Feb 29, 2008
Executives
Stuart Essig - President and CEO Jack Henneman - EVP, Acting CFO and Chief Administrative Officer Gerry Carlozzi - EVP and COO
Operator
Good day, everyone, and welcome to the Integra LifeSciences 2007 fourth quarter conference call. (Operator Instructions) At this time, I would like to turn the call over to your host, Mr.
Stuart Essig, President and Chief Executive Officer. Please go ahead, sir.
Stuart Essig
Thank you. Good morning, everyone, and thank you for joining us for the Integra LifeSciences fourth quarter 2007 conference call.
I am Stuart Essig, President and Chief Executive Officer of Integra LifeSciences Holdings Corporation. Joining me today in Plainsboro are Jack Henneman, Chief Administrative Officer and Acting Chief Financial Officer; and Gerry Carlozzi, Chief Operating Officer.
During this call, we will review our revenues for the fourth quarter and full year 2007, which we announced this morning, and update our forward-looking guidance for 2008. Much as we would welcome the usual hour of questions at the end of the call, we're not in a position to do so because we have not released audited financial statements.
We would absolutely not want to give you any information that turns out to be different in our final numbers. Just as we do not answer questions during the quiet period before an earnings report, we're not going to take them now, since it is actually still the quiet period before an earnings report.
We will, however, schedule a full-blown earnings call once our audited numbers are available, and we'll take all of your questions then. Thank you as always for your patience.
Before we get to the heart of the call, Jack Henneman will make some remarks regarding the content of this conference call.
Jack Henneman
Thank you, Stuart. This listen-only presentation is open to the public and can be heard through telephone access or via a live webcast.
A replay of the conference call will be accessible starting approximately one hour after the conclusion of the live event. Access to the replay is available through March 4, 2008 by dialing 719-457-0820, access code 9005480, or through our webcast accessible on the Investor Relations portion of our website.
Until the audit of the financial statements for the year ended December 31, 2007 is completed, the financial information disclosed in this morning press release and on this call are subject to change. Any changes to the financial information disclosed in this morning's press release and on today's call, as well as additional items that may be identified, could be material.
Today's call is a proprietary presentation of Integra LifeSciences Holdings Corporation and is being recorded by Integra. No recording, reproduction, transcript, transmission or distribution of today's presentation is permitted without Integra's consent.
Because the content of this call is time sensitive, the information provided is accurate only as of the date of this live broadcast, February 29, 2008 and should not be relied upon beyond March 4, 2008, the last day that an archived replay of the call authorized by Integra will be available. Certain statements made during this call are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995.
Among others, statements concerning our ability to complete our financial statements for the fourth quarter and 2007 fiscal year and file our Form 10-K for the year ended December 31, 2007 in a timely manner, our ability to remediate material weakness, management's expectations of future financial results, new product launches and regulatory approval, and market acceptance of these new products, future product development programs and potential business acquisitions are forward-looking. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from predicted results.
For a discussion of such risks and uncertainties, please refer to the risk factors included in Item 1A of Integra's Annual Report on Form 10-K for the year ended December 31, 2006, and the information contained in our subsequent filings with the Securities and Exchange Commission, including in the current report on Form 8-K that we filed today. These forward-looking statements are based upon our current expectations and we undertake no duty to update information provided during this call.
Certain non-GAAP financial measures are disclosed in this presentation. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measures is provided in the press release we issued this morning, which is available on our website in the Press Release section under Investor Relations.
Additionally, in the press release and in the current report on Form 8-K that we filed today, we provided explanation for why management believes that presentation of these non-GAAP financial measures provide useful information to investors regarding Integra's financial condition and results of operations and the reasons for which Integra's management uses the non-GAAP financial measures. I will now turn the call over to Stuart to review the highlights of 2007.
Stuart Essig
Thank you, Jack. In 2007, we organized our entire selling organization around divisions and delivered tremendous revenue growth.
We continue to drive our mission to become one of the great medical device companies. As we have done in previous years, we've grown internally by introducing new products and growing our sales organization.
