomical design and streamlined surgical technique of Cadence will complement Salto’s proven clinical history and revision feature. These ankle products will enable our sales teams to offer multiple solutions as we enter one of the fastest growing extremities markets.

As a result of the progress that we have made, we now expect sales of our combined ankle portfolio to exceed $12 million for the full year. We recently announced two exciting licensing deals as well that expand our Regenerative product portfolio. Earlier this month at the Symposium on Advanced Wound Care we announced an agreement with Vomaris to commercialize their advanced microcurrent technology marketed under the name Integra VolTAC.

This product aims to mimic the body’s own electrical signals to support wound healing, while preventing the growth of microorganisms. We also had a number of engaging conversations with clinicians at the conference relative to this technology. We look forward to introducing VolTAC at the outpatient wound care clinic as well as through our inpatient channel. VolTAC complements our portfolio of leading product offerings in burn, wound and diabetic foot ulcers.

Last night we announced an agreement to commercialize HuMend, an Acellular Dermal Matrix, derived from donated human tissue. HuMend’s tensile strength and flexibility will complement our bovine-derived SurgiMend product and provide clinicians with a choice of products with plastic and reconstructive procedures such as tendon protection, abdominal wall reconstruction and breast reconstruction. We expect to release commercially HuMend in the middle of the year.

Finally if you turn to Slide 5, I will provide a few more details on the Omnigraft launch. Since our analyst day last November, we have made significant progress towards launch of Omnigraft for diabetic foot ulcers. We received PMA approval in January and have been optimizing our manufacturing capabilities as well as our marketing and channel strategies.

Our sales training in medical education efforts are going well. The outpatient sales team has been trained on both PriMatrix and Omnigraft. Both channels, inpatient and outpatient, will also sell VolTAC, which can be used in a much broader set of cases, including early-stage wounds that simply need a dressing with antimicrobial benefits. This portfolio leverages our channel structure bringing novel advanced dressings to the market.

Since receiving our PMA approval, we participated in several industry conferences, including the Diabetic Limb Salvage Conference and the Symposium on Advanced Wound Care. Over the last two months, we have hosted over 700 healthcare professionals at our educational seminars and hands-on training courses.

We have made significant progress on obtaining reimbursement for Omnigraft and announced today that we have positive coverage decisions for nearly 112 million lives, including over 90% of Medicare patients. Our FOUNDER study on Omnigraft was the largest DFU study conducted to date, and demonstrates healing with a median of one application.

Competitive substitutes can require 4 to 6 applications on average. With only one application Omnigraft offers a higher quality of life to patients as well as cost savings for both the providers and the patients. We believe Omnigraft is a great fit for the evolving healthcare environment.

We expect to receive final FDA approval for Omnigraft packaging shortly and with that will be positioned to launch in June, slightly ahead of our original mid-July target. We look forward to providing you with additional updates in the months to come.

And with that I'd like to turn the call over to Glenn to provide a more detailed review of our first quarter 2016 financial results and our revised outlook for the year. Glenn?

Glenn Coleman

Thanks, Pete, and good morning everyone. Our first quarter sales performance came in better than we expected driving a slightly stronger bottom-line result. Our total first quarter reported sales were $236.8 million, up nearly 17% on a reported basis or nearly 9% on an organic basis with both of our global segments contributing to the strong organic growth.

Moving to our segment performance, please turn to Slide 6, sales in our Specialty Surgical Solutions segment were $151.2 million in the first quarter, representing a growth of 8.5% on a constant currency basis. Organic and reported sales both grew at approximately the same rate.

Dural repair sales increased in the low teens largely due to increased volumes driven by new customer wins for both DuraGen and DuraSeal. Sales in our Precision Tools and Instruments franchise increased over 7% in the first quarter, and also contributed to the strong organic growth in the Specialty Surgical segment.

This quarter was particularly strong as a result of an easier comparison to the first quarter of 2015, when we were working through the integration of MicroFrance. We also saw a continuous up-tick of our MAYFIELD 2 cranial stabilization device.

Tissue Ablation sales grew low single digits in the first quarter, while NeuroCritical Care sales were down slightly as compared to the prior year. Overall international sales in this segment increased approximately 10% on a constant currency basis, as strength in Europe and Asia more than offset weakness in Latin America.

Given the first quarter out performance and our expectations for the rest of the year, we are increasing the low-end of our guidance for both organic and reported sales by 1% to a new range of 4% to 6%.

Turning to Slide 7, I'll discuss the results of our Orthopedics and Tissue Technologies segment, which also had a very strong quarter. Sales in this segment were $85.6 million, up 37.5% on a constant currency basis. Organic sales increased 11%, driven by mid-teens growth in our regenerative products, which make up over 70% of sales in this segment.

Sales of TEI products were softer than we planned as run rates for the private-label business were lower than initially forecasted. Thus we are slightly reducing our expectations for revenue growth from TEI private-label for the full year.

Sales in our extremities franchise increased about 20% on a constant currency basis, resulting largely from the acquisition of the Salto ankle. Excluding acquisitions, extremities sales were roughly flat as growth in our TITAN Shoulder offset declines in our lower extremities products. As Pete mentioned earlier, we are seeing better traction with the Salto ankle than we had anticipated at the time of the acquisition.

This is primarily attributable to the strong clinical history of Salto and the efforts that our sales team made to maintain and grow relationships during the transition period. As a result, we are now expecting our total ankle arthoplasty sales to be over $12 million in 2016, an increase of several million dollars over our previous guidance.

Our entry into the fast growing ankle market coupled with new product launches on the horizon such as the static frame for external fixation gives us confidence that we will see growth in the rest of our lower extremities franchise as we exit 2016.

Overall international sales in this segment increased about 30% in constant currency driven by sales of TEI products in Europe and strong double-digit growth in all other major regions. For the full year 2016 we expect reported growth in the Orthopedics and Tissue Technologies segments to be between 25% and 30%, and organic growth to be between 10% and 15% representing no change from our prior guidance.

