Integra LifeSciences Holdings Corp
|Integra LifeSciences Holdings Corp. |(IART-NASDAQ) |$35.85* |
Note: This report contains substantially new information. Subsequent reports will have changes highlighted.
Reason for Report: 1Q13 Earnings
Prev. Ed.: Apr 15, 2012; 4Q12 & FY12 Earnings (share price and broker material considered till Apr 12, 2012)
Brokers’ Recommendations: Neutral: 66.7% (12 Firms); Positive: 27.8% (5); Negative 8.3% (1) Prev. Ed: 8; 8; 0
Brokers’ Target Price: $41.46 (↓3.54 from the last edition; 11 firms) Brokers’ Avg. Expected Return: 15.6%
*Though dated Jun 11, 2013 share price and brokers’ material are as of Jun 5.
Note: The tables below for Revenue, Margins, and earnings per share contain fewer brokers’ material than the brokers’ material used in the Valuation table. The extra figures in the Valuation table come from reports that did not have accompanying spreadsheet models.
Portfolio Manager Executive Summary
Integra LifeSciences Holdings Corporation (IART) is a diversified medical products company that reports revenue under three business segments: Integra NeuroSciences, Integra Orthopedics, and Integra Medical Instruments.
Of the 18 firms covering the stock, 12 (66.7%) assigned neutral ratings and 5 (27.8%) provided positive ratings and 1 (8.3%) firm had a negative outlook.
Neutral and negative or equivalent outlook (13/18): The firms hold mixed reviews about Integra for 1Q13. They remain disappointed with the fact that in spite of the company’s results being in line with the estimates, however, the guidance provided by them is quite conservative. Regular FDA scrutiny remains a cause of concern for the firms. In addition, they are also worried about the product recalls taking place on a regular basis, which in return is hurting the company’s revenue. They further believe that the only reason owing to which the revenue has grown marginally is because of the robust growth in U.S. Extremities. But they do not see a further upside in the foot and ankle business, and hence expect the revenue to lower. According to the firms, on a general basis, problems faced by the company include problems in integration of acquired business, quality control issues which attracts regular FDA scrutiny and inability to improve margins. Although the firms are encouraged with the company’s recently provided long–term growth plan, they remain on the sidelines till further visibility is obtained, which is expected no sooner than FY14. However, the firms are encouraged to note that Integra witnessed minimum slowdown in surgical volumes compared to its peers under the challenging macroeconomic environment. They expect Integra to gradually emerge as a stronger player in the market based on its broad range of products. The firms believe that management will remain disciplined in its acquisition strategy and product launches.
Positive or equivalent outlook (5/18): The firms are encouraged with the in-line results of the company. The positive firms believe that ex-recall figures would have beaten the estimates, and hence remain encouraged regarding company’s performance. They further believe that FDA matters will stay for a while, though these will not be likely to affect the company’s financials. They are encouraged with the company’s five-year detailed restructuring plan for achieving 5% to 7% revenue growth with focus on improved profitability. The firms expect these measures to drive the company’s margins further. They consider Integra’s International setup as the key long-term revenue growth opportunity. They are optimistic as Integra caters mainly to non-elective procedures, which makes it a relatively safe investment. The firms also remain positive regarding Integra’s continuous improvement in regenerative medicine, improved inventory management and manufacturing efficiencies.
Jun 11, 2013
Overview
Integra LifeSciences, a world leader in regenerative medicine, develops, manufactures, and markets cost-effective surgical implants and medical instruments. The products are used primarily in neurosurgery, extremity reconstruction, orthopedics, and general surgery to treat millions of patients every year. Integra is headquartered in Plainsboro, N.J. and has research and manufacturing facilities throughout the world. Additional information is available online at Integra-.
Analysts identified the following factors for evaluating the investment merits of IART:
|Key Positive Arguments |Key Negative Arguments |
|The specialized spine sales force creates significant opportunity for |The company is facing stiff competition from large-cap players like |
|Integra, as the spine industry is currently the fastest growing market |Medtronic, Zimmer Holdings, and Smith & Nephew in the extremity fixation |
|(estimated 5%−7% growth rate per year). |market. |
|The company continues to introduce new products in Extremity |The firms remain concerned based on the continued pricing pressure and |
|Reconstruction. A larger sales force should help these products penetrate |increased operating costs leading to bottom-line contraction. |
|deeper in regions across the globe | |
|Most of the firms are encouraged by the company’s five-year growth and |The manufacturing overhang on the Collagen manufacturing unit in |
|restructuring plan, successful implementation of which is expected to |Plainsboro following the FDA inspection may create a downside for the |
|drive the company’s profitability and margins further in another five |company’s regenerative segment. Additionally, downside was also brought |
|years. |about the product recalls from Anasco, Puerto Rico facility. |
Note: The company’s fiscal year ends on Dec 31.