We've also grown by consummating strategic and synergistic transactions. We completed five in 2007.
We've also started new businesses from scratch. We entered the spine orthobiologics market through the introduction of the Integra Mozaik, the establishment of a sales organization and the acquisition of IsoTis.
Finally, we've expanded our horizons internationally, significantly increasing our European infrastructure, including through continued go-direct efforts for various products and markets. Revenue growth was stronger in the quarter than we expected, nearly $3 million above the top-end of our guidance and significantly higher than Street expectations.
We achieved revenues of approximately $157.6 million in the fourth quarter. These revenues were $32 million or 26% higher than in the fourth quarter of 2006.
Revenues from products acquired since the beginning of the fourth quarter of 2006 total $18 million. We are very pleased to announce that internal revenue growth in the fourth quarter was consistent with our longer term targets of 10% to 12% and well above Q3.
We remain pleased with the underlying strength of our business and its continued ability to generate double-digit revenue growth before taking acquisitions into account. For the full year, revenues were approximately $550 million, an increase of $131 million or 31% above 2006 revenues.
We are very pleased with our revenue growth for the year. At this time last year, we guided to sales of $508 million to $520 million for the year 2007.
Taking into the account the approximately $37.7 million in revenues from acquisition, which were not yet closed at the time that guidance was given, our actual revenues came in right in the middle of the range and acquired product lines exceeded the targets we originally laid out for them. As you can see, we did what we said we would do one year ago.
Our Neurosurgical and Orthopedic Implants revenues increased over the prior year quarter by 31%. Rapid growth in collagen-based products and extremity reconstruction drove internal implant revenue growth.
Highlights for the quarter include Integra dermal repair products increasing over 20% and extremity reconstruction metal implants products revenues increasing by 25%. Revenues from collagen-based bone growth products increased 45% over the fourth quarter of 2006.
Sales of recently acquired IsoTis products contributed $7 million in sales to this category. Revenues from our Medical Surgical Equipment category increased over the prior year quarter by 22%.
The majority of the internal growth came from sales of Radionics, intracranial monitoring and Miltex product lines. Sales of product lines acquired since the beginning of the fourth quarter of 2006 contributed $11.1 million of sales to the quarter.
International sales were 25% of total sales in the quarter and 24% of total sales in 2007 compared to 24% for the full year of 2006. Changes in foreign exchange rates contributed approximately $3.1 million to revenues in the fourth quarter.
I would now like to turn the call over to Jack to discuss our financials.
Jack Henneman
Thank you, Stuart. As we are still in the process of completing our 2007 financials statements, we are unable at this time to write results below the revenue line, neither the continuing material weakness nor its result.
The delay in the completion of our audited financial statements reflects any underlying weakness in our business. On the contrary, our business has been very strong as reflected in our revenues.
Importantly, based on the work performed to-date, we expect that the potential adjustment that we are analyzing will not have a negative impact on our earnings. We remain committed to put all necessary resources behind our finance team.
We've succeeded in recruiting, training and retaining qualified people in our finance organization in the last several months, which will enable us to improve the timeliness of our financial reporting. We have supplemented to replace many of the consultants we previously used to close our books with permanent employees.
All are them are rapidly coming up to speed on our numbers and processes. Substantial progress has been made, but more work remains to be done.
Resolution of these issues remains the top administrative priority of the Integra organization. Let me reiterate from our press release what we know at this time about our earnings per share.
First, the company expects to record a $4.6 million non-tax deductible charge in the fourth quarter of 2007 for in-process research and development related to the IsoTis acquisition. We anticipate that this charge will impact earnings per share by $0.16.
We have not included this charge on our previously provided fourth quarter and full year 2007 GAAP guidance, because at the time we provided that guidance, the amount of the charge had not been determined. Because of the impact of this charge, we anticipate that we could report GAAP earnings per share within or below the GAAP earnings per share guidance range provided in our third quarter earnings release, upon completion of our audited financial statements.