If you’ll turn to Slide 8, I'll discuss the changes to our total revenue guidance. Based on our first quarter performance, we are raising the low-end of our full year 2016 revenues by $10 million to a new range of $985 million to $1 billion, representing growth of between 11.5% and 13% on a reported basis.

This guidance includes an increase in our organic growth rate to approximately 8%, up from the 7% we provided in February. We expect approximately 5% of overall growth to come from acquired products and based upon current exchange rates we expect a minimal tailwind from foreign currency translation.

As Pete mentioned, we are preparing to launch Omnigraft slightly ahead of schedule now slated for June. This gives us increased confidence in the $15 million projection for total outpatient DFU sales that we previously provided. Moving to our guidance for the second quarter of 2016, we expect revenue to increase 2% to 4% on a sequential basis with organic growth expected to be between 6% to 7% year-over-year.

Now if you please turn to Slide 9, I will review the first quarter 2016 P&L performance and update our expectations for 2016. In the first quarter, GAAP gross margin of 64.2% increased 130 basis points from the prior year, and adjusted gross margin of 69.2% reached a record high and expanded 240 basis points. These improvements largely resulted from favorable product mix with our high gross margin Regenerative products outperforming other franchises.

For the full year of 2016, we are maintaining our previous guidance and expect the GAAP gross margin to be about 64% and adjusted gross margin to be approximately 69%. We expect gross margins to be slightly lower in the second quarter before increasing later in 2016.

Moving to operating expenses, our R&D expense increased 60 basis points to 6.1% of sales in the first quarter. For 2016, we're not making any changes to our R&D guidance provided in February.

SG&A expense was 47.3% of revenues in the first quarter of 2016, an increase of 120 basis points year-over-year on a reported basis. On an adjusted basis, SG&A was up 150 basis points for the quarter to 44.4%.

Sales and marketing expenses rose in the first quarter, as we invested in advance of the launch of Omnigraft and recorded higher commissions associated with higher sales volumes.

We are raising our full year guidance for both reported and adjusted SG&A by 50 basis points. Our adjusted EBITDA margin was 22% in the first quarter, an increase of 50 basis points from the year ago period. In 2016, we expect EBITDA margin expansion to occur mostly in the back half of the year as revenue increases to bring the full year EBITDA margin to 24%, a 180 basis point increase over 2015.

Moving to income taxes, we are lowering our adjusted tax rate guidance to approximately 30% in line with our first quarter results. Based upon our strong first-quarter results and outlook for the full year with the P&L changes that I just reviewed, we are slightly increasing the low-end of our previous full year adjusted EPS guidance by $0.03 to a new range of $3.38 to $3.50.

With regard to the second quarter, we expect our adjusted EPS to increase slightly on a sequential basis as compared to the first quarter as higher sequential revenue volumes will be mostly offset by a slightly lower gross margin and increased commercial investments. This EPS progression implies double-digit adjusted net income growth in the second quarter as compared to the prior year.

Turning to Slide 10. First quarter cash flow from operations was approximately $19 million. Capital expenditures amounted to almost $11 million from a higher year-over-year as we increased investments in orthopedic instrument sets to support our new product introductions.

Trailing 12 month free cash flow conversion was about 55%, an improvement over the 49% from the prior year. We are maintaining our guidance of $125 million to $140 million in operating cash flows, excluding the accretive interest payment associated with our convertible notes.

We plan to make additional Capex investments to upgrade manufacturing equipment and increase automation in our facilities and thus are raising the bottom end of our capital expenditures guidance to approximately $40 million.

Our full year adjusted free cash flow conversion of between 70% and 80% remains unchanged. Turning to Slide 11, I'll wrap up with a quick update of our capital structure as of March 31, 2016. We have a net debt of $659 million, a borrowing capacity under our existing revolver of about $585 million, and a bank leverage ratio of three times. Based on our strong capital structure we have the flexibility to invest in our business and pursue strategic M&A opportunities to reach our long-term financial targets.

And, with that, I'll turn the call back over to Pete.

Peter Arduini

Thanks Glenn. If you will turn to Slide 12, I like to take a few minutes reviewing our key focus areas for 2016 and beyond. With our strong performance in the first quarter, we are well on our way to achieving our 2016 financial guidance. Our Regenerative technology products are driving organic growth and higher profitability, and we are pleased with our overall execution against our top priorities.

We are looking forward to the upcoming launch of Omnigraft and will continue to advance our broader Regenerative portfolio with the addition of products like VolTAC and HuMend. We take great pride in being able to provide innovative clinical solutions that make a meaningful impact to patients’ lives.

Our unique 3 by 3 strategy will provide clinicians with three different Regenerative products through three channels and this is a well-developed strategy that positions us for our launch in June.

The new product pipeline is strong and in the first quarter we successfully piloted the Cadence two-piece ankle. In 2016, Integra will be positioned to offer surgeons a portfolio of ankle arthroplasty products.

We continue to make progress with international product registrations of our leading regenerative products, neurosurgery products and extremities portfolio, including a global launch of the Cadence total ankle system. We have a growing R&D pipeline, the number of clinical trial opportunities to enter new markets or expand existing ones, and several large new product introductions.

We are in a great position and we are making the necessary investments in channel, clinical and marketing development in order to achieve our longer-term financial targets. Finally, we are continuing to evaluate strategic M&A opportunities in specialty surgical solutions and orthopedics and tissue technologies. M&A aligned to our strategy and key business will remain a core part of our growth plans.

Overall the first-quarter performance was a great start to what we expect will be a very successful and historic year for Integra, and with that operator please open the lines for questions. In an effort to accommodate everyone, we ask that you limit yourself to one quarter and one follow-up, after which you may rejoin the queue.

Operator you may now open the lines.

Question-and-Answer Session


Thank you. [Operator Instructions] We will go first to the line of Travis Steed - Bank of America. Please go ahead.

Travis Steed

Hi, good morning.