Jun 11, 2013
Long-Term Growth
Integra is the industry-leading company for neurosurgery products with expanding orthopedic businesses in the Extremity Reconstruction and Spine segments, one of the faster-growing markets in the medical device space. The company has a leading market share in neurosurgical implants (34.5% of FY12 revenue) and surgical instruments (22%), as well as an emerging presence in orthopedics (43.5%) driven by investment in extremities and spine.
The company has historically built its portfolio through acquisition, executing more than 40 deals since 2000 and effectively diversifying from its legacy collagen matrix product lines. Besides acquisitions, the company generates growth by leveraging its core biomaterial technology, adding to its sales force, and by increasing distribution capacity. Integra’s products cater to non-elective surgeries, which should provide some stability on the demand side, as these procedures tend to be recession-resistant. Since the beginning of FY09, the company acquired 6 businesses or product lines. The company generates strong cash flow, which can be used for acquisitions or to pay debt. The firms believe that the expansion of sales and distribution capabilities in the extremity reconstruction and spine businesses could generate better-than-expected sales growth.
Overall, the firms have a mixed long-term outlook on Integra’s business. While Integra enjoyed steady improvement in sales based on both acquisitions and organic growth, the same pattern of periodic acquisitions may not continue in the future. The company has a healthy pipeline of products, particularly in the higher-growth spinal area. Further, Integra faces competition from several larger players in both the neurosurgery and orthopedics markets. Going forward, the firms expect Integra to record 5% and 9%–10% growth in the top and bottom lines, respectively.
Even amid near-term macro challenges in Europe, international expansion remains vital to the company’s long-term growth strategy. Orthopedics remains in focus as it still represents the largest market opportunity. The company is expected to invest more in the necessary infrastructure to support geographic expansion and new product introductions, which should drive gross margin further.
Five-year Growth Target: During its analyst meeting on Oct 25 2012, Integra outlined its five-year growth targets. The company sees itself as a 5%-7% top-line and 9%-13% bottom-line grower over the next five years. Integra’s new CEO Peter Arduini provided a path to generate $100 million in cost savings and 400-500 basis points in gross margin improvement over the next five years. The company’s key initiatives include supply chain optimization, facility consolidations and standardizing IT and quality systems across all locations. The firms are impressed with Integra’s margin expansion strategy as according to them, over the past few years, the company’s mergers and acquisitions integration efficiencies were not up to the mark. However, they believe that achieving the long-term revenue growth could be difficult if there is no macro-economic recovery.
Jun 11, 2013
Target Price/Valuation
|Rating Distribution |
|Positive |27.8%↑ |
|Neutral |66.7%↓ |
|Negative |8.3%↑ |
|Avg. Target Price |$41.46↓ |
|Maximum Target |$50.00 |
|Minimum Target |$35.00 |
|No. of Analysts with Target price/Total |12/18 |
|Average Upside from Current |15.6% |
|Maximum Upside from Current |39.5% |
|Minimum Downside from Current |2.4% |
Risks to the target price and valuation include a slowdown in the economy, which is likely to impact hospital capital spending and elective procedures, competition, slower spine market, and integration issues associated with acquisition.
Recent Events
On May 2, 2013, Integra LifeSciences reported its 1Q13 results.
Highlights are as follows:
➢ The company reported net loss per share of $0.15 in 1Q13, significantly down from EPS of $0.23 in 1Q12. Adjusted EPS decreased to $0.39 in 1Q13 comparison with EPS of $0.71 in 1Q12.
➢ In 1Q13, revenues grew marginally y/y, from $196.7 million in 1Q13 from $196.1 in 1Q12, while on a constant currency basis also the growth rate was negligible.
