IART - NASDAQ

Good day, and thank you for standing by. Welcome to the Integra LifeSciences’ Third Quarter 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there'll be a question-and-answer session. [Operator Instructions] Please be advised, that today's conference is being recorded. I would now like to introduce your host for today's call Chris Ward, Senior Director of Investor Relations. Please go ahead.

Thank you, Justin. Good morning, and thank you for joining the Integra LifeSciences third quarter 2023 earnings conference call. Joining me on the call are Jan De Witte, President and Chief Executive Officer; and Lea Knight, Chief Financial Officer. This morning, we issued a press release announcing our third quarter 2023 financial results. The release and corresponding earnings presentation, which we will reference during the call, are available at integralife.com, under Investors, Events and Presentations and a file named Third Quarter 2023 Presentation. Before we begin, I would like to remind you that many of the statements made during this call may be considered forward-looking statements. Factors that could cause actual results to differ materially are discussed in the company's Exchange Act reports filed with the SEC and in the release. Also, in our prepared remarks, we will reference reported and organic revenue growth, and organic revenue growth excluding Boston. Organic revenue growth excludes the effects of foreign currency, acquisitions, divestitures, as well as discontinued products. Organic revenue growth excluding Boston also excludes the revenues from products manufactured in our Boston facility in both periods. Management believes that excluding revenues from all products manufactured at the Boston plan provides useful information when evaluating the company's organic growth because of the unusual nature of the manufacturing stoppage and voluntary global recall. Unless otherwise stated, all the segregated and franchise level revenue growth rates are based on organic performance. And lastly, in our comments today, we will include certain non-GAAP financial measures. Reconciliations of any non-GAAP financial measure can be found in today's press release, which is an exhibit to Integra's current report on Form 8-K filed today with the SEC. With that, I will now turn the call over to, Jan.

Thank you, Chris, and good morning, everyone. I want to begin our remarks today with an update on our progress on the quality system remediation at our Boston manufacturing facility and our return to market plans for SurgiMend and PriMatrix and our private label products. We recognize this remains top of mind for our investors and analysts as it is for me and our leadership team. So before going into the broader business updates, let's turn to slide four. As a reminder, during our last call, we told you we expected to resume manufacturing by the end of the fourth quarter this year. We also highlighted that the final external audits of the updated quality system would be conducted in the first quarter 2024, with results submitted to the FDA by the end of March 2024. This then paves the way for the resumption of commercial distribution in the mid-to-late second quarter of 2024. For the past four months, we have worked diligently on the remediation of our quality system in Boston, consistent with the holistic plan we built in alignment with the FDA expectations. We've bolstered our Boston operations leadership, quality expertise, project management capabilities and capacity with internal resources, and we further engaged external subject matter experts as well. We recently completed several interim external reviews that confirmed the adequacy of the changes we are making. So I'm pleased to report that as a result of all this progress, we remain on schedule with the restart timelines we communicated last quarter. Also want to provide insight into a couple of critical milestones along the way. We have plans for an external review shortly after we restart of the factory. This review will be in addition to and in preparation for the independent audits we intend to submit to the FDA before the end of March. These activities will then clear the way for us to build sufficient inventory ahead of our re-launch into the market. In the meantime, we have also been working closely with our customers to manage through the recall and have now substantially assessed and reconciled our customer's inventory. Our Tissue Technologies sales team is also working closely with our customers to facilitate product substitutions in about 10% to 15% of cases, on-track with our expectations. And finally, our manufacturing and clinical progress keeps us in-line for PMA approval for SurgiMend in the first half of 2025. The right side of the slide shows the updated financial impact. Financial results for the third quarter [both] (ph) the effect of $7 million of returns, which Lea will discuss in more detail, in addition to the lost sales for the third quarter, we previously communicated. The additional returns impact albeit isolated to the third quarter only, has impacted our revenues by $7 million. Adjusted gross margin by 60 basis points and adjusted earnings per share by $0.07. In summary, we're making significant headway towards completing the necessary remediation requirements in Boston to bring these critical technologies back to the market for our customers and their patients, and we are on-track with our communicated timelines. With that, let's move to slide five, for some overall third quarter business highlights. I am starting on the right side of this page. Our third quarter revenues were $382.4 million, and decreased by 0.4% on an organic basis. These results reflect the Boston impact, including the $7 million return reserve increase, which offset otherwise strong organic growth performance. Our topline performance was below our guidance for the quarter, and I realized this will be frustrating for our investors, but we are making things right with our customers and we're taking the necessary steps to get through this period as quickly as possible to position our business for long-term sustainable growth again. Our end markets for both CSS and Tissue Technologies remain strong and continue to grow in-line with the expectations we outlined during our May Investor Day. In the third quarter, we saw strong demand for our unique technologies across the portfolio. Excluding the Boston impact, we delivered organic growth of 7.1% at the high end of our LRP range. In our CSS business, we saw organic growth of 7.4% above our LRP range for this segment. In our Tissue Technologies business, we delivered organic growth of 6.7%, excluding the Boston impact. And our international growth was strong once again at nearly 12%. Now turning to our bottom line. Our third quarter adjusted earnings per share came in at $0.76 within our July guidance range. This result included the approximate $0.07 headwind from the increase in the Boston recall return provision. As we look beyond our third quarter revenue results and back to the left side of the page, we continue to deliver several proof points along our path to the growth commitments we laid out during our Investor Day. First, on innovating for [ad comps] (ph) we're excited about return to market of the CereLink monitors for our customers and their patients. We re-launched in our first international markets, and we'll be broadening our re-entry in the fourth quarter. We also filed the updated 510(k) in the U.S. in mid-September with an expected launch of the product in U.S. in the first quarter, early in the first quarter 2024. In addition to CereLink, we also submitted 510(k) for the next generation Aurora Surgiscope, which brings enhanced usability to the 8 millimeter Surgiscope based on customer learnings from our initial limited releases. Second, we advanced our international growth strategy with further geographic expansions, expansions of our CUSA platform, and registrations of DuraGen, DuraSeal, Mayfield, and our Duo LED lighting in EMEA and Latin America. As well as the launch of DuraGen Plus in China. Although each product alone won't be material to our overall revenue growth, collectively, they showcase our strategy to bring our existing technologies to international markets and leverage our commercial footprints. We also made a significant step forward with our In-China-for-China strategy by starting the build out of a leased manufacturing facility near Shanghai. And then third, on an inorganic opportunities and broadening our impacts on care pathways, we're delivering on the successful integration of the SIA business with greater than 100% revenue growth year-to-date and advancement of our clinical program for a second PMA approval in the high growth breast reconstruction market. We have also expanded our UBM platform with a 510(k) clearance for MicroMatrix Flex, bringing the first organic [NPR] (ph) line to the A-Cell UBM portfolio. We've also strengthened our executive leadership by appointing Chantal Veillon, as Chief Human Resources Officer. Chantal, brings a rich experience in driving cultures of talent enrichment, leadership development, and accountability. And finally, sustainability remains an integral part of how we do business. Effective ESG Management enables us to produce lifesaving products, reduce business risks, minimize our environmental impact and drive strong financial results. As part of our continued commitment to transparency and accountability we issued our second annual ESG report for 2022. This report details the progress we have made, particularly in our commitments to our customers and patients, building a more rewarding diverse and inclusive workforce and improving our environmental sustainability. And it also lays out our plans for the coming year. And with that, I will now turn it to Lea, for updates on our financial results and full year guidance.

