UBS Global Healthcare Conference - INTEGRA LIFESCIENCES HOLDINGS CORP

Perfect. Amazing. Thank you so much, everybody, for joining. Patrick, my team here at UBS. I'm delighted to have Lee here as CFO of Integra to have what should be a fun chat. Thank you for joining us. Ah, thank you for the opportunity, Patrick. I mean, I'd love to start just kind of big picture, you know, the health of the overall environment. A big discussion point this year has been procedure volumes and things like that. things like that. I know you have other things going on, but what are you generally hearing from your customers? How do you feel about the health of the overall system and the procedure environment in totality? Yeah, certainly. So our primary end markets that we serve are neurosurgery and tissue reconstruction, both of which are characterized by strong durable demand, both of which value clinical evidence and strong customer relationships. As it relates to procedure volumes across both of those end markets, largely stable, right? Our products help meet critical needs, patient needs in clinically necessary procedures, which kind of underscores the durability of that demand. But across both end markets when we talk to customers, here's what we're hearing that they care about. They also care about clinical evidence and product differentiation. They care about those strong established relationships coupled with supplier reliability, economic value, scale, along with more broadly ease of contracting, right? And so that has a lot to do with why earlier this year, we created a chief commercial officer role, consolidated all the activities, commercial and contracting activities under that role with an intent to more efficiently leverage our scale, right? Maintain those relationships, ease contracting, and painting more consistent kind of story around the economic value that our portfolio provides. I'd love to actually jump on that CCO role as well and get a sense of that. You know, what does that involve day-to-day from a contracting? Is that about clever rebates between product categories or looking across multiple IDNs that maybe roll up into one? You know what's the strategy there? Yeah. So the strategy, as we operate our two different divisions, we did have an enterprise sales team, but the way they were showing up was kind of in support of one division versus the other, right? And this creates a much more cohesive approach to how we go to market and what we, and it aligns more consistently with what we're seeing across our customer base, right, Where, you know, we're dealing with GPOs who are organizing on behalf of, you know, 85% of the categories in which their customers play, and so they want to be able to have those broader conversations. This helps facilitate that and truly bring the scale of the enterprise portfolio into the conversation as we think about not only contracting in terms of volumes, but in terms of supply chain needs and assistance and how we make sure we consistently get our products to our customers in a timely manner. We'll dive into each of the areas in a second. But I guess, you know, connected to what you're just saying, you have a few verticals where you have very high market shares and a very dominant position. And so I guess is there also an ability to leverage that to help support yourself in some more fragmented markets on the other side, and that's kind of a holistic – is that the way to think about it? Absolutely. Absolutely. That makes sense. And then, you Know, externally everyone has their own discussions around, like, what's going on in, like healthcare and things like that, but you know, obviously the product side is big for you guys, but as part of the health system, like what are the things that are coming up the most internally as discussed topics as part of the healthcare system overall? Yeah, so internally, I kind of view that question through the lens of kind of what keeps me up at night, is that a fair way? Yeah,so as you can imagine, there are a number of things, right, across the area, I mean, you know we're constantly evaluating things like material inflation, labor costs, tariffs, interest expense, what's happening more broadly across the supply environment, all those things, you know, are foremost in our minds. But we're also looking at those dynamics that are evolving across our landscape. Things like increasing pressure we're seeing from both private and payer governments across the health system. An example of that would be changes that we're seeing happening in China with respect to VBP implementation and moving towards more of a nationalistic approach versus province by province. Things happening right here in the U.S. in terms of CMS reimbursement and what will likely be an evolving sort of outlook on healthcare spending, and so more to come on that. And then AI technology and what role that will continue to play in terms of competitive positioning, in terms of how we work, as well as impact the capital markets. So all of those things are very much top of mind. But it's important. So while we, from a kind of share of mind, it's uppermost, it is not that we devolve there because there is recognition that, you know, macro pressures will always exist, right? What matters is our ability to implement mitigating procedures to sustain durable, profitable growth. And so what we know, change moves the needle on that front, are things like improving our supply and quality, driving cost efficiencies, lowering