➢ For FY13, Integra guided revenue in the range of $840 million – $852 million from previously guided range of $865 – 880 million. GAAP EPS is expected in between $0.90 – $1.22 from previously guided range of $1.68 – $1.87, while on an adjusted basis, the EPS is expected in between $2.40 – $2.70 from previously projected $3.08 – $3.27.
Revenue
Integra reported total revenue of $196.7 million in 1Q13, versus $196.1 million in 1Q12, up marginally y/y (up marginally at CER). Recalled products adversely affected the company’s revenue by $2.9 million. Additionally, recall-related shortages affected the revenue in the range of $6 million and $7 million. The product shortages primarily affected the DuraGen and few products in the private label business.
Guidance: For 2Q13, the company expects the revenue to grow in the range of $205 million and $211 million.
For FY13, Integra guided revenue in the range of $840 million – $852 million from previously guided $865-880 million. In terms of percentage, revenue is expected to increase in the range of 1% and 2.5%.
On a segmental basis, growth in U.S. Neurosurgery is expected to be within flat to mid-single digit, U.S. Instrument revenues are expected to increase flat to low single digits, U.S. Extremities to grow within mid-teens and U.S. Spine & Other revenues to grow from mid-to upper single digits.
On Oct 24. 2012, Integra, reaffirmed its five years organic growth expectation of 5%–7%, based on 3%–5% growth in U.S. Neurosurgery, 2%– 4% in U.S. Instruments, 9%–11% in U.S. Extremities, 1%–3% in U.S. Spine and Other, and 10%–12% in International.
Segment Reporting
Integra reports its revenue under five categories: International, U.S. Neurosurgery, U.S. Instruments, U.S. Extremities and U.S. Spine and Other.
International (23.3% of revenues in 1Q13)
This segment sells similar products of the other four categories in the following geographies:
i) Europe, the Middle East and Africa
ii) Central/South America, Asia-Pacific and Canada
Total international revenue in 1Q13 was down 1.7% y/y at $43.6 million. Recall related problems affected the revenues on an international basis. However, the losses were partially offset by growth in spine implants, dermal and lube franchises.
On Jan 18, 2013, Integra introduced a device used for filling deep soft tissue or tunneling wounds. This also includes diabetic foot and leg ulcers. Integra introduced Integra Flowable Wound Matrix after its received European CE Mark Certification.
Five-year International Expansion Plan: Integra is currently working on its global expansion plan with a three-pronged strategy, which is based on international expansion, international penetration and international growth. The company expects the share of outside U.S. revenues-to-total revenues to increase to 30% from current level by 2017. Notably, in the last 18 months, the company expanded its sales footprint added in some of its European direct markets. Moreover, in Asia, it hired dedicated contributors, one in China and one in India, as well as a leader located in Singapore, managing the rest of Asia in order to focus on the targeted countries.
U.S. Neurosurgery (19.8% of revenue in 1Q13)
The U.S. Neurosurgery segment sells a full line of products specifically for neurosurgery and critical care such as tissue ablation equipment, dural repair, cerebral spinal fluid management devices, intracranial monitoring and cranial stabilization equipments.
Neurosciences revenue was down 3.0% y/y to $39 million in 1Q13. Apart from the recall related problems, the segment witnessed growth in capital products in critical care and tissue ablation. Cranial stabilization increased at mid-single digits.
On Apr 29, 2013, Integra introduced a new product that provides titanium implants for non-loadbearing (non-facial) operative cranial neurosurgical procedures, named Integra Compact Cranial Closure System. Within this product a disposable, pre-sterilized, battery powered screwdriver called Integra Compact Disposable Powered Driver is used. This is useful for fixing implant screws and plates.
U.S. Instruments (18.8% of revenue in 1Q13)
The U.S. Instruments business sells more than 60,000 instrument patterns and surgical products and lighting to hospitals, surgery centers, and dental, podiatry, and veterinary offices.
In the U.S. Instruments segment, revenue came in at $36.9 million in 1Q13, down 2.8% y/y. The decline in the sales was brought about by weakness in sales of Xenon lighting and alternate site products. Strengths were seen in sales of retractors, LED lighting headlamps and instruments.
On Jan 31, 2013, Integra entered into a three-year contract agreement with Premier Healthcare Alliance. Under this agreement, Integra would be supplying products like Ruggles- Redmond neuro/spine instruments, plastic surgery instruments, Padgett reconstructive, sterilization containers, Jarit surgical and laparoscopic instruments.