Thank you, Jan. Now on to our third quarter financial results and I'll begin on slide six. Our third quarter total revenues were approximately $382 million, representing a decrease of 0.7% on a reported basis and a decrease of 0.4% on an organic basis. As Jan mentioned, the increase of the Boston returns provision was a headwind to our third quarter results, impacting our revenues and organic growth and driving declines in our gross margins, adjusted EBITDA margins, and adjusted EPS. In the second quarter, we estimate the returns provision based on the best available information we had at that time. However, during the third quarter, we’re working closely with our customers to assess and reconcile their returnable inventory, we recognize the need to make an adjustment to our returns provision. We believe we have adequately provided for any remaining returns. While Boston remains a significant headwind, there is much more to our results for the quarter. We continue to see solid performance across our business outside of Boston with organic growth of 7.1%, once again, demonstrating the breadth and resilience of our portfolio. Adjusted gross margin for the quarter was 64.6%, down 210 basis points versus the third quarter of 2022, primarily driven by the Boston impact. Adjusted EBITDA margin for the quarter was 23%, down 430 basis points and adjusted earnings per share were $0.76 down $0.10 compared to the prior year. Gross margin pressures, largely driven by Boston, are planned growth investments and the year-one dilution from the SIA acquisition impacted our adjusted EBITDA and EPS metrics. If you turn to slide seven, I will go deeper into the third quarter revenue performance of our CSS segment. Reported third quarter revenues in CSS were $268 million, an increase of 7.4% on a reported and organic basis from the prior year. Overall the CSS segment delivered quarterly result exceeding the growth range outlined during our Investor Day. Global Neurosurgery sales were up 8% with low-double-digit growth in CSF Management driven by Certas Plus valves, low-double-digit growth in Neuro Monitoring driven by ICP microsensors, and high-single-digit growth in Dural Access and Repair, driven by DuraGen, DuraSeal and Mayfield. We saw a mid-single-digit decline in Advanced Energy due to the timing of CUSA capital orders, offsetting some favorable timing benefits in the second quarter. Overall, excluding CereLink, capital sales for the quarter were down low-double-digits due to CUSA capital. Year-to-date, our capital sales excluding CereLink monitors are up mid-single-digits, and we remain encouraged by the continued momentum in the market for capital and the demand funnels for our capital portfolio. Instruments grew approximately 5% benefiting from strong demand. The performance of our instruments business continues to exceed long-term growth expectations for the market with high-single-digit growth year-to-date as the market remains stable and the team continues to take market share and win new business. Shifting to International. Sales grew low-double-digits in the quarter, led by China, indirect markets, Australia and Canada. Our growth in China is driven by our regional expansion strategy outlined at our Investor Day with our team in China delivering double-digit growth with strong performance across the Neuro portfolio as we grow beyond tier one city. Moving to our Tissue Technologies segment on slide eight. Tissue Technologies was down 15.6% on a reported basis and 15.1% on an organic basis compared to the prior year, excluding Boston organic growth was 6.7%. Third quarter sales in the Wound Reconstruction franchise, which includes a majority of the Boston products, decreased by 15%, excluding the recalled products, we experienced organic growth of 7.5% driven by double-digit growth in MicroMatrix, Cytal, Gentrix, and our amniotic portfolio as our sales team refocused their selling efforts this quarter following the recall related activities in the second quarter. We are pleased to see such strong demand and commercial execution in this franchise, which continue to provide us with confidence in the long-term growth potential of this business. In our private label franchise, sales declined 14% versus last year due to lost sales from private label partners associated with the recall. And finally, international sales in Tissue Technologies were down double digits due to Boston, which offset double-digit growth and Integra Skin, MicroMatrix, and Cytal. Turning to slide nine, I will now review the rest of our third quarter P&L metrics. As we look at our gross margin and profitability metrics, we continue to see Boston as the primary headwind to our gross margins representing an approximate 180 basis point impact with 60 basis points coming from the third quarter return provision adjustment and approximately 120 basis points coming from the impact of the lost sales from the recall. The remaining 30 basis point impact is due to production inefficiencies in other sites. In addition to the impact to gross margins, our adjusted EBITDA margins and adjusted EPS also reflect planned investments and the strategic priorities for the business, we originally outlined in the beginning of the year, including the year-one dilution from the SIA acquisition. On our second quarter call, we highlighted these investments as critical to our long-term growth and we continue to protect them. Finally, we saw an approximate 150 basis point benefit to our tax rate in the quarter from jurisdictional income mix and improved utilization of R&D and international credits. The third quarter tax rate also included a year-to-date true up. We expect approximately 50 basis points of the benefit to carry forward beyond 2023. If you turn to slide 10, I will provide a brief update on our balance sheet, capital structure, and cash flow. During the quarter, operating cash flow was $27 million and free cash flow was $14 million, reflecting increased working capital primarily from investments in inventory bills. Our investment in inventory is to rebuild our safety stock levels and increased inventory for our European markets in preparation for EU MDR. Free cash flow conversion was 43% on a trailing 12-month basis. Our balance sheet remains strong, with ample liquidity support our short and long-term plans. As of September 30th, net debt was $1.2 billion, and our consolidated total leverage ratio was three times. The company had total liquidity of $1.5 billion, including $274 million in cash and the remainder available under our revolving credit facility. Our balance sheet flexibility has enabled us to execute the accelerated share repurchase we announced on our July earnings call. If you turn to slide 11, I will provide an update to our consolidated revenue and adjusted earnings per share guidance for the fourth quarter and full year 2023. Fourth quarter revenues are forecasted to be between $397 million to $403 million representing reported growth in the range of approximately minus 0.4% to positive 1.1%, and organic growth in the range of approximately minus 0.8% to positive 0.7%. Our reported revenues reflect the strengthening U.S. dollar. Excluding Boston, we are forecasting organic growth of approximately 5.1% at the midpoint, driven by continued strong global demand for our products. For the full year 2023, revenues are forecasted to be in the range of $1.541 billion to $1.547 billion, which reflects the third quarter additional Boston recall returns provision and current FX rates. The updated guidance represents reported growth of minus 1.1% to minus 0.7% and organic growth in the range of approximately positive 0.1% to 0.5%. Excluding Boston, we are forecasting organic growth of approximately 6%, reflecting the stable growth in our markets and strong global demand and performance we have demonstrated year-to-date. Turning to adjusted earnings guidance for the fourth quarter, we expect adjusted EPS to be in the range of $0.89 and $0.93 down from the prior year, driven by the Boston recall, our planned strategic investments, OpEx management to offset part of the impact of the recall, and our tax rate improvements. During our July earnings call, we estimated a modest improvement in gross margin for the full year. We saw an impact to our gross margins in the third quarter due to the increased Boston recall returns and unfavorable sales mix, driven by stronger international performance. We are also seeing a slower uptake on net productivity and yield improvements. We now expect a moderate decline in gross margins versus 2022. Our full year adjusted EPS guidance is being revised to $3.10 to $3.14 per share reflecting the strength in the U.S. dollar, Boston recall returns provision, adjusted gross margin outlook, second half expense management, our recently completed ASR, and the tax favorability. Now, I will turn the call back over to, Jan.

