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Integra LifeSciences Holdings (IART)
Q1 2013 Earnings Call
May 02, 2013 8:30 am ET
Peter J. Arduini - Chief Executive Officer, President, Director and Member of Special Award Committee
John B. Henneman - Chief Financial Officer and Corporate Vice President of Finance & Administration
Matthew S. Miksic - Piper Jaffray Companies, Research Division
Jonathan Demchick - Morgan Stanley, Research Division
Robert A. Hopkins - BofA Merrill Lynch, Research Division
Glenn J. Novarro - RBC Capital Markets, LLC, Research Division
Christopher T. Pasquale - JP Morgan Chase & Co, Research Division
Robert M. Goldman - CL King & Associates, Inc., Research Division
Steven M. Lichtman - Oppenheimer & Co. Inc., Research Division
Spencer Nam - Janney Montgomery Scott LLC, Research Division
Amit Hazan - SunTrust Robinson Humphrey, Inc., Research Division
Previous Statements by IART
» Integra LifeSciences Holdings' CEO Presents at Citi 2013 Global Healthcare Conference (Transcript)
» Integra LifeSciences Holdings Management Discusses Q4 2012 Results - Earnings Call Transcript
» Integra LifeSciences Holdings Corp., Q4 2008 Earnings Call Transcript
Good morning, and thank you for joining us for the Integra LifeSciences First Quarter 2013 Earnings Results Conference Call.
Joining me today are Peter Arduini, President and Chief Executive Officer; and Jack Henneman, Chief Financial Officer. Earlier this morning, we issued a press release announcing our financial results for the first quarter of 2013 and revising our full year guidance.
Certain statements made during this call are forward-looking, and actual results might differ materially from those projected in any forward-looking statements. Additional information concerning factors that could cause actual results to differ is contained in our periodic reports filed with the SEC. The forward-looking statements are made only as of the date hereof, and the company undertakes no obligation to update or revise the forward-looking statements.
Certain non-GAAP financial measures are disclosed in this presentation. A reconciliation of these non-GAAP financial measures is available on the Investors section of our website at integralife.com.
As we aim to keep our prepared remarks short, we will reference the financial results in the press release and will not restate the individual numbers. As a result, you may want to keep a copy of the release handy during the call.
I will now turn the call over to Pete.
Peter J. Arduini
Thank you, Angela. As we indicated in our April 10th press release and Form 8-K, the voluntary recall we announced 3 weeks ago overtook our momentum for what otherwise would've been an on-target quarter for revenues and earnings. The recall is well defined and bounded. Today we are producing and releasing products from Añasco, but it will be several months before we reach adequate supply levels.
That said, the recall's impact on both the first quarter's results and on our expectations for the balance of the year was significant. For the first quarter, recalled product returns reduced revenues by $2.9 million, which falls within the range of $2 million to $4 million that we estimated on April 10. We also estimate that recall-related shortages reduced revenues during the quarter by an additional $6 million to $7 million.
The product shortage primarily affected sales of DuraGen and select products in our Private Label business. If not for the effect the recall, we would have met expectations on the top line.
Further, the recall and related supply issues have a disproportionate impact on our profitability. The regenerative medicine products are our highest gross margin products, so an expected reduction in sales of those products translates rather directly to the bottom line.
In addition, we are incurring significant incremental expense mostly recorded in cost of goods sales, cost of goods, to respond to the warning letter in Añasco. We will discuss these and other unplanned variances in our manufacturing operations a bit later in the call.
Because of the recall, our biggest challenge and highest priority today is to build enough product to meet the requirements of our customers. We are executing a plan to increase capacity in both of our regenerative medicine facilities and have reprioritized production in favor of the highest value and most strategically important products. Both of these priorities have the potential to drive results towards the higher -- the high end of guidance.
However, we are operating with the highest degree of compliance vigilance and are anticipating that we may have some interruptions for product -- production modifications that could lengthen the time to meet our inventory targets. We expect that our plans will enable us to regain the profitability levels we had in 2012 as we exit this year even after absorbing the impact of the medical device tax and additional expense embedded in our P&L.
Turning to the top line results from the first quarter. Our strongest growth continues to come from Extremities, particularly in the United States. Our U.S. Extremities business, which was largely unaffected by the recall grew 18% in the period. Our regenerative medicine and foot and ankle product lines drove most of the increase, and all product franchises performed well, posting double-digit increases.
U.S. Spine & Other, which includes our spine and Private Label products, decreased 3%. Our Spinal Hardware product sales declined, resulting from continued pricing pressure and a challenging market. Orthobiologics sales grew, led by a strong demand for our Evo3 products. Sales of our Private Label products were down from the prior year period due to the recall. The reprioritization of production in Añasco will adversely affect our Private Label business and, therefore, the results of the U.S. Spine and Other segment for the balance of the year.