U.S. Extremities (15.9% of revenue in 1Q13)
The U.S. Extremities segment includes the U.S. extremity reconstruction business, which includes such offerings as skin and wound repair, bone and joint fixation, implants in the upper and lower extremities, bone grafts and nerve and tendon repair.
The U.S. Extremities surged 18% y/y to $31.3 million in 1Q13. Within the Extremities segment, growth was largely brought about by regenerative medicine and foot and ankle business. All the products within this segment achieved double-digit growth rate.
On Mar 20, 2013, Integra received 501(k) clearance from the U.S. (FDA) for Integra Proximal Humeral Fracture Plate System. The company aims to have a controlled market release of this product. With the release of this product, the company’s shoulder product line will receive and boost as well as increase the Integra Titan Shoulder portfolio.
U.S. Spine and Others (22.1% of revenue in 1Q13)
This segment includes:
• The U.S. Spine business, which focuses on spinal fusion, spinal implants, and deformity correction
• The U.S. Orthobiologics business, which focuses on bone graft substitutes and other related medical devices that are used to enhance the repair and regeneration of bone in various types of orthopedic surgical procedures
• The Private Label business, which sells the company’s regenerative medicine and other products to strategic partners.
In the U.S. spine and others segment, revenue came in at $43.6 million in 1Q13, down 2.8% y/y. Spinal Hardware product sales declined owing to continued pricing pressure and challenging market. Robust demand in Evo3 products led to strong sales in orthobiologics sale. Revenue from the private label products were down owing to the product recall problem.
On Apr 30, 2013, Integra released a new product, Hollywood VI intervertebral body fusion device (IBD) system. This product will be primarily used in transforaminal lumbar interbody fusion (TLIF). This is a procedure used to alleviate pain and nerve compression by fusing and stabilizing adjacent vertebrae in the lower back.
On Apr 29, 2013, Integra revealed the next version of Camino platform. This can be used as an advanced system for monitoring continuous intracranial pressure (ICP) and cerebral spinal fluid (CSF) drainage.
On Mar 20, 2013, Integra expanded its Daytona and Malibu Spinal Systems by introducing cobalt chrome rod. This rod, known as the Enhanced Strength and Stiffness rod, or ESS+ rod, provides greater stiffness and strength in comparison with the existing rod. The company aims to release this product under controlled market environment during 3Q13.
On Oct. 24, 2012, Integra expanded its spine product portfolio by introducing Integra Complete Cervical Intervertebral Body Fusion Device (IBD). This product has got 501(k) clearance from the U.S. Food & Drug Administration. This product provides stability for spinal fusion after the affected cervical disc is removed.
Product Category: Integra represents revenues in three product categories: Orthopedics, Neurosurgery and Instruments.
The orthopedics product group includes specialty metal implants for surgery of the extremities, shoulder and spine, orthobiologics products for repair and grafting of bone, dermal regeneration products and tissue-engineered wound dressings, and nerve and tendon repair products.
The neurosurgery product group includes dural grafts that are indicated for the repair of the dura mater, ultrasonic surgery systems for tissue ablation, cranial stabilization and brain retraction systems, systems for measurement of various brain parameters and devices used to gain access to the cranial cavity and to drain excess cerebrospinal fluid from the ventricles of the brain.
The instruments product group includes a wide range of specialty and general surgical and dental instruments and surgical lighting for sale to hospitals, outpatient surgery centers, and physician, veterinarian and dental practices.
In 1Q13, worldwide Orthopedics sales increased 4.8% y/y to $90.3million. The company registered a 4.3% y/y growth in worldwide Neurosurgery sales to $63.2 million. Worldwide Instruments revenues were $43.2 million, down from previous quarters $43.9 million.
Product Recall
On Apr 10, 2013, musculoskeletal major Integra LifeSciences Holdings initiated a voluntary recall of some of its products manufactured during Dec 2010–May 2011 and Nov 2012–Mar 2013 at its Anasco, Puerto Rico facility.
Presently, Integra envisages first-quarter revenues to be lower by roughly $8-$11 million compared with prior expectations. This is due to lower sales on account of the recall and the imminent product shortage. Thus, the company expects first-quarter revenues in the range of $194 million to $197 million.
