IART Integra LifeSciences Holdings Corporation

Integra LifeSciences Holdings Corporation (IART) reported disappointing preliminary results for the fourth quarter and full year 2011.

Integra expects to report total revenue in the range of $202–$203 million, way below the previously announced guidance of $208.5–223.5 million. Sluggish sales during the quarter resulted from the inventory reduction initiatives by the company’s instrument distributors, worldwide weaker economy and disappointing sales of Extremity Reconstruction products in the domestic market. Based on this initial guidance, the company’s fiscal 2011 revenues are expected to be around $778.5–779.5 million (lower than the guided range of $785–$800 million). 

Adjusted EPS in the fourth quarter is expected in the range of 65–70 cents, lagging considerably from the previously stated range of 75–83 cents. Fiscal 2011 adjusted EPS of $2.74–$2.79 also compared unfavorably with the previously announced adjusted EPS outlook of $2.88–$2.96. Earlier, while reporting the third quarter result, Integra anticipated the acquisition of Ascension Orthopedics (acquired in October 2011) to dilute its adjusted EPS by 5–6 cents in the fourth quarter.

The company also lowered its 2012 revenue guidance. Integra currently expects 2012 sales to increase roughly 8% on a constant currency basis, and 7% on a reported basis over 2011 revenues, which is well below than the earlier provided guidance of 10%. This was in the wake of weak fourth quarter result combined with stronger domestic currency compared to Euro, volatile international economy and lower growth expectations for the domestic extremity product lines.

For the past few quarters, Integra has been witnessing several headwinds in the form of weakness in the extremities and spine markets leading to softer procedural volume, tough competitive environment in global knee and hip replacement market, challenging macroeconomic environment in Europe and continued softness in the US leading to lower sales in Spine and Orthobiologics.

To worsen the situation, Integra recently received a warning letter from the US Food and Drug Administration (FDA) pertaining to quality systems and compliance issues at its collagen manufacturing facility in Plainsboro, New Jersey. Earlier in August, the company received a Form 483 observation from the FDA regarding manufacturing concerns at this collagen manufacturing facility. Collagen products currently represent roughly 23% of total sales and are manufactured at two facilities (the second in Puerto Rico). We are anxious regarding the FDA warning letter as it may weigh down the stock further.

However, the company is taking several steps to navigate through these difficulties. Earlier in December, the company saw a change at its helm with the appointment of Mr. Peter Arduini as the new President and Chief Executive Officer. Mr. Arduini was earlier the President of Medication Delivery at Baxter Healthcare, a $4.8 billion global business of Baxter International (BAX).

Integra faces direct competition in the medical instruments & supplies industry from major players like Medtronic (MDT) and Stryker Corp. (SYK). Currently, the company retains a Zacks #3 Rank (Short-term ‘Hold’).  Considering the company’s business model and fundamentals, we have a long-term ‘Neutral’ recommendation on the stock.

 
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