Thank you, Lea. Please turn to slide 13 to conclude our prepared remarks. And as we wrap up, I'd like to cover a few highlights from what Lea and I walked you through. First, our progress in addressing the Boston facility and returning to the market remains on-track. Interim external reviews confirms the adequacy of our remediation plan and the changes made so far, and they reflect significant steps made towards the resumption of manufacturing by the end of the fourth quarter ‘23 and commercial distribution in mid-to-late second quarter ‘24. Product substitutions are within the expected range of 10% to 15%, highlighting the breadth and depth of our Tissue Technologies portfolio, and we remain on target for SurgiMend PMA approval in the first half ‘25. Second, despite the Boston recalls impact and the additional returns provision, our underlying third quarter growth performance has been strong. Our Global CSS and Tissue Technologies segments, excluding Boston, delivered over 7% its organic growth. Many of our product lines exhibit double-digit growth, underscoring the appeal of our diversified portfolio and the health of our markets. Additionally, our international business has delivered strong growth again. And finally, related to our long range commitments, we've taken a big step, bringing CereLink back in our international markets, and with the regulatory filing, CereLink should be back in U.S. early first quarter. Advancing our growth drivers with a 510(k) submission for the next generation Aurora Surgiscope, and we continue to progress on our breast reconstruction PMAs. We're also continuing to expand our international presence and portfolio, and we're investing to capture future international potential. In conclusion, our journey has been marked by both significant achievements and significant challenges. The radiations and improvements we're bringing to Integra are making us stronger and are de-risking the path to our LRP, and will enable us to consistently deliver our financial commitments. As an organization, we remain dedicated to our purpose of advancing healthcare to restore patients' lives. And we'd like to thank our dedicated teams for their unwavering support and hard work. Together, we're shaping a future in which we continue to make a meaningful impact on patients and deliver lasting value to our shareholders. Thank you for your time this morning. This concludes our prepared remarks. And operator, we can open the lines for questions.