That said, we expect our adjusted net income for fourth quarter and full year 2007 to be in excess with the top-end of our previously issued guidance. Just to be clear, the in-process R&D charge would be one of the items excluded from GAAP earnings in our adjusted earnings number, just as we have done in the past.
Based on the work performed to-date, the net affect of any final adjustments to our reported numbers related to the open items in our audit, it would be unlikely to have a negative impact on earnings per share either on a GAAP or adjusted basis. So while our work is not done, we expect to see the positive impact to the over-performance on revenues translating to the adjusted earnings per share line.
In the fourth quarter of 2007, we reduced our average shares using calculated diluted earnings per share, buying back 500,000 shares of our common stock for $20.5 million. The weighted average common shares outstanding that we anticipate using in the calculation of diluted earnings per share in the fourth quarter is approximately $28.8 million.
Later in the call, Stuart will discuss our earnings guidance for 2008. I will give you some color on our expectations for certain line items on our P&L for 2008.
In 2008, we continue to expect improvements in our gross margin as our higher margin products grow faster than lower margin products. We expect that our gross margin for 2008 will average between 62% and 63% of sales.
We are now targeting R&D at approximately 5.5% of total revenues in 2008. We anticipate that SG&A as a percentage of sales will decline throughout 2008 toward our previously announced goal of 38% to 40% of sales for the year, as we increase the productivity of our recently hired sales reps, reduce cost at IsoTis and diminish our reliance on outside consultants on the finance and information technology functions.
Finally, we expect total amortization expense to be approximately $4.2 million per quarter through the end of 2008, of which approximately $1.1 million will be reported in cost of product revenues. And now, I would like to turn the call over to Gerry Carlozzi to discuss our recent acquisitions of IsoTis, our clinical trial and our selling organizations.
Gerry Carlozzi
Thank you, Jack. During the quarter, we continue to execute on our plans to complete the integration of the IsoTis acquisition.
I'd like to acknowledge the hard work of the integration teams who worked on the IsoTis project. The integration required a significant amount of work and our employees have risen to the challenge and worked hard to affect a smooth and an efficient process.
Thanks to their hard work, we remain on target to complete the integration in accordance with our timetable. We have executed an all actions required to achieve the synergies we laid out as part of the acquisition plan.
Our NeuroSciences selling organization continued to focus on the introduction of Integra Mozaik into key strategic spine accounts. We now have 225 accounts that we consider active.
We have been exceedingly pleased with the reception of the Integra Mozaik, Osteoconductive Scaffold that's been received in the market. Surgeons appreciate the handling characteristics.
We have launched additional sizes and configurations during this quarter. Near the end of 2007, we formed our orthobiologics sales organization to combine forces with our direct neuro sales team.
Our orthobiologics sales teams allow us to increase our market presence in orthopedics from 20 specialists selling Integra Mozaik bone graft substitutes during the first nine months of 2007 to our new expanded model consisting of over 300 reps selling our full range of orthobiologic products. IsoTis forms a centerpiece of our new Integra orthobiologics distribution channel.
IsoTis product lines include demineralized bone matrices, marketed under the brands DynaGraft, OrthoBlast, Accell. These products are used for bone repair and bone fusion in orthopedic procedures that includes spine, trauma, reconstruction in foot and ankle.
The combination of the IsoTis products with the Integra Mozaik family of products provides us with the most comprehensive product portfolios in the orthobiologics market. I would also like to update you on the DuraGen Plus Adhesion Barrier.
Assuming the trial objectives are met, we continue to anticipate a 2010 filing of the PMA, which would then expect a result in an approval during 2011. The trial continues to generate increased awareness of DuraGen Plus for the use in spine where it is indicated for the repair of the dura.
Our Integra Extremity Reconstruction division continues to be focused on expanding its field presence and introducing new products. Earlier this year we completed the integration of KMI and closed its facility in Carlsbad, California.