Peter Arduini

Good morning.

Travis Steed

So revenue growth came in well above what I think anyone expected in the quarter, with the flow through to margins was somewhat limited, but just curious with the investments in the product launches more than you thought they would be this quarter and can you quantify some of these different investments and do they start to fall off in second quarter, so you can see some margin expansion?

Peter Arduini

Yes, Travis I will comment and then maybe Glenn you can talk a little bit about more of the specifics on it. I would say no surprises from our standpoint and as we have been kind of discussing from the fourth quarter on that entering two new, completely new markets to us, the ankle market, which is completely new, with two products.

And the outpatient wound care center with a major focus on reimbursement, a major focus on hands-on training and proper preparation. This is directly in line is what we thought, and again if you think of some of those items – I mentioned items, but we had a lots of hands-on training with clinicians and labs, a significant amount of work that actually went into building out the rest of our commercial teams.

I will give you an example. I mean, we upgraded some of the broader sales force and really filled out all of the roles here in Q1. So even Q4 to Q1 we have had an increase in actual feet on the street that we had as we exited last year. But I feel quite good about where we are and then really in line with what we have signaled, we still have investments to make within Q2. Those start equalizing out and decreasing as we go into the second half and that is when we start seeing more margin expansion in the second half. Glenn, I don't know what else you want to add to that.

Glenn Coleman

No, I would just reemphasize that most of the margin expansion we expect in 2016 is going to come from the back half of the year. So, in the second quarter we are still going to have a heavy investment in selling and marketing and that will kind of flatten out in the back half of the year, and as sales ramp we will see much better margin expansion in Q3 and Q4.

Peter Arduini

And just to emphasize the point on the increases, when you take a look at something like Omnigraft the largest study done, first PMA in 15 years, a product that saves money for providers, saves money out of pocket to patients, we view this as really a franchise brand opportunity, and really want to invest appropriately to have this as a product that can build and grow our company for not only the next years, but into the next decade.

Travis Steed

And just a follow-up on gross margin, so you are – over 69% this quarter and you are guiding to 69% for the full year, but DFU should help margins in the second half and can you think about what are the offsets in the gross margin line this year as well?

Peter Arduini

Yes, I will just comment and Glenn you can clarify a couple of points. If you think about the growth we had in this first quarter, a lot of the core stuff came from Regenerative products that we have had for quite some time that run significantly above the company average.

Omnigraft has good margins and very good margins, but I would say our wound care products and some of our larger products we have had for a significant time even have higher levels of margin. So when you bring out VolTAC, which is above the company average, HuMend, which is probably slightly below or at, and Omnigraft, which is above but not as high as the other products.

That is an example of how they will moderate in the second half of the year. I would say as those products grow, and we have talked about this, we ramp up our manufacturing facility, we see that margins on Omnigraft then continuing well in the range of where we are with our legacy burn and broader wound care products.

Glenn Coleman

And Travis, just a couple of additional points to add, our Precision Tools and Instruments business is doing exceptionally well. You saw 7% organic growth this quarter. That is a lower gross margin business. So some of that we are expecting to continue here for the remainder of the year, so from a mix perspective though it will put a little bit of pressure

on our margins and then just keep in mind, we talk about our collagen manufacturing center ramping up that will still be a headwind for us until we get to the end of the year.

With the new product launches as well, we will probably see some slightly lower yields on some of those product launches initially. So that is the reason why what you saw in the first quarter will be a little bit down in Q2 and then come back to the 69% plus in the Q3, Q4 time frame.

Peter Arduini

But overall good confidence in where we are with gross margins and it is, very emblematic of the products and a lot of the good work that the team has put in in cost and yield maximization over the last few years.

Travis Steed

All right. Thanks for the questions.


And we will take our next question from the side of David Lewis from Morgan Stanley. Please go ahead.

David Lewis

Hi, good morning. It is actually Jon Demchick in for David.

Peter Arduini

Hi Jon, good morning.

Jon Demchick

So Pete, wanted to start off on the upcoming DFU launch, from the commentary it sounds like the real major step left is getting the FDA packaging approval, and it sounds like you are pretty far along on the production sales training and payer access parts? So how much work is there left to do on those other parts and where are you versus your initial expectations specifically for the amount of reimbursement that you are already kind of have lined up?

Peter Arduini

Jon, and so I think you have called it correctly. We are down to hearing back from the agency on the final wording on the package itself. We feed quite good about the insert in all of those other combined items, keep in mind, what we have been very cautious about and what we think is very important is we are not just shipping a piece of product in the box, we are actually shipping a solution that for the outpatient center involves the right types of trays don't have to be defrosted, have shelf stability, have sterile drapes, have the stapler set up, has everything that they need and so, we have taken a lot more methodical approach and it has been great actually working with the agency on this.

I would say that we are slightly ahead of where we thought we would be with covered lives. We have been pleasantly surprised by the reception of about private and public payers to the quality of our data. As I had mentioned it is the largest study that has been done in this space. This study shows superior capabilities for the product in a lot of aspects, but obviously it is closure rates, the median rate of one and what that actually means for cost savings to – the system is resonating, but what is also resonating we think as payers think about this, it is also going to resonate with the best committees is in a Medicare structure the outpatient co-payment for a Medicare patient is from 20%, and so if you have one application of the product it can be $200 to $250 out of pocket that a Medicare patient pays.

If you get five or six applications you could be paying $1200 to $1400 out of pocket versus if you used Omnigraft, it will only be $200, a $1000 different personally to the patient. And so I think a lot of these things are starting to resonate and hence approvals are coming through faster. That being said, gee, why aren’t we taking our numbers up faster, we look at this as a franchise opportunity debriding the wound, properly training folks, not actually allowing people to buy the product until they have been certified or gone through training, kind of governs the speed that will ramp up and we have talked about that and we are really not gearing off of that course. So, all good, but a quite disciplined approach about how we want to grow the product.