Thank you. [Operator Instructions] And our first question comes from Young Li from Jefferies. Your line is now open.

Thanks so much for taking our questions. This is actually Young, in for Matt. I guess, maybe to start, just on Boston, I mean, it seem like it had a bigger impact than expected. Good to hear the substitution rates are in-line. But maybe if you can provide a little bit more color on, why the $7 million increase in return provisions, and as you're going forward, Boston impact assumptions right-sized, maybe you can also talk a little bit about customer attrition and how you can regain their business, post remediation?

Yes. So when I talk about, kind of, the impact that we saw in Q3, and then Jan, I can turn it over to you --

Yes.

…for any sort of customer dynamic. And thank you for the question. So, as we mentioned, so it's -- when we announce the recall and then in our Q2 call, we were about, call it, 45 days post the recall. So at that point, while we had obviously already done some initial work working with customers, we had limited visibility to all of the inventory that was out there and potentially returnable. So based on the information we had at that time, we projected what the appropriate provision would be for returns. Since that time, as you can imagine, we've had an opportunity to now work with essentially all of our customers and get more, even more insight and visibility into their inventory. To be able to, to more accurately assess what's returnable. And so that's the incremental $7 million that you saw impact our Q3 results. And so we're confident based on the work that we've done that and the visibility that we now have, that we've accurately captured that and provided for it in our reserve, as of the end of September. So what that means is, as we move forward, we wouldn't expect to see any impact from a P&L perspective for any future returns, because it's been provided for us as part of our reserve. And that's the only incremental Boston impact we saw for Q3. So as you think about the full-year dynamic for 2023, we had originally called out a Boston impact of about $60 million topline. That number is now $67 million topline. We had called out an EPS impact of $0.35, that number is now $0.42, but it is isolated to 2023. In our July call, we had mentioned, we’ve called out, while we did not provide guidance on 2024, we did articulate our expectations of the Boston impact on 2024. And at that time, we had communicated an impact of $50 million topline and $0.30 to EPS. That projection remains unchanged. As I mentioned, the nature of what happened in Q3 really was isolated to returns and does not have an impact on what we called in 2024. So hopefully that answers your question.

Yes. That's been very clear. Appreciate the color. I guess maybe --

Yes, Matt. Matt, you had, your second question. Okay, if I answer that one?

Yeah. So thanks for that. So for the follow-up question, I guess, was wondering, in terms of, share loss, how much do you expect to recapture, following the re-launch in mid ‘24? And how are the impacted reps during this time? If you can comment about what they're focused on, what they're doing?

So, let me get in three, three parts, right, all linked to how are we prepping for commercial return. First, the sales force, the reps, a lot of attention, both from a perspective of communication, but also compensation, we're planning with them. We stay close to them, keeping closely informed. We definitely have some higher attrition than normal, but well in control, I would say. Second, yes, that sales force remains in touch with our customers. And that's where the substitution is important, both in the Wound Reconstruction as well as in the Surgical Reconstruction. We have substitute products, which that allows sales force to be in the door, be in the procedures, and work with customers to maintain the relationships and as we indicated, in between 10% to 15% of the procedures that have substitutes. And then third, from a re-launch perspective, our sales teams and sales leadership estimates that, yes, we will be back to about 100% of our business in about 12 months after the allowance. And that's really driven by two elements; one, the strength of the relationship; and then second, the merits of the products that come out of our Boston facility. These were products that were getting market share and before we did a recall, all for good reasons. And those reasons will be still there when we announce [indiscernible].

All right. Thank you so much.

And thank you. And one moment for our next question. And our next question comes from Vik Chopra from Wells Fargo. Your line is now open.

Hi, good morning and thanks so much for taking the questions. Two for me. I'll start with the first one. So, we've heard about increased anti-corruption issues in China that could make access to hospitals more difficult. Maybe just remind us what percent of your sales are from China and what impact this could have on Integra? And then I just had a follow-up.