our remediation investments that we've had to make, pulling out a lot of those one-time costs or investments. Those are the things that are going to allow us to mitigate those macro pressures should they come. Yeah, you have a lot more levers you can pull than some others. I mean, on the cost-conflation side, where do you guys see that? Do you see it with the price of oil? Is it wages and salaries? Where are you seeing that? Yeah, oil, to some degree, from a freight – for us, it's more wages, salary, material costs for components that we see most of our increases. And I'm guessing, as you're sort of suggesting it, but the internal efficiency is the better way to offset that rather than pricing. Is that probably the right way to think about it? Yeah, yeah. And I think while we've been able to get and capture about one point of price, right, on average, on an annual basis, clearly that's not enough necessarily to offset or mitigate some of the increases that we're seeing in other parts of the business. And so we do look to cost efficiencies to help close that gap. It's better than most of MedTech, though, which is negative one. So you're doing better there. Maybe specialty surgery. I had a great Q3. I think you grew 4% or so. I think I was led by Nero. You got it. Maybe, you know, for those who are less familiar, a quick overview of what's in specialty surgery and what you guys are seeing there that's driving that growth. Yeah. So to your point, specialty surgery as a whole division grew about 4% Within that, neurosurgery grew 6.5%, and that included a headwind that we saw in that business due to our Cincinnati just flood of about $7 million. It also, though, reflects the benefit of a favorable comp from a year ago. So if you normalize for all those one times, the actual growth was closer to kind of 3.5% to 4%, which is what we expect from that part of our portfolio. In addition, we saw the international specialty business grow high single digits, which is exciting because it demonstrates when we reestablish supply availability, we can get the pull through. And so we were really excited to see that from a performance standpoint this quarter. And as you look across the portfolio, that contribution was driven by multiple products, right? So it's not just one place. We saw meaningful growth in Serralink, in Sirtisvalves, in Bactisil, Durasil, and the recovery pathway from our cranial perforators. So all of which had a really strong contributing factor. What we know from a customer perspective and customer reaction is they also are seeing the benefit of improved supply availability, which is encouraging. Clearly, given the Cincinnati disruption and the flood there, we are working with them proactively and transparently. to talk about that recovery pathway, which right now we have line of sight too in the middle of 2027. Definitely, I think we'll touch on some of that. Yeah, I'm sure. But maybe sticking with specialty surgery, the neuro side, it's one of the areas where you guys have tremendous market share and power in some of the sub-verticals. Absolutely. Maybe if you could break down for people a little bit some ofthe areas that you're playing within that and what the competitive environment is looking like because, selfishly, from my perspective, I think you're competing with a lot of conglomerates that, from what I can tell, they don't necessarily spend as much energy as they ought to on those categories. Is that a thing that you see? Absolutely. So to your point, within specialty surgery, across the subsegments, we're typically number one or number two. In our spaces, kind of exception in ENT, which we're number three. And most of the categories in which we compete, we're competing with, you know, one or the other of the kind of the bigger, large med tech companies. A&T, we probably compete with both. But in most of those examples, it's situations where we're completing with divisions, which have been a much larger company. So there is a different focus because we do operate in very niche spaces and have for some time with well-established relationships and products, a broad portfolio with products well-embedded into the workflows of the surgeons. That becomes a competitive, a point of competitive distinction. And then within that, you know, you had obviously a few production issues historically. to what degree do you think, because surgeons are so used to using what they use, they just defer replacement or purchasing of some of the more capital equity items and then come back to it later? Or is there an amount of time they defer and then they switch? Or how do you think about what's, you know, residually in that space? Yeah, so I mentioned the fact that we're like number one or two in most of the spaces with the neurosurgery, and we've been able to maintain that even through kind of this last three-year period, which has been the heart of kind of our turnaround and transformation. We've been able to do it primarily because in neurosurgery, while we have experienced supply chain disruption, it hasn't necessarily been for a protracted period. We have been out months, maybe several months or even a quarter, but for the most part, you know, our customers have been able manage through inventory or like you said, because, you know, it's capital and we can service them through that period, it doesn't create as much disruption as you might think. That said, right, we still recognize we have to rebuild trust in terms of being reliable and