We introduced several new innovative products in the quarter, including our AEON Shape Memory Staple, ADVANSYS Midfoot Plating System and the Uni-CP Compression Plate. We have a full complement of 75 sales professionals in the field, including specialists focused on engineered tissue repair products.
We launched a Flowable version of our Integra Wound Matrix during the quarter and we also launched Integra Os, a bone void filler product using our collagen-ceramic matrix technology this quarter, and plan to launch a series of demineralized bone matrix products next month. We're excited about the synergy of small bone and joint implants for the upper and lower extremities in the orthobiologics platform that we have assembled.
Integra's total ankle, the HINTEGRA continues to grow with the flagship product for our European orthopedic sales force. We look forward to initiating the clinical trial in the US for this innovative product during 2008.
We began recruiting investigators and will retain a clinical research organization to manage the process. Our extremity reconstruction sales platform has continued to penetrate the market with record growth in 2007, and is well positioned to continue to exceed our targets during 2008 with a current direct sales organization and new products that were introduced during 2007.
In Integra medical and surgical instrument group, we established our direct selling organization, renamed Integra Surgical. As a result of integrating the Jarit, a newly acquired Luxtec LXU surgical team, we now have a combined selling organization of approximately 40 direct sales reps covering about half the country, selling Jarit instruments and Luxtec lighting.
By operating directly in these markets, we expect to save $1.5 million in SG&A spending in 2008. In the other areas of the country, we will continue our strong historical relationships with Jarit and Luxtec dealers.
We shut down three of the four LXU sites in the United States. We've already integrated the customer service and distribution activities and expect the total headcount reduction from the LXU integration of approximately 50 individuals.
In Europe, we continue to expand our infrastructure in our sales and marketing organization. As a result, we are starting to increase sales growth and operating efficiencies.
Early this year, we took over the distribution of our neuro products from our dealer in Switzerland. We also inaugurated our new Puerto Rico facility and have started the production of our collagen-based products in this facility.
This investment will allow us to continue to expand our capabilities in the area of regenerative technology development and provide us a second source of manufacturing supply for these important products. Stuart will now provide more information regarding our guidance for 2008.
Stuart Essig
Thank you, Gerry. Our management team continues to seek out external opportunities for growth, and future acquisitions could affect our results going forward.
However, the forward-looking guidance that we are providing does not reflect the impact of acquisitions or other strategic corporate transactions that have not yet closed. In our press release, we have provided quarterly revenue and earnings per share guidance for 2008.
Full year revenue and adjusted EPS guidance for 2008 remains the same as we previously announced. Due to the increased seasonality that we experienced in 2007, we have adjusted our second half guidance to better reflect that seasonal trend, shifting both revenues and earnings from the third quarter to the fourth quarter of 2008.
But, our full year 2008 revenue guidance remains $635 million to $655 million. The full year GAAP earnings per share guidance for 2008 is anticipated to be in the range of $1.86 to $2.01 and adjusted earnings per share in the range of $2 to $2.15.
As we've done in 2007, we no longer adjust earnings per share for the effects of FAS 123(R). For those of you who are still tracking the impact of FAS 123(R), we anticipate total stock-based compensation expense in 2008 to remain in the range of what was reported in 2007.
We expect the quarterly impact of share based compensation expense to be approximately $0.09 per diluted share for each quarter during 2008. I want to complement our sales, marketing, clinical and development teams for the great success in the quarter and in 2007.
With record revenues well in excess of our expectations, we delivered excellent growth in the quarter and improved our ability to drive both internal developments and acquired products. We expect this trend to continue and remain extremely confident in our growth plan, strategic direction and divisional leadership.
We are very well positioned for a great 2008. As we said, we can take questions.
However, when we've completed our audited financial statements for the year ended December 31, 2007, we will host a conference call to discuss the audited financial results. That call will be open to all listeners and will be followed by a question-and-answer session.
Thank you for your participation in today's call.
Operator
Once again, ladies and gentlemen, this will conclude today's conference. We thank you for your participation.
You may now disconnect.