Okay. So I'll take that, Vik. Our China sales about 5%, 6% of our total, specifically to your question on the anti-corruption, I think like many, many companies, that we've seen confusion and some freezing of some commercial and professional education activities in the first week, right. Specifically in the month of August, we've seen it improve over September and then continue to significantly improve over October. When we look as our impact on the business, it's not material. And that's linked to our portfolio we have in China. That, that 5%, 6% of total is essentially neurosurgery portfolio, a lot of consumables and therefore linked with procedures. Now, neurosurgery procedures are cannot be delayed for significant times. We've seen that also during COVID. And in addition, the procedures themselves don't lead to themselves to too much judgments or overuse. Okay. So the tightening of some controls doesn't translate into tightening what goes on with neuro procedures. And in addition, we have strong internal controls and policies in place. So, from a -- how we operate, there's no need or no change that we're using in our process. So, yes, overall that, we've seen some of the ways in August, but as you see in our third quarter numbers and what we expect is we have no material impact on our business.

Great. Thank you for that color. And then my follow-up question, pretty topical, I guess. It's on GLP-1. Maybe just any thoughts on what you have, about GLP-1's near-term and long-term, kind of, what it means for Integra. I just don't think that the impact is as clear for Integra, as for some other companies. Thanks so much for taking the questions.

Yes. So GLP-1, we have not seen, and we don't foresee any material impact. That's also what we hear back from interactions with our customers. If you look at our business and our LRP growth drivers, and then the link with GLP-1, it's very limited, right. If you look at neurosurgery, it's difficult to argue that the incidence rates of traumatic brain injuries, tumors, hydrocephalus would be impacted by decline in the prevalence of diabetes or obesity. And I would say the same for Tissue Technologies, the vast majority of our sales are in the acute settings and for non-diabetic food ulcer linked wound care. So again, here, difficult to see the link between incidents, [Rachel Burns] (ph), traumatic wounds, and breast reconstruction and the impact of GLP-one. So as I said, we have not seen, and we don't foresee any material impact. And thank you.

Thank you. And one moment for our next question. And our next question comes from Robbie Marcus from J.P. Morgan. Your line is now open.

Good morning. Thanks for taking the questions. I wanted to start with 2024 and how we should think about the recovery of the lost sales from the Boston products. And one clarification, is the $15 million headwind off of the reported 2023 or ex, you know, what you would have done without the recall. And how do we think about lost sales and the recovery there? You'll have been off the market for a long time. This is a highly competitive market. Doctors will likely have moved on and tried other devices. How do we think about the ability to regain share? Is it 25%, 50%, 75% of the lost sales. And how long do you think that'll take?

Yeah. So, Robbie, I'll start with just framing kind of what the $15 million relates to. And so really just to ground you, if you take a look at our, the guidance that we provided going back to April. So the full year basis, what we thought the business is going to be, you apply the growth factor that we assumed as part of our Investor Day in terms of how we projected the business to grow. The $15 million is off of that. So that's how to think about, you know, the impact that we characterize from Boston in 2024. And then I'll let Jan talk maybe some of the questions around getting back into the market.

For Robbie, as I also touched when with, I think, Matt's question, if you look to our Boston portfolio. The portfolio we were building share. And so getting back in the market is first getting back to where we were and then getting beyond that. In terms of getting back to where we were say, mid 2023. That's where our sales force, is planning in and assuming it will take them one year to get back to where we were and then continue to build that share beyond. As I indicated, based on the merits, all those exceptional products that we're making in [indiscernible].

Great. And if I could just squeeze one more in, as you think about your forecasting, your modeling, it looks like CereLink is moving back a little bit in the US. How conservative should we think about that $15 million and is that something that may move around or down as we move through next year? Or is that a number you think will not move any lower? Thanks a lot.

So, are you asking about CereLink. So, CereLink we are anticipating an early Q1 launch. I think, what we've said in the past in terms of, as you think about the size of that business and once we've relaunched in all markets for monitors, we'd expect the business to be kind of back at the run rates we saw previously, which is about $12 million annually. So that's CereLink. The $15 million impact that I characterized earlier to your first question was specific to kind of Boston based product portfolio and the impact to that portfolio as a result of coming back into commercial distribution in the mid to late Q2 timeframe. So that would be kind of independent of CereLink. So I'm not sure if I missed part of your question in there.

No. It's okay. Thanks a lot.

And thank you. And one moment for our next question. And our next question comes from Ryan

Good morning. Thanks for taking the questions. I want to talk about the Tissue Technologies business for a moment, if I could. You guys did 6.7% organic growth, ex-Boston. If I'm not mistaken though, you know, you estimate the markets are growing at 7% to 9% from the Analyst Day. So help me understand. I mean, even if we remove Boston, is the market getting worse in the third quarter? Is that spillover from Boston? And just how you think about your growth in tissue ex-Boston relative to the market?

Yeah. So, maybe I'll start and then, we can have a Jan chime in. So and thank you for the question Ryan. So again, if you think about from a tissue tech perspective, we saw, in Q2, ex-Boston, we saw that business grow at about 3.8%. And we knew at that time that we had even though we had that's the ex-Boston portfolio. There was some distraction in the sales force as they were, you know, part of the efforts to manage the recall. And we had anticipated that growth would accelerate into Q3 as we started to reposition the sales team, which is exactly what we saw happen. Right? So that growth accelerated from 3.8% to what we, we talked about which is the 6.7%. To your point, it's not quite at the LRP kind of rate, but I think a lot of that has to do with the fact that, again, for Q3, we were still in the process of repositioning, developing our substitution strategy, executing on that. And so I don't know that we were necessarily hitting on all cylinders from the absolute beginning of the quarter to the end, but I think the clear momentum pickup that we saw in Q3 versus Q2 illustrates what we have -- the potential that this business has in terms of what we can drive and deliver in growth. And as we look out to Q4, we would expect that to continue, such that on a full year basis, we would expect, again, ex-Boston to be in that kind of 7% to 9% range that we communicated at Investor Day. And I know there was a second part of your question. I don't know if I answered that fully Ryan.