making sure that we can meet customers' needs as they arrive. And we're doing that work. And as I mentioned earlier, our customers are starting to... I guess one of the other advantages of neuro just holistically is none of these procedures are elective in any capacity. And so, you know, when we think of Medicaid potential cuts or ACA reform, presumably, I don't know if you guys feel this way internally, but those patients are going to have to get treated in some capacity, whether it's through that vertical or something else. Is that the right framing here? Absolutely. Absolutely. And so while, you now, we know concerns around ACA subsidies are an issue, to your point, most of our procedures, trauma, acute-based, and so we have not seen any sort of material impact from those things i should know this but um do you have an ability to guess the amount that's sort of trauma going through the er versus more planned for you guys like even just yeah i i don't have that visibility i don'T KNOW i i guess i guess the the connection that question is like how much visibility do you think you guys in a normalized environment have over the demand over the next quarter or two is it relatively even cadence of you know purchasing and yeah it has It has proven to be pretty stable demand, so that's kind of how we think about the business and plan accordingly, but don't have the specific visibility into the specific kind of dynamic situation. On the newer side, the reps, how has, like, retention and hiring been on that side? You know, are they still feeling very engaged with everything? How has that been? Yeah, that has been, as I mentioned before, because the nature of any disruption that we've had has been a lot more limited in terms of time and duration. That's where we've been able to sustain, you know, our reps from a retention perspective pretty consistently over the course of the three-year period of time. And, again, that's valuable to us because we know the strength of those relationships matter in the purchasing decisions of surgeons, especially in neurosurgery, but also as it relates to instruments. Maybe talk a little bit about tissue reconstruction because it's such a different business model in a way. And maybe to help level set people, you know, walk people through some of the things that have happened there. I know, for example, the cord of Durazor was very good, but Integra Skin was a little softer. So maybe if you could put some details around what you're seeing in tissue. Yeah. So across tissue reconstruction, I'll start talking about some ofthe bigger piece parts of the portfolio. So Primatrix and Durazorb, to your point, in Q3, we saw strong growth from. Our matrix, we had recently relaunched back into the market in Q4 of 2025, and, you know, we continue to be excited about the ramp that it's driving. We have, through Q3, we're tracking to recover greater than 50% of our pre-recall revenue. On Integra Skin, which is the biggest part of our wound reconstruction portfolio, we continued to see sequential growth as we moved from Q2 to Q3. which is a good thing, but we weren't seeing growth at the level that we had forecasted or anticipated. And here's what we believe is happening. There was a period of time where IntegraScan was supply constrained. And while we're back in much healthier position, we got there over time and there were parts of our portfolio that lacked, particularly the larger sizes. And during that time, we did see additional competitive entries in that space. And so reclaiming the share that we had in that place has proven to take longer and be more difficult than we originally anticipated. And that did have an impact on growth. That said, what we're learning as a result of having Prime Matrix back in the bag is there is this portfolio play and education that we have an opportunity to drive around how and where to use Primatrix separate and apart from Integra Skin, separate and depart from other products and wound reconstruction to drive more optimal outcomes. And that has to be a very intentional, focused conversation that we not only fully educate our sales team on, right, because some of them have never carried all four, all products in the bag at the same time, but also our customer base. And so that's the work that we started to do where we have led with Prime Matrix to drive kind of that more portfolio-based conversation. We've seen success in terms of growth across the entirety of the portfolio. And the key then is to expand that, right, across all accounts. And that's what we're going to be doing through the balance of Q4 and into 2027. WUNC has quite a distinct market in that there's just obviously so many different slices of it, and it's quite fragmented in some areas. and less than others but so for those who are maybe a little less familiar um do you maybe paint a picture of competitively where you guys are now um versus that long tail and um any update on obviously there's been multiple stabs of reforming parts of the market demanding greater clinical evidence which i think probably not to put words in your mouth plays to your strength but giving people a picture that as well might be quite helpful yeah absolutely so across our wound reconstruction portfolio. First, it's important to understand about 90% of our business is inpatient-based, right? And it's inpatient based because of the profile that's unique to kind of our portfolio. We do have a broad portfolio, strong clinical evidence, right, substantiated by