Espicom View: Integra LifeSciences is making radical changes in an effort to capture growth opportunities. The disposal of low-margin products and streamlining manufacturing will certainly aid this, but the acquisition of Covidien's DuraSeal product line is a clear indication that Integra recognises Neurosurgery as one of its most promising growth segments. Alongside its Extremities business, Neurosurgery achieved solid growth in Q313, in contrast to the company's US Spine & Other business, which has echoed the downward market trend. Integra is now on a good growth trajectory, and is making all the right moves in order to maximise shareholder value in a turbulent market.
Integra LifeSciences has announced a number of strategic changes to its business in an effort to maximise growth opportunities. Firstly, the company has made plans to eliminate manufacturing operations in Burlington, MA, and is consulting with employee representatives to eliminate its manufacturing operations in Andover, UK. Integra expects these actions to be complete by the end of calendar 2014.
The Burlington operations will be consolidated into the company's facilities in Cincinnati, OH and York, PA, while the proposed changes in Andover, subject to the outcome of consultations, include consolidating the assembly of electronics into Integra's facility in Ireland and discontinuing certain non-core product lines. As a result, the company recorded approximately US$500,000 of expenses in Q313 and will record approximately US$1.5mn of expenses in Q413 in connection with these closures. Integra expects the two consolidations to reduce operating expenses beginning in FY2015 and reach an annualised run rate of approximately US$4.5mn per year in FY16.
In addition, Integra is undergoing a series of product rationalisation initiatives, and is discontinuing the following:
• Several products and product lines in the US Instruments segment that are low-margin and -growth.
• A few small, non-strategic and/or low-margin product lines currently manufactured in Burlington and Andover, reported in the Instruments, Neurosurgery and US Spine & Other segments. Any prospective discontinuations in the Andover facility are subject to consultations with employee representatives.
• Several small, low-margin and -growth products and product lines within the US Extremities, US Neurosurgery and International business segments, for the purpose of simplifying the product offering and reducing complexity.
In addition to these product discontinuations, Integra is identifying revenues related to products within its Private Label business that are being substantially reduced or eliminated, because its customers found other sources during the company's supply disruptions earlier in FY13. Revenues associated with products identified for discontinuation and the affected Private Label revenues were approximately US$28mn in FY11, US$21mn in FY12 and US$8mn in H113. Integra expects revenues for these products to be close to zero in FY15.
Furthermore, Integra has entered into a definitive agreement with Covidien to acquire the latter's Confluent Surgical business, including surgical sealants, adhesion barriers and, most importantly, DuraSeal sealant. The companies expect to complete this transaction by the end of Q114, subject to receipt of regulatory approvals. Under the terms of the agreement, Covidien will receive an initial cash payment of US$235mn from Integra upon the closing of the transaction. Additionally, Covidien may receive up to US$30mn, contingent upon the achievement of certain performance measures related to the transition of the Confluent Surgical business to Integra.
Integra believes that the DuraSeal product line fits well within its Neurosurgery segment growth strategy by providing a broader set of solutions for surgical procedures in and around neurosurgery. In addition to its strategic value, Integra believes that this deal will add scale and increased profitability by every measure without introducing new complexity into its structure. Confluent Surgical products include: DuraSeal, DuraSeal Exact/Xact, VascuSeal and SprayShield. These products generated approximately US$65mn in revenue during FY12 and gross margin comparable with