Jon Demchick

Thank you. Very helpful, and just a quick follow-up, if there was a stronger quarter than I guess I would have expected in Specialty Surgical Solutions and actually the strongest quarter that I think you had seen in some time there, including some pretty steep acceleration in the last couple of quarters. Comps get a bit easier into the back half of the year, is there a reason why you are expecting I guess a slowdown or is it more just you know, the limited increase, it is just expectations based on where we are in the year right now?

Peter Arduini

Yes, I would say. It was a great quarter by specialty surgical worldwide. We had 8.5% overall growth Dural repair and as Glenn commented precision tools and instruments continue to perform well. I think the integration of MicroFrance and if you recall MicroFrance had a strong footprint o US but not as strong in the US. We’re starting to make some very strong connections here in the US and remember the reason we wanted it was minimally invasive open neurosurgery is tied to transsphenoidal skull base access provided by an ENT and our neuro sales force working with some new added ENT specialists, so it will start to open some doors along with new introductions. But why we moderate the growth as it goes back to Dural repair, we're still growing significantly above the market. We think we're going to continue to do so but still not at the same levels that we have been running really over the past few quarters and so we still see that moderating out some which it has but at the same time I think our brand presence, our channel coverage, we feel quite confident that we'll be able to continue to have strong growth in specialty surgical, just at a slightly lower clip throughout the rest of the year.


And we will take our next question Raj Denhoy from Jefferies. Please go ahead.

Raj Denhoy

Good morning. I am trying to get a better view on how the international business did. You give us some detail on currency and revenue from acquisition but not really a breakdown on that acquisition piece. So maybe, or maybe you could so we could better figure out how you're doing overseas?

Peter Arduini

Yes, I'll give high level comment and then Glenn maybe you want to break out a little bit more detail. I mean it was it was a strong overall performance. Internationally, I think if you look at Asia Pacific we were we were up in the high teens, some of our countries that we've been investing in quite a bit have continued to do well such as China and some of the emerging market areas that we've got a new focus on Korea as an example continuing to grow. Western Europe, again, some of the markets that are traditionally we thought of as growth markets continue to do well for us as we're building out our infrastructure. You may recall we've gone direct and instruments in multiple parts throughout Europe, we've gone direct in Italy with the acquisition of our distributor which is enabled us then to take more products that are organically developed direct ourselves and so Europe up in the upper teens as well. The big soft part is in Latin America, not a whole lot different than a lot of other folks are talking about. You know Brazil, primarily because you've got Argentina, Mexico there's a lot of dynamics that we think are going to be sopped throughout the year but an overall a strong performance and we're making good progress, I’d say also on our registration strategies as well. So Glenn, what did I miss?

Glenn Coleman

Well, I just think in terms of the organic growth. The numbers that we put up this quarter, a lot of that came from the international side of our business. So US grew a little bit faster overall, organically versus international but international business grew north to 7% organically and as Pete mentioned we saw some really healthy growth coming out of Asia Pacific in China and Japan, nice uptake with our MAYFIELD 2 product. VolTAC doing really well outside the US and MicroFrance continues to perform very well in Western Europe. The Latin America drop year over year was expected. We call that out in the last earnings call just giving some of the challenges in Brazil and Mexico so I would say that business is performing right in line with everybody’s expectations but it is down year over year. But overall I am very pleased with the performance of the international business for the first quarter here.

Raj Denhoy

Okay, so the underlying growth was about 7% overseas?

Glenn Coleman

Over 7%.

Raj Denhoy

Over 7%. That’s helpful. And then just on extremities. You guys continue to put up a very strong numbers there I am curious if any of you can offer in terms of surge and retention now that you've acquired or starting to integrate the Salto ankle anything you can offer and how tightened is doing out there, you both seems to be doing well and maybe you could just offer some additional commentary.

Peter Arduini

I would start with shoulder; we continue to have good overall growth. Obviously we're not in a high, double digits as we were when we initially launched the product. More competition coming into the field but more confidence in our product as more users are now expanding as opposed from kind of our core growth as we rolled out of a few years ago. So we feel quite good about the pace about where we are with the overall tightened and we've got a couple of other products that are going to be coming out, one is our Glenoid Solution it comes out really in the middle of this year and then a second Glenoid product that comes out later at the end of this year as well. So that's running as we expect. As Glenn commented, I think Salto has exceeded expectations, people say gee why, look at it when you're in the mid stuff of a product that may get sold off, and it’s in the transition of an acquisition. It's challenging for the seller, for anyone to kind of keep confidence what's going to happen and I think as it comes to us, many customers see us as a strong player within the lower market. We really committed ourselves to the product.

We showed that we were going to be investing back into it, brining more sets in, bring more training and then we also shared with those same customers about cadence and not to switch them but to have them we excited about that we're really going to be a strong player within the ankle market and I think that's what's starting to play out now with this 12 million that we are now seeing here for the total portfolio for the year, we think that these products are matching up well.

So that’s the doing and other thing for us is we're seeing folks that do ankle which is obviously a more sophisticated procedure than fixation or some of the other forefoot hindfoot procedures, we've traditionally been a player and it opens the door for those customers to say let me know more about the rest of the Integra portfolio and lower and so although we're still not where we want to be, sequentially we've been improving on our lower performance and with some of the new introductions and new customers coming in we see as we had talked about turning the tide around lower growth at ankle, going into the second half of the year.

So we feel quite good about the plans, shoulders works add, ankle really being seeding where we thought we would be and our lower portfolio right on track to the recovery that we had planned for.

Raj Denhoy

Right, and just one last one if I could, one of the questions on Omnigraft was could you or how would you build out this outpatient sales channel, which you hadn’t traditionally participate in and it sounds like you've now done that. So I am curious if you could offer something really about the size of that sales force, how much coverage do you think you have at this point of that outpatient setting and then also in the context of these two licenses that you done have additional products for that channel, do you think you need more still in the outpatient would setting? Or do you feel pretty good about how you're set up there?