data over years. Product pricing that's been advantageous, especially when you look on the outpatient side of the business. It's kind of in line with where reimbursement rates are. And so our pricing stays consistent, whether you're talking inpatient versus outpatient. And then in terms of efficacy and outcomes, right, being able to demonstrate healing, wound closure, efficacy, you know, is important, right? And that space and certainly has become even more important as we look to the outpatient setting. We also, because of the breadth of our portfolio, right, have been able to create scale and a presence inside the hospital, which has allowed us to be really competitive in that space. In the outpatients side, to my point earlier, we, only 10% of our business is in the out patient. We don't necessarily have channel access in the physician office setting per se, but what we're excited about in terms of the changes that we see in outpatient wound is those changes very likely could push volumes in more inpatient adjacent spaces. And so what do I mean? I mean the hospital outpatient setting, ambulatory surgery centers, where we do have channel access, it affords us an opportunity to potentially make that a lot more accessible than it otherwise would have been. And, so, it's interesting to your point on where other competitors in the space have seen impacts. They've seen impacts because they've had to change pricing or margins because what is now a fixed reimbursement rate of $127 per square centimeter. We were already priced in line with that. We haven't had an impact on our margins. The other area competitors have seen impact is in terms of wastage. Our portfolio affords us lots of different sizes, and so we don't have as much impact as a result of that. And then, as I mentioned earlier, the clinical evidence that backs up our portfolio helps drive physician selection when it comes to what products to use. Do you think we can finally, over the next few years, see some consolidation, given there's this large sort of Wild West tale of no evidence-based small companies? Presumably, they're going to, at some stage, have to see and share. Yeah, I think there's going to be a couple of things, right? You'll see either vendors decide to leave the space, right, because the margins just don't make it, you know, attractive anymore. It could mean consolidation. It could means, you have to respond. You know, they make a play for the inpatient space. We'll see how that turns out. Nice. Cincinnati, maybe a little bit of background for those unfamiliar and more importantly sense of timing of recovery curve and how things are going there. Yeah. So, yeah, maybe for a little context. So we did experience a flood at our Cincinnati manufacturing facility in the middle of July. And, you know, our facility is located in a valley next to a river, and the site itself experienced over four feet of water across the manufacturing facility. As a result, we saw – and for us, we don't maintain significant finished goods at our Cincinnati site, so those were at our DCs. So, we did have inventory accessible to us. And then across portions of the portfolio manufactured out of that facility, we do have some secondary supply sources. So, for Q3, we saw a headwind of $7 million in terms of lost revenue for the quarter. And for Q4, we're forecasting an impact of about $15 to $20 million. Most of that impact is related to one particular product line for which we didn't, A, have a lot of inventory and, B, don't have a secondary source of supply, and that is our Mayfield line. And, you know, we've done at this point a full accounting of the inventory that we've had to subsequently write off along with the fixed assets that needed to be replaced, and all of that is in flight right now. for the Mayfield line, it does require some specialized equipment. And so there are some longer lead times associated with that. That is driving our current thinking around when we can be fully operational, which is going to be more in that mid-2027 timeframe. There are parts of the facility that already are up and running, which are important to understand. But getting that Mayfield capability back up and running is what's going to take to Q2 or, yeah, middle of 2027. I've been involved with production lines before. It always takes longer. It's tough. It always does, yeah. It's a real thing. Yeah. I mean, if we take a step back and think of supply resiliency overall, you guys have put a tremendous amount of effort over the last two-ish years, three years in building up supply resiliency and really redoubling down on the product side of things. if you i mean qualitatively where do you think we are in that journey um today look we've done a lot of work it's actually pretty exciting when you start if i kind of take a snapshot right here right now we have um strong supply availability across our tissue reconstruction portfolio when you look at the products that we've been able to bring back to market we brought back about 50 of the kind of the more significant products that were recalled over the past three years Next product we'll bring back is Surgimen, and then in 2027, have every expectation that we can bring back the final two products to the market, all of which is very exciting, right? And throughout, we also are seeing the benefit of where we've been able to establish stronger supply reliability, inclusive of regions outside the U.S. We are seeing the pull through in demand, and that is what