IART Integra LifeSciences Holdings Corporation

In an attempt to consolidate its position in the Extremity Reconstruction business, which has witnessed disappointing sales performance in the recent past, medical products company Integra LifeSciences Holdings Corporation (IART) recently launched its new Allograft Wedge System.

Developed from human cancellous bone, the Integra Allograft Wedge is sterilized through the BioCleanse Tissue Sterilization Process. This is also terminally sterilized using a validated method to attain a Sterility Assurance Level (SAL) of 10^-6. This system comprises simple pre-cut allograft wedges for both Evans and Cotton osteotomies and a set of instruments designed to provide a method of assessing osteotomy space to aid in the selection of the appropriate Integra Allograft Wedge implant.

Integra’s Extremity Reconstruction sales organization, which works on lower extremity fixation, upper extremity fixation, tendon protection, peripheral nerve repair/protection and wound repair, distributes this Allograft Wedge System in four sizes (6, 8, 10 and 12mm). The company claims that this variation in size will help the surgeons limit the uncertainty by accommodating a patient's unique surgical needs.

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 and

tough competitive environment. The company is facing stiff competition from large-cap players like Medtronic (MDT) and Stryker Corp. (SYK) in the extremities fixation market. Additionally, the challenging macroeconomic environment in Europe and continued softness in the US is leading to lower sales in Spine and Orthobiologics.

Earlier this month, while reporting preliminary results for the fourth quarter and full year 2011, the company estimated quarterly revenues in the range of $202–$203 million (way below the previously announced guidance of $208.5–223.5 million). The company believes the poor performance is primarily due to the disappointing sales of Extremity Reconstruction products in the domestic market.

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 remain apprehensive regarding the FDA warning letter as it may weigh down the stock further.

Although the company is taking several steps like planned product launches and acquisition strategy to navigate through these difficulties, the challenging macroeconomic environment remains a headwind for the turnaround. Currently, Integra retains a Zacks #4 Rank (Short-term Sell). Considering the company’s business model and fundamentals, we have a long-term Neutral recommendation on the stock.

 
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