Peter Arduini

Yes, I would first say for launch we feel quite good about where we are with people, products and support, so to answer your question directly we talk about this three by three strategy, what's really important is we have three channels that are out there that work together between key customers and in our healthcare ecosystem it's not discrete just by outpatient and inpatient. Most of these centers that are outpatient are owned by a bigger group that has in-patient capabilities, they like to do broader contracting. So we have ready to go our enterprise or a big contracting group, it’s already talking to IDMs in broader wound-care groups about how we can contract business. Our in-patient group which is now over really 130-some folks that sells our impatient products, again calls on most of the customers to do the toughest wounds there out there and a few days a week they go to the outpatient center these doctors and work on diabetic foot ulcers. So they know the technology that we bring. So they'll be focused on the in-patient market and now we have now50 representatives who across specifically dedicated on the outpatient area.

So with that combination Raj, we're able to really working on incentives between inpatients and outpatient, we're able to put the specific focus which needed on those channels and in the case of Omnigraft which will be an outpatient only base product, which really designed for that environment, to get everything you need to get things done.

Relative to VolTAC, it is a product that actually, it’s actually very cool. We're really excited about having. It's got some very good clinical data that [inaudible] has already put in place. As we mentioned we're not interested to get into basic bandages and stuff, we want to have novel technologies and the fact that this has an interesting capability where zinc and silver deposits on the bandage, it actually sailing in the body, it creates electrical current that produces the ability for any types bio-burden to build up and also increases kind of the repentance in the body which we all have that actually helps healing is really interesting. And this product can play out in the inpatient as well as in the outpatient world but what's really important for our channel to recall our indication Omnigraft, we really can't sell Omnigraft for about six weeks post the disease state.

So VolTAC now can be sold day one and so it really gives that channel a product to be put into different and we think is going to add value from the first time a patient walks in that center and then obviously if they needed to go to advance product that we have that in the bag as well and then last on HuMend you asked about that will be sold through that channel. HuMend will be sold through the surgeon and channel which is the dedicated channel that we picked up via TDI that caused on hernia, plastic reconstructive surgery to do hernia and broader plastic and reconstructive work and human tissue solutions in areas such as breast reconstruction, it's a $2 million to $3 million market that we haven't played in but we think it's going to be a really nice fit for us and with the right clinical studies on our bovine product and human product we think we're one of the few players that can offer kind of a basket of those solutions that will be needed.

Again a little bit longer play for us, maybe the next couple years but we think it's a really interesting growth opportunity and right in our warehouse.


And we take our next question from the side of Larry Biegelsen from Wells Fargo. Please go ahead.

Craig Bijou

Good morning guys, it's actually Craig on for Larry. I wanted to start on DFU and I wanted to see if you could help us think about or frame a longer term Omnigraft opportunity. Maybe in terms of surgeon adoption and revenue ramp kind of relative to other competitive products and I guess more specifically, how should we think about the impact of Omnigraft one application versus multi applications for other products. The reimbursement coverage where we stand now and how quickly that you can gain more coverage and then maybe sales force size relative to competitors?

Peter Arduini

So, I would say Craig, I am not kind of, on this call kind of attempt to give you my view on the adoption curve and outlooks. I mean candidly as we get through the next 3 to 4 months, we'll have a better view about the value committees, the adoption rate, the conversions that take place.

I will tell you though when you think about value committees, if you have a study that's highly compelling is a pharma grade from a prospective blinded standpoint it saves money for the system, saves money for the patient and actually it has extremely good human characteristics. It's a little bit easier discussion then going in with the study that people debate if it's actually clinically relevant or not.

So we feel quite good from that aspect. I think from a channel standpoint fifty wraps is that going to be adequate in the long run no? No, it's quite adequate for what we need now but there are scenarios where we'd say we may need to double that sales force in the next 18 to 24 months. And so will be very responsible about how we grow that. We have symmetric internally, we take a look at what an average rep we should be able to sell and carry which, I'm not going to communicate now but that's how we're looking at the algorithm around that and how we would manage that ramp up but I think as far as covered lives, I mentioned we're kind of ahead of where we had planned, which is a good thing that enables us to get more aggressive on where we're going to play sales representatives and put our reimbursement type focus.

We still have some work to do on the private payers side although we've already received some private approvals already some big names which we're quite excited about and also in the veteran affairs that I didn't mention but we have a smaller group of specialist and dedicated folks there as well and we expect to be full line selling within the VA systems as well.

So more to come but we feel quite good about where we said our ability to ramp up and probably most importantly the technology that we have and its capabilities. Yes, there is a negative would be, some people are paying a fee for service for as many applications as they place I would say that’s changing day by day, there's more and more clinicians that clearly are salary based or quite frankly want to do and choose the right technology for the patient and again for a patient that maybe only needs one application has less money coming out their personal pocket to pay for the product and also the product and also has very high healing characteristics and ultimately is less expensive for the healthcare system. We just think that's the winner, not only in the long run but with a big chunk of customers in the short run and that's what we will see how fast that adaption rate plays out because there is a health detention by some products that we put five applications on you personally make more money as a clinician or a system versus doing less which we think actually is going to have better outcomes and better crossed economics in the long run and again we will keep you updated and report on that as we roll the product out beginning here in June.

Craig Bijou

Great. Thanks that's helpful and just secondly I mean you have a strong market position in most of your businesses and you have been showing traction with your shoulder and the ankles and I want to ask do you feel that you have critical mass in your extremities business and I guess how important is size in that business and is that one of the M&A opportunities to expand that business?

Peter Arduini

Yes, so directly no we don't have critical mass. I have spoken about our desire relevance scale, big deal relevance being invited to the party when bidding take place in the consolidated market which really mean you need to be a top four, top five player preferably top three. We are probably in the top seven range in extremities whereas in pretty much all the other markets we talked about we are in that either one two or top three position.