drove the performance we talked earlier about in terms of international specialty and Q3. And so we're excited about that. Now, to your question about when is it going to be done, because we do have that remediation plan that will carry us through 2027, that's probably the next major kind of milestones, getting those products back. And then, of course, with the Cincinnati disruption, bringing that site back online to be able to meet kind of the demand that we expect to see continue across the parts of the portfolio supported by that site. I'd love to hop on OUS in a second. Yeah. But as for the big picture, you know, supply resiliency side of things, that has obviously consumed a massive amount of your time in the last couple of years, really. You know, as you look forward, presumably you guys are quite excited. And isn't there an ability to just go more offense commercially and, you know, really proactively be pushing in the channel in a way that I'm guessing was harder to do over the last couple of years? And how meaningful is that also freeing up your time? Yeah, absolutely. Without a doubt. There is meaningful opportunity across kind of our current portfolio that we'd love to pursue more aggressively. And that's exactly what our CEO, Stuart Essig, means when he talks about going on offense. As you look within specialty surgery, a key part of that is international, right? So we have said for a long time that we are underpenetrated in regions outside the U.S. We know that. We've had an expansion strategy that we've wanted to execute for some time. We did have to pull back on that strategy during the height of the supply constraints. But getting into this more reliable supply position unlocks our ability to kind of drive that strategy forward. So we're excited to get that going. We do have and continue to invest in some areas of innovation in specialty surgery that we expect to be able to bring to bear. So innovation that supports our category leadership in catheters as well as tissue ablation. across tissue reconstruction. As you can imagine, we're excited about not only relaunching the 510k version of Surgimen, but also continuing the work to pursue getting a PMA on Surgiman, which allows us to enter the implant-based breast reconstruction market with an expanded label. We fully expect to be able to get that PMA in 2027. From a portfolio standpoint, we're also pursuing getting a PMA in implant-based breast reconstruction on Durazor, which is our resorbable synthetic, right, which creates options for surgeons in that space, and that should follow kind of after the surgeon and PMA. So again, to your point, lots of opportunities to tap into what exists already. And maybe most importantly, now that we have also refinanced our capital structure, it creates the ability to go after those things. right? And so we've extended our debt maturities. We have added flexibility in terms of the type of capital instruments that we have. We also, you know, it gives us an ability to manage some of the interest expense dynamics. Right now, about 75% of our capital structure is fixed through 2027, but we also have a terminal B that's part of our capitol structure, which creates options as we move forward. And we improve kind of our overall profile in the effort to help manage expense further. And in doing so, we've also created new access to capital pools. So very excited about it. You guys were busy. I had a lot of credit investors calling in. So you were definitely busy. I mean, on the OUS side of things, you know, you hinted at it there, expansion plans. I'm guessing, you know some of the larger competitors, they kind of already have that OUS infrastructure in, so they just historically have just dumped it through there. What does it mean for you guys to build that up? Are you going market by market, sort of individually building them up, and are there dynamics, OUS, that are certainly I know the different dynamics we can have, but for like Neuro, is it very different, or is it just the usual MedTech ASPs are like two-thirds of US, and you just have to go central? Yeah, so we've so far We've deployed kind of a combination of indirect as well as direct approaching to the market. So where we do have sales teams on the ground versus indirect where we go through distributors. To date, we've been in some of our untapped opportunity in terms of expansion exists in markets in which we're already in. We just didn't go very deeply, right? And so for us, an example of that is China, where we have an opportunity to extend beyond kind of tier one hospitals more deeply. And we do that leveraging a direct sales force. In terms of structure, the reimbursement dynamics are very different, right, depending on the markets in which we serve. There are areas where, you know, as a result of reimbursement and pricing, you know, from a margin standpoint, margins are lower than the averages we see in the U.S. But there are other places, other pockets where they actually are a little higher. And so we manage through that accordingly. But do you see, like, as I'm – well, prior to some of the supply chain challenges in the international markets, we were driving high single-digit growth, right? That's a growth opportunity that does not exist, right, necessarily at that level across the markets that we serve in the U.S. And so we look to be able to get back to sort of that sort of run rate as we continue. and then within that china obviously big market yeah um you mentioned bbp because