Yeah. No. Thanks, Lea. Is this kind of how you think about the growth and the impact. As you're remediated in Boston, we all can see kind of what the growth is ex-Boston, but what kind of spillover impact does that have in the other businesses? I mean, you would think that’s SIA’s acquisition is growing to 100%. So clearly, it's making up for some of the losses on Boston. But can you grow at or above market rate ex-Boston with everything going on there? And that's kind of the point of that question.

Yeah. So sort of maybe go a bit deeper, Ryan. So one, when you said 7% to 9%, definitely our best strategy, and therefore, Boston, is a growth creative dryer within that mix. Right. So the comeback next year, we're further put that portfolio into the right mix. That said, when we look at the rest of the portfolio, our A-Cell, MicroMatrix, Gentrix, Cytal, I mean, very strong, I mean strong double-digit growth that we continue to deliver there. Demand for Integra Skin is strong. Part of that is substitution, yeah, [from matrix] (ph) away. So we when we look at the portfolio and how it performed for third quarter we feel good with that portfolio, we feel good with the markets. Of course, we're missing the Boston products. And like Lea said, July from a sales perspective, they were still very much chasing to understand the inventory, and drive the recalls, back from the field. That's, as of August, that came a lot more back to us tomorrow.

Okay. That's very helpful. Yes. And then the follow-up question, just to be clear, because I think there's some fears out there that, and this is a potential what if, but if there is a government shutdown later this year, does that impact the ability of the FDA to come into your facilities? And so just to kind of be clear, can you just very specifically walk us through kind of what's required to get the Boston facility, given the green light to proceed as normal to manufacture again. Do you -- is it just external third party reviewers that the FDA need to come in at any point, it'd be helpful just to understand that more specifically.

So the short, Ryan, is that the FDA does not have to come in. So the requirements from the FDA is that when we decide that we're substantially complete with the remediation, we bring in an external auditor. Okay. We've shared that name of that company with the FDA. They've approved of that. So they will come in, do the audits, we assume that given all the preparation we've done, this will be a satisfactory audit. We decide on our own terms to restart the factory. The only thing that the FDA wants is that we sent or shared that audit report with the FDA. But there's no go or check, by the FDA. Before we start the factory or start shipping again, certainly.

Okay. Very, very helpful, Jan. Thank you.

Just, Ryan, if I could just -- I'm sorry. One other clarification or just a final point on that. So that's with respect to Boston. The one other thing, is with respect to our 510(k) submission for clearance, in the US for CereLink because that submission occurred prior to any official government shutdown, our understanding is that timeline will remain unpacked. So that we won't see an impact from that either. If we had submitted it post the government to shut down, then we would be at risk. But our understanding is at this point, we our timeline for that is still, tracking to what we communicated.

Thank you, Lea.

And thank you. And one moment for our next question. And our next question comes from Craig Bijou from Bank of America Securities. Your line is now open.

Good morning, everyone. Thanks for taking the questions. I wanted to ask on CereLink. So you started the relaunch in, I guess, like a couple international markets. So, Jan, maybe just talk a little bit about kind of the strategy and when you'll get to a full international relaunch. And then I know it's been asked before, but, you know, how to think about any contribution from either the international launch or US launch and how it could potentially ramp once it's fully launched, both here and outside the US.

First, on the international asset, you're correct. So end of the third quarter, September we launched several countries, Canada, South Africa, the [nordic] (ph) countries. The priority is very much determined by two factors. One, there's the timeline of the local regulators, which go from very short to reasonably short. And then second, there's a couple of basic logistics assumptions there. In the month of October, we're relaunching several other in the countries, Southern Europe, a bit of Eastern Europe, UK is going on. Switzerland is going on. And so every month, yeah, over the next two, three months, we will be bringing on more countries in Europe. And that brings us to January when, when we move as should start to be launched in [March] (ph). Again, from the question on ramp up, what we picture is a ramp up, yeah, comparable to the first year of the severance launch in 2021, 2022, where in the first 12 months, we were 12 months on the market before we recalled, we sold, yes, almost $12 million, so roughly $1 million a month. And so we model, in function of that ramp up in 2021, 2022.

Got it. That's helpful. And then on the on the Boston facility, wanted to see, I understand the process there, but wanted to see, have you had any additional, or incremental conversations with the FDA on your plan. And if not, do you plan to recognizing that you guys have already set out the plan with the third party. But just wanted to see if there's going to be any other additional conversations that you expect with the FDA?