The costs associated with the recalls and remediation plans is also a matter of concern for Integra. It expects, therefore, to report higher expenses in the first quarter on account of scrap related to affected finished good products that were not released to customers, affected work in process, and legal and consulting costs, of about $2.5 million to $4.5 million.
With regard to the second quarter of 2013, Integra might not be able meet its market demand for the identified products. The company forecast revenues in the band of $205 million – $211 million for 2Q13.
New Jersey Regenerative Medicine Facility Update:
In addition to FDA’s inspection in late 2011 and 2012, on Nov 5, 2012, Integra received a warning letter from the FDA regarding quality issues at Andover manufacturing facility. In Oct and Nov 2012, Anasco and Puerto Rico facilities were inspected by the FDA.
Earlier in Aug 2011, Integra received a Form 483 observation from the FDA regarding manufacturing concerns at its collagen manufacturing facility in N.J. In Dec, 2011, the company received a warning letter from the FDA related to quality systems and compliance issues at that plant. In Jun and Jul 2012, the FDA again inspected the regenerative medicine facility and subsequently undertook a 20-day inspection of reviewing the progress of the facility’s remediation program and its quality systems. The FDA issued a new Form 483 with seven observations, relating to Corrective and Preventative Action (CAPA), non-conforming products, production and process controls, certain software validations and document control procedures, control of storage areas and stock rooms and delays in the filing of supplemental Medical Device Reports.
Since Aug 2011, the company has undertaken significant efforts to remediate the observations that the FDA has made. The company has additional capacity in Puerto Rico, where it plans to transfer various functions from its existing facility of Plainsboro. Moreover, the company is coming up with another new facility in the N.J. campus by FY13.
The company has incurred expenditure of approximately $15.2 million since August 2011 through the end of the quarter ended March 31, 2013. This figure consists of $6.8 million for remediation activities and $8.4 million for unplanned idle time and underutilization. The capital expenditures directed to the remediation of regenerative medicine facility over the same period were $7.5 million.
In 1Q13, the company incurred an expense of $1.5 million compared to $1.6 million in 1Q12. For FY13, the company expects to incur an expense of approximately $2.8 million on remediation activities.
Margins
During 1Q13, Integra witnessed a 4.2% y/y decrease in gross profit to $116.3 million. Gross margin was down 280 basis points (bps) y/y to 59.1%.
The decrease in the gross margin is primarily attributable to $3 million of revenue reversals, $1 million of scrap expense, adverse effect of product mix and obsolete inventory write-off.
In 1Q13, Selling, general and administrative expenses increased 14.6% y/y to $100.1 million and research and development expenses increased 6.7% to $12.7 million. 1Q13 witnessed an operating loss of $44,000 compared to operating profit of $17.5 million.
Outlook: For FY13, the company expects the gross margin to be in the range of 60% and 61% from previously guided 63%. On an adjusted basis, the guidance remains in the range of 63% – 64% a decline from previously guided 64.5% – 65.5%.
The company, however, expects $100 million of cost savings over the next five years, with expected adjusted gross margin in the range of 68%-70%. This will be possible on the back of three key initiatives ― supply chain optimization, footprint rationalization, consolidation of information and quality systems.
EARNINGS PER SHARE
Integra reported loss per share of $0.15 in 1Q13, significantly down from $0.23 in 1Q12. Adjusted EPS was $0.39 in comparison with $0.71 in 1Q12.
Guidance: For FY13, on a GAAP basis, Integra guided EPS in the range of $0.92 and $1.22 compared to previously guided $1.68 – $1.87. On an adjusted basis, EPS is expected in the range of $2.40 and $2.70 compared to previously guided range of $3.08 – $3.27.
Over the five-year planning horizon, the company expects adjusted EPS growth in the range of 9%-13%.
Jun 11, 2013
– The Online Stock Research Community
Discover what other investors are saying about LifeSciences Holdings Corporation (IART) at:
IART profile on
|Analyst |Varun Parekh |
|Copy Editor |Anita Ganguli |
|Content Editor |Urmimala Biswas |
|No. of brokers reported/total |18/18 |
|brokers | |
|Reason for Update |Earnings Update |
|QC |Rajiv Mukerji |
|Lead Analyst |Urmimala Biswas |
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Jun 11, 2013
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