everything's now it's just kind of how it is is that still an attractive market for you guys even even with bits of bbps that's still something where the volumes are just so potentially huge that it's just worthwhile so yeah so across china what we saw again because we're in neurosurgery is that was a therapeutic area that did not have as much clearly we had vb3 but not as much as maybe areas like cardiovascular, as an example, right? And so, you know, we're assessing because we, you know, monitoring to see how that's evolving, right, clearly there's more pressure across the board with respect to VVP. We still have our In China, For China manufacturing facility, which is up and operational, and we are waiting for approvals to be able to actually sell into that market through product produced at that facility. But we do see that as an advantage in terms of being able to retain access to that market, drive growth. To your point, it does change potentially the margin equation and certainly serves as a way to mitigate some of the tariff headwinds that we've seen on the reciprocal China tariff set that we have had to pay. So, yeah. been an eventful few years it has i get it um you know as cfo you've got presumably a lot of different mouths that want feeding and people coming to you asking for investment you know all wanting you know r&d dollars sgna dollars um supply chain dollars all these things how do you i mean some of them presumably are just automatic like the supply resilience you think it's just that's an easy guarantee gotta do it but what about you know how do você decide between the two businesses, how do you balance the neuro relative to the tissue reconstruction side? Yeah, so to your point, over the past couple of years, the focus has been very clear, right? Supply chain, resilience, addressing quality remediation has had to be paramount. We have, though, continued to support and feed, if you will, innovation in places across both portfolios. I mean, fundamentally, we believe that, you know, we need to remain both in tissue reconstruction and specialty surgery, and so we need to support innovation across both. Some of that decision is a function of kind of what's near in and accessible, so that PMA strategy which we were executing against, there's a timeliness to that that you have to follow through, so it becomes a factor. clearly return on invested capital and value creation opportunities that we have and the durability of that going forward is an element. Growth from a total enterprise contribution and accretive growth perspective also is a consideration and a recognition that I can't starve one to completely, you know, feed the other. So there's a balance there that we take. And, you know, we get to that through conversation and collaboration with their chief commercial officer in terms of how to create the most economic value across the enterprise. You do a lot of these meetings, a lot about the discussion, things like that. I imagine, you Know, externally, people are focused on a certain set of things, and maybe those correlate to the biggest focuses internally, but they might not. And so I guess my question is, what are things internally that are a bit focused that don't typically come up as much externally or flipped another way? You know, do you think there are things that people miss about Integra or just misunderstand? Yeah, it's interesting. So I think at a kind of from an external perspective, what there is a clear appreciation for, given we're kind of three years in, is the transformation that's underway, the turnaround, the investments we've had to make, and the headwinds, right, that we are facing as a business. I think what's probably less well understood are the opportunities for growth that we have on the business and how well positioned we are to execute on them. And at some level, I get it, right? There's a little bit of an execution discount that's being factored in because we haven't done, what we said should be possible on this portfolio. And we understand that, and we understand we need to win back the confidence of our investors to be able to eliminate that execution discount. But here's why I'm excited, because I do think there's more progress happening than can be observed maybe initially, right? That progress looks like, you know, this year, you think about it, we haven't had those same significant supply chain interruptions that we've had in prior years. We haven't seen significant product recalls. Gross margins are going to be flat this year, which doesn't sound exciting, except if you understand the prior couple years, they were declining. Same with EBITDA. From a free cash flow standpoint, in 2023, free cash flow was $73 million. In 2024, it was $25 million. In 2025, it declined $30 million. This year, we're on track to deliver free cash flow in the range of $130 to $140 million. That doesn't happen by accident, right? EPS, you know, was declining in the last two years, double digits. EPS this year projected to grow about 5%. Again, it happens because we're really intentional about investing to fix what was broken, drive operational capabilities to sustain that, and be very intentional about getting those costs back out of the can. I think everybody's excited to see the other side of the curve. I mean, I think that's going to be, it feels like you're getting through the biggest part of it, and now there's a nice runway ahead. Thank you so much. Thank you, Patrick. I appreciate the opportunity.