So, the short answer is yes. So remember where we, in end of July, got this warning letter, we responded to that warning letter within two weeks with our plan to address those issues and the broader holistic plan. We got a confirmation from the FDA that they are aligned with this, and this goes back to some of the dates that the FDA has put down like doing that external audit before March 31st next year. We also had a telephone call with the FDA to make sure that [indiscernible] each other well plus, we shared, some of the external companies we're using and will use for that external audit. So we wanted to have that aligned with the FDA in which they are fully aligned. As of that point, every two, three months, we do send updates to the FDA. So we keep them informed on the major stages of progress and main actions on the Boston facility.

Great. Thanks.

And thank you. And one moment for our next question. And our next question comes from Richard Newitter from Truist Securities. Your line is now open.

Hi. Thanks for taking the questions. I was wondering if I had just asked on SurgiMend. We're getting close to the FDA, I think providing feedback on the clinical addendum that you had filed for that product. What can we expect to come out of that? And is there anything in there that could potentially delay timelines for that.

So expectations, I think we communicated we submitted in July that [indiscernible] and there's some further information that's being shared. We expect, early next year to get, feedback and the goal of that clinical part of the PMA. Now what we tried to explain last time is that the critical path for the PMA becomes the pre-market inspection of the Boston facility, which can only happen when the factory and the commercial is fully up and running. And so we expect that the market audits to happen either end of 2024 or early 2025, which leads us to PMA approval in the first half of 2025.

Okay. And then, second question, can you just bridge us between the gross margin from 2Q to 3Q, just one more time. I just want to make sure I have all of the components right there -- to get there. And then also, any comments on M&A, just and capital deployment given the space and valuation compression over the last few months. Thanks.

Yeah. Happy to take the question. And so let me provide a couple of data points. So as we look at our gross margin was 64.6% for the quarter, it was down about 250 basis points from kind of internally where we had been tracking. And that's made up of three elements. First, the Boston return has a direct impact on margins and that was about 60 basis points. But then we also saw an acceleration of growth internationally that was higher than we had anticipated and that did have a negative margin impact coupled with some -- within the US, some product mix dynamics that also had a negative margin impact. And that was about, 90 basis points together. And the remaining 100 basis points is driven by kind of the slower uptake on productivity improvements that we had anticipated. So that's the dynamic that played out in Q3 relative to what we were expecting. As we move into Q4, we'll see a couple things. One, we won't have the Boston return repeat. Right? So that 60 basis points comes back. We also would expect to see more normalized kind of, revenue mix growth dynamics, between international, US and some of the product timing that gave rise to negative margin dynamics should alleviate. So that should come back as well. What likely won't come back in the Q4 timeframe is the net improvement in productivity initiatives that we had outlined, so that will likely continue to be a gap. And that's why we're now calling a moderate decline year on year, full year 2023 versus full year 2022. As I characterize kind of the nature of that net productivity, uptake or slower uptake. A lot of it is we've talked about we see opportunity to drive improvement in our gross margins. We've deployed teams to go after not only identifying initiatives, but starting to execute, but we started to do it kind of in small pilot areas. And what we've been able to confirm is that the value is there, greatest value being in some of the tissue tech sites that we have, but the expertise needed to execute on those initiatives is the same expertise that we need to help support the Boston restart plan and so we were not able to deploy as many resources against that effort as we had anticipated. And so that's what's causing the slower uptake versus what we had anticipated. So I'll pause there on gross margins. And I can go into M&A if you want.

That was very helpful. Thank you.

Yeah. Richard, on your M&A question, I mean, clearly, M&A will continue to be a priority for capital allocation as part of our long range planning, though at this point, I would say we temporarily are tempering somewhat. And specifically at tissue tech, which I think is quite obvious given that management is very focused on getting Boston back. That said, we have our strategic game boards often, you don't fully control the timing. So we are continuing to explore and then primarily on our CSS, our Codman Specialty Surgical sites, and specifically we say midsize store tuck in deals that meet our return on investment requirements are strategically, you know, fitting to our business and also fit within our financial discipline, which remains strong in the business.

Okay. Very helpful. Thank you.

And thank you. And one moment for our next question. And our next question comes from Steven Lichtman from Oppenheimer and Company. Your line is now open.

Thank you. Good morning, everyone. Lea, just wanted to follow-up on gross margin. You talked about some of the near-term dynamics and the efficiency opportunities you see, I guess, certainly Boston, becomes less of a focus for the team. Can you give us your updated thoughts overall where you see gross margin tracking over the next couple of years? I mean, update if you could, on other drivers that you see, for gross margin, particularly now with you having more time in the CFO seat.

Yes, Steve. Happy to take the question. So bigger picture or longer term. So, A, just to be clear, we're not providing an update on any LRP guidance at this point. But to your point, I have taken, additional time to drill into the opportunities that we have to improve gross margin. I remain committed that there is value there for us to create, but it's a lot to unpack. And so if you recall at Investor Day, we said there's about a 300 to 500 basis point opportunity for improvement in gross margin over our LRP period. And it was coming from three primary places. Volume mix price was kind of one bucket. The productivity yield initiatives that I referenced earlier was kind of bucket two, and then footprint optimization was a third bucket that we had articulated. And I would tell you the volume mix price is totally embedded in how we are driving revenue and bringing MPI to market. And so that still remains very viable. And as you saw, based on our results in Q3 in terms of the business outside of Boston that business is growing at our LRP day levels. And so as that continues to happen, as we bring MPI to market, we will realize that the gross margin improvements related to that. The second piece that I articulate around productivity yield, those are the areas where it's a slower uptake, but the opportunity is still there. We will need to redeploy resources or accelerate the deployment of resources against those efforts in order to extract it. And so that's what we're looking at now to understand from a timing perspective, you know, when that happens and the overall magnitude. So that's how we're thinking about it right now. And, you know, more to come. We'll have an official update as we finish going through our LRP process.