So yes I think expanded acquisitions but as importantly real strong acceleration organic R&D, I will tell you that we have made very good progress within our specialty surgical neuro business in getting the R&D engine moving. You are going to hear more about that over the next couple of years of new products coming out. We have made very good progress with our genetic platform from things you have heard about from thin skin to obviously Omnigraft and our capabilities where we haven't been as a effective has been in metal and I think we have got the right R&D team in place, we have got the right clinical group around it, I think we have got the right development process to be able to get products out faster and I think cadence is probably our first good example of a sophisticated products that coming out getting it dates and looks quite promising for us so that is an area and it's an area of interest that we will stay quite focused on.

Craig Bijou

Great. Thanks for taking the questions guys.


We will go next to side of Matthew O'Brien with Piper Jaffray. Please go ahead.

Matthew O'Brien

Thanks for taking the questions. Just maybe Glenn to start off with, looking at guidance for Q2 and the organic number that you are putting out there is pretty meaningful deceleration from what you saw here in Q1 despite easier comps, what is it as far as pressure points that you guys are concerned about that leads you down to that kind of level here in quarter Q2 on the top-line?

Glenn Coleman

Thanks for the question Matt. I think the key thing for us is specialty surgical and the fact we are not expecting to see the same level of organic growth we saw in Q1 versus Q2 and again a lot of that is coming from the easy comp and precision tools instruments. Last year, first quarter MicroFrance was an easy comp, it was the first quarter of transition post acquisition, so expecting 7% plus growth in that part of our business is not something we expect in Q2 or accountably for the rest of the year.

And then as Pete mentioned on dual repair side, accountably we saw a really-really strong growth quarter again and we are being little bit cautious relative to expectations around our ability to grow with that rate in Q2 and beyond Q2. So I really kind of highlight specialty surgical out of the part of the business that we are not expecting to seeing the same level of growth as we saw here in Q1.

Matthew O'Brien

Okay fair enough. And then you mentioned the private label business in TEI being a little bit softer. Can you quantify what that impact was and which we are thinking as far as some of the shortfall that you could see from that business and then how is the rest of TEI trending versus your expectations and I guess what I am asking is there issue with drop with that asset as you are integrating it?

Glenn Coleman

Yes, so on TEI, I think the main miss versus the plan is then the private label business can they only purchase TEI, there is probably more inventory with some of our private label partners that we initially thought and so we are working through some of that and the run rates are lower than we had previously anticipated. It's probably to the tune of several million dollars just to give you quantification of it. I think we will see a sequential improvement in the TEI private label business though in the back half of the year. So expecting that to kind of recovery to the more normalized run rate but the rest of the TEI business is doing well and we work through a lot of the rep transition and turnover we have now got the right team in place to launch Omnigraft in addition to prior metrics and so we feel very good that TEI is going to perform in accordance with the plans for the year excluding the TEI private label fees which currently we are not expecting the full recovery this year. The good news is other acquired products like the Salto are outperforming so we expect to be pretty much where we thought from the overall acquisition perspective but that's where I look at the overall expectations for TEI and Salto.

Peter Arduini

Yes, I would say look TEI was a fabulous acquisition for us. I think it’s outpatient focused which helps to set us the SurgiMend product and capabilities are great. Human will go again into the SurgiMend channel. And we have to yet to talk about our pipeline that we are working on with the legacy TEI scientist and our teams but we think we have got really nice pipeline that you are going to see more and more organic growth come out from that product families, we think there is some cross synergies between the two technologies. So in the spectrum of the type of hiccups one has in integration, these are minor spectrum of things and we really feel good about where our growth trajectory can look like that capability in those technologies in a greater sense.

Matthew O'Brien

Very helpful thank you.


We will go next to the side Mike Weinstein from JPMorgan. Please go ahead.

Mike Weinstein

Thank you. Couple of quick questions so how does Dural repair grow low teens off of the comp and which it grew North to 20% last year. And maybe just help me understand with better Dural repair which is obviously a long standing relatively mature business going out strongly and then kind of neuro instruments business decline in low single digit, so it would seem that in part of the advantages having all those products together but you have got one side of the business doing extremely well and the other side of the business struggling.

Peter Arduini

Yes Mike it's Peter. I would say so the Dural repair is really made up of two key products. So it's our DuraGen family which is eight different types of SKUs, they are customized to different types of closure needs in the Dural and that has been a product, it's been with us for quite some time but we brought out different approaches and different techniques so to speak we have got suitable products, we have got a product that is actually a secured product for different types of impaired Dura and then just a few years ago we purchased Duro seal which is a sealing technology that actually goes over top sutures and I would say that asset from a standpoint of how it was brought to market really wasn't optimized previously it was owned by [indiscernible] at the time we didn't have a dedicated detailing neuron channel and so what we have been able to do is the combination of the two products which complement each other really to bring all the solutions that one needs to actually close the dura with clinical data that we are detailing the way specialty pharma company would detail in many cases with the clinical evidence out there that really hasn't been done and looking at new ways to expand the market.

So the market has only been growing in open Dural procedures probably about 2% to 4% and so we have been growing significantly above that. We have been able to actually been able to maintain our pricing through that window time but we have been also been able to bring new users in. And a lot of that is being an increased confident in the data we have been able to show them and there is a lot of use of off-label products such as fiber and sealant which just aren't as efficacious clearly in the head as a product like DuraSeal and I think with the right type of studies from highly reputable universities and stuff we have been able to convince a lot more users to move over the product and they have been very happy with it.

So that's why we have been able to get the kind of growth up into the high teens to low double-digit range in the 20s but we are also realistic in the market that's growing 4%, we are not going to be able to grow at 20% over the long run even with market expansion it's more of a high single digit growth and I have been wrong about that the last few quarters we have been able to continue to grow at a higher level but through ’16 that's clearly going to slow down and it has slowed down but we will continue to be a growth lever faster than the company average for a while.