Okay. Understood. And then just a follow-up on, I don't think we touched much on Aurora in the 510(k) filed. I think you gave some long term thoughts on the market opportune or the product opportunity for you guys in 2027. How are you thinking about sort of the ramp of that product as we go through 2024? Thanks.

So as we communicated in the past, right, the past couple of years, yeah, we're limited release to learn in the case, of the Surgiscope, the 8 millimetre Surgiscope that has led to some upgrades to the product, and that's a 510(k). We consider that 2024 is the first real commercial year where we have the product sets, we have the sales force and will start to go into the market. We're not sharing projection or guidance yet on what we expect there, but definitely a different, a different rhythm, a different slope in terms of commercial opportunity and commercial thrive.

This to point on that within Q3, we did see strong growth on our Aurora. It was it was up high double digits for the quarter. So some momentum building there.

Great. Thank you.

And thank you. And our next question comes from Matthew O'Brien from Piper Sandler. Your line is now open.

Good morning. Thanks for taking the questions. Real quick, don't you need the warning letter listed, at the Boston facility before you can submit the SurgiMend TMA?

Yes. And so that's the reason why, after we get going, we'll have the FDA in to audits, auditing linked to the warming letter and auditing to the pre markets audit for the PMA. So between say mid next year and end next year, there will be FDA audits in there.

Okay. But you need to have it lifted before you can submit. Got it. Okay.

Well, we can submit -- we can submit -- sorry, Matt, we can't submit before the audits, but the FDA will only approve after successful PMA audit.

Lift to the warning letter. Got it. Okay. And then on the Boston impact. Can you -- can I see that how a little bit more just in terms of -- is that impact a gross impact or a net impact that includes positive offsets from the substitute products that you're selling in kind of 10% to 15% of your cases?

Yeah. So that's a -- it does not include the substitution impact.

Okay. So it's just -- it's a gross impact. It's not a net impact.

Yeah. Correct. Correct. Not net of substitution. Correct.

Got it. Okay. That was it for me. Thank you.

And thank you. And one moment for our next question. And our next question comes from Jayson Bedford from Raymond James. Your line is now open.

Thanks. And good morning. Just a couple of quickies. On the timelines, to return to market, Jan, you mentioned in line with previously communicated timelines. Just to be clear, the expectation is late second quarter 2024. Is that correct?

Mid-May to end second quarter. Okay. So that's the timeline we project and plan for. And that's also as we communicated three months ago.

Yep. Just to be clear. Thank you. And then can you just remind me of the revenue breakout between private label and the rest of tissue tech from the Boston facility. And can we assume that the private label component is pretty sticky and the challenge will be more on the rest of the business?

Yeah. So in terms of kind of dimensionalizing it, so our private label business is within the Boston portfolio. It's about 20% of the Boston portfolio. And if you recall, Boston, we dimensionalize at about 5% of our total revenue base. And so, obviously, we are continuing to work with our private label partners during this time to help them understand our remediation plan, give them as much insight and collaboration throughout the process. Obviously, you know, they have to make the kind of their own determination at the end of the day in terms of the path that they will take. But we are being, very collaborative in terms of our interactions with them.

And is it your expectation that you keep a 100% of that private label business?

I think Jayson, as you said, it is strictly in the sense that for a private label customer to develop a new supply, validate it, it takes significant time and effort. That said, I mean definitely at this point in time, our private label customers are, frustrated with us, we're staying close to make sure information wise, they what to have and they can have their planning. I think as we get closer to commercial release, that's where we'll see, if and where we would have impact on our private label business forward.

Okay. Thank you.

And thank you. One moment for our next question. And our next question comes from David Turkaly from JMP Securities. Your line is now open.

Hey, good morning. Just a quick one on the guidance. It looks like you updated 2023. You're able to offset some of the Boston impact with the lower tax and the lower share count. And I know it's probably just high level 2024, but you reiterated the impact in the EPS of $0.30. Could we view that as possibly conservative given that some of those, the share count specifically and the tax may carry through?

Yes. So, yes, so just to be clear, we do not provide guidance for 2024, but to your point, when we quantify the Boston impact, 424, that was only looking at Boston in isolation. So I think to your point, as we have tax benefit that will carry forward that is not reflected in that EPS number that I gave you because that was Boston only.

And your share count as well. Right? I mean, imagine it's fair.

Okay. Correct.

And then just one quick follow-up, please, the 10% to 15%. You guys have so many options there, synthetics and biologics. I'm curious if you think that that might be too low. I know you said that you're in line with that now, but given the options you have, could that change?

The answer is yes. This is a learning process both for our sales force as for our customers. And definitely from a sales force perspective, we've seen them every month getting better at understanding what, where, how to bring that portfolio to. So we are driving to hopefully be at the higher end or above the higher end of the –

Thank you.