You mentioned about instruments, instrument is actually growing quite well for us right now. I mean we are up in the upper mid single digit range, we have got some new launches actually MAYFIELD 2which is a sophisticated positioning device for neuron, the MicroFrance products all performing well and we see that continuing on, you alluded to this actually we are doing detailing with our neuron channel for a lot of these specially instrument and that is helping the growth within that product line as well.

Mike Weinstein

Yes, I was talking about the critical care piece of neuron.

Peter Arduini

Okay. Yes look it's a good question. On the neuron critical care which is actually monitors bedside monitors for oxygen and such we came out with the new product platform a couple of years ago, first new product platform we have had over a decade it was widely successful, we converted our install base pretty much all of it and so we had large bolus of growth last two years and now you are seeing much slower conversion because the folks that use the monitors, there is no lot of growth in the marketplace and as we have converted them now year-over-year we are not seeing the same level of growth as we did previous years. And we pretty had planned for that type of decrease in growth.

Mike Weinstein

Okay and then just one of the business help you spend more time on which is just that the historical, what you guys call regenerative technology but really that's the dermal repair business that's growing as nicely as it is, is that what you are referencing?

Peter Arduini

So when we talk about the broader regenerative for the company, it's more typically associated with our skin portfolio as a broader chunk of the business. So if you think about this so within specialty surgical we talk about Dural repair and in Dural repair there is two regenerative products DuroSeal and DuroGen and then the regenerative portfolio I have sighted there is skin, tendon repair, neuron repair, all of our TDI products which are obviously in burn and wound repair that fits in that broader bucket. Obviously the legacy ones and other ones that Integra has made but while we reference them in a common format is they all have gross margin that either start within it or have an eight in their number on the higher end of the scale. So the gross margin mix is extremely rich within those areas.


And we will take our next question from the line of Steven Lichtman from Oppenheimer. Please go ahead.

Steven Lichtman

Thank you. Morning guys. Just a couple of follow-up, first can you talk about repeating in ankles how you think having the two systems in the bag helps you competitively? How are the two going to get in position relative to each other in the field as you guys are calling on accounts?

Peter Arduini

Yes, I mean look simply put if you have one product you are a player if you have two you are committed. And I think the ability to have multiple systems if you think about the hips and knees guys they have multiple systems why because not every system fits the need of each patient and accountably the instrumentation doesn't fit the approach of different surgeon. So we think that the credibility where we are seeing it of having different systems that way makes a big difference and I think over the time as this segment grows you are going to see that happen with other players. I think that will bear out.

Relative to positioning, again playing off with that same point it's kind of straight forward. I think if you think of Salto, it has the most clinical data over a decade it has a revision feature which is a very important component for putting an ankle in a younger patients knowing that in a decade out you are going to need to revise that and so what's the product knee approach for that, at the same time it has probably more instruments and is a little bit more technique dependent and the products such as cadence was designed to have less instruments, more refinement that way, more bone sparring and also a set of different type of gating tools and the marketing guys are going to like this but I will just use the crew definition of different shimming structures so to speak. But you can adjust the gate on how you position the ankle and I think that becomes an important component for people with different morphology, different types of challenges that they have to get better wear, to also getting better alignment of the ankles.

So again you have two different products that can match up to different patient needs and we just think it's a great fit I think you already have designed surgeons on both sides look at both ankles and really agrees, they just makes a lot sense to have it in the portfolio that way.

Steven Lichtman

Makes sense and then just secondly Glenn on the tax rate you brought it down a bit in terms of the full year guidance is that a function of higher international mix and maybe what are you overall thoughts about bringing that rate down over the next several years?

Glenn Coleman

Yes, so the main reason why we have lowered our tax rate guidance was probably due to two factors, one: is better income mix relative to having more income coming from low tax jurisdictions predominately in Ireland and the UK would be the two major countries there and higher R&D tax credit which has been on initial plans. In longer term, we are committed to bringing our tax rate down. So absolutely as we grow international business as we look at some of our tax planning strategies our plan is to bring our tax rate down it's going to take us some time to bring it down meaningfully but clearly you can expect us to continue to move forward and progress on a lower tax rate as we move forward.

Steven Lichtman

Great. Thanks guys.


We will take our next question from Jason Bedford from Raymond James. Please go ahead.

Jason Bedford

Just a couple of quick questions to follow-up, within your ortho, tissue and technology business, as looking at the organic growth it seems like your regenerative business is still growing quickly without any real contribution from Omnigraft. So I was just wondering if you can give us a little more granularity on the drivers of this growth and maybe comment on growth and private level?

Peter Arduini

Yes, so I would say we have over the last few years a major consolidated effort on driving our broader legacy platforms in broader wounds in neuro repair, in tendon repair, in different types of deeper tissue, there were tissues types of disease state. So as an example we added a specialist group which is a dozen strong that really works with our broader sales force of over 140 those folks own nothing but the regenerative number this wraps on the numbers well so not only do we have a sales manager who is kind of imagining that you have a deep specialist who is also working with those wraps and can go in and in some cases at an institution where may take two to three days or even a week to get a conversion done.

A normal sales wrap probably would be intimidated by what has to happen or can afford to spend the time there and a specialist with other clinical health can do that and we are finding that approach is actually converting customers or taking existing customers and having them use a broader part of our portfolio on more cases so we clearly winning that right. Secondly as we brought more products out on the last past few years we brought different mashed and products out, we brought a thin version of our product out so that's also helped quite a bit. And now with the TEI you can go into a TEI customer who used the TEI product and talk about the Integra product and how it compliments different procedures same vice versa for Integra customers never use TEI so those synergies is well are just creating much stronger growth and we see that to continue as you mentioned even when we are launching Omnigraft, because Omnigraft will call in customers that are completely separate from what I just mentioned for the majority of that volume since we really don't do much in the outpatient setting today.

Peter Arduini

And Jason, I would add relative to the private level business this is now a new opportunity to a certain extend in that we have got increased capacity with our new collagen manufacturing centre, so that opens up a whole bunch of new doors for us around selling and increasing our private label opportunities and we are seeing a nice uptick in private label which we report as part of our regenerative portfolio. So that is also now becoming a more meaningful in terms of the contributions to the business so.

Jason Bedford

But it’s not like that line items was influenced by a big new contract or anything like that?

Peter Arduini

Well, there is a number of new contracts that we have got as well as new contracts that we are pursuing. I would put it this way Jason is the fact that the legacy customers that we have are pretty much the legacy customers that we have at this point of time we haven't really brought anybody new on.

But what’s happening is in some cases we throttle back those legacy customers in previous years because we are running it 90% capacity and now that we have significant more capacity we can actually get them more product that they wanted actually year ago then what Glenn alluded to we actually now have a funnel of new stuff that probably will be coming into the portfolio that's not competitive with what we do in Integra but leverage our capabilities and we believe in forecast on a go forward basis over the next few years we will continue to see an uptick. And again, private label isn't a go forward strategy for us but it's a great optimization of the capacity that we have to get better cost leverage that cost based and in some cases partner with some folks maybe in the pharma side or other sides on certain versions of technology that we couldn't afford or wouldn't take the risk ourselves. And so, the new facility really set this up well to be able to kind of work on some of those partnerships that the company really did a great job with many years ago and then in the last five or six we just had the capacity to do it and so now that's reinvigorated.

Jason Bedford

That's helpful and just maybe along the similar lines on the TEI private label discussion I was a little unclear have you lost any contracts meaning as a relationship in severed or is the lower forecast at revenues the function of lower revenue levels at the same customers?

Peter Arduini

We have not lost any of the agreements, it's lower revenues at the same customers and Glenn commented the fact that I would just before we purchased the TEI there were some larger volumes purchased from a couple of the private level partners that took them a little bit longer couple of quarters to burn through that they are now at a what we would say I think a run rate where demand matches what’s going on that's how we are going to run it. We had discussions with those partners those partners are committed to growing the business and we have a good relationship with them so we feel quite good that will pick up and continue at this new run rate. I also make the point that if there was a reason to go our separate ways but the private level products we offer are actually products that we could take direct if we needed to do so, but at this point in time we think the partners we have it's going to play out well for us to stay in line with them and keep this private level partners.

Jason Bedford

Okay, thank you.


We will take our final question from the line of Matt Taylor from Barclays. Please go ahead.

Matt Taylor

Hi, thanks for taking the question. I just wanted to ask the follow-up on the cost of margin side. So you articulated couple of dynamics between investments that you are making with the launch in differences in mix that are going to compress margins in the near term. Could you give us a longer term view on margins just articulate sort of where you are with some of the bigger programs that you focused on in the past like ERP and expanding your cost programs in terms of consolidating plans and just help us understand the view of not just this year but the next couple of years?

Glenn Coleman

Yes, so Matt I will take this one. Overall we are still right on track with our full-year plans to get to EBITDA margin number that's close to 24% that will be a significant improvement over 2015 something to turn about 180 basis points and longer term we are still committed to doing 25% plus EBITDA margin expansion due to 2018 time frame so we see half to get there. Where we are in some of the key projects the ERP system is winding down I think by the end of this year we will pretty much be completed ERP implementation that does give 100% done but we are stop calling it out as any special type charge and we will be in the kind of business as usual from that point forward.

Relative to the plan consolidation most of that heavy lifting is behind us. We have a couple of things that we are working at the moment outside the US which is coming to closure here, in the second quarter but you are seeing a lot of that play structuring of and consolidation from the past reflected in our improvement in gross margins so the fact that we are able to get to 69% plus, plus margins is a function of the improved mix but also the heavy lifting that took place over the past couple of years to consolidate plans and what we are seeing now is more productivity and efficiency coming out of our existing plans. And so that benefit is what you are seeing but most of that candidly is behind us we have got one plan referred here in Q2 that move is almost complete and then everything from this point forward I think we smaller in nature relative to our plans but we are never I say done we are always looking for opportunities to further find inefficiencies and optimization throughout the company.

Peter Arduini

The only thing I would add Glenn I think on is, your team your company with the new ERP system we have we are starting to find ways to really get new capabilities and structures in place that can optimize how we think about customers service, about our logistics visibility worldwide and many cases on inventory. So, we are just kind of hitting the tip of the iceberg on leveraging those capabilities as well and ultimately running the company more efficiency that way we are going to be able to affect cash flows as well as profitability. Just to put a finer point on it for the quarter and the rest of the year if you think about it right now we have a sales force -- that's really not selling a whole lot of products yet because we haven't launched Omnigraft and we are ramps up that's building productivity obviously for us over the long run and we have a plant that's running less than 20% capacity to make those products.

So this is what we communicated over the since our investor day and stuff so that's right on track and as we feel those that gives us great confidence that we can drive up and increase our overall margin just from those components of our own. So we are right on track to how we thought we would be and I would say we are ahead of plan relative to new product launches and kind of the ramp ups of where we have been. Team has just done a really great job of not only making the dates but exceeding the dates and setting us up well for success.

Matt Taylor

Great, thanks a lot for the comments.


And at this time we have no further questions so I would like to turn it back to speakers for any closing comment.

Peter Arduini

So, thank you all for your questions and take your time to listen to the call this morning. Good dialogue I just like to briefly comment on few key messages that we hit on our prepared remarks. First, we are executing on a 2016 financial objectives. We talked about raising our organic growth rate to 8% and increasing adjusted earnings per share growth. Second, we are entering the out-patient wound care market with the launch of Omnigraft in June and we are well-positioned to implement the 3X3 commercial strategy we talked quite a bit about.

Third we are also continuing to drive growth with new products and we will be launching over 7 new products in 2016. And finally, we are committed to pursuing strategic M&A as a core part of our growth strategy. The first quarter exceeded our expectations and we really well set up for successful 2016. So again, thank you for listening and we look forward to speaking with all of you here in the near future. Have a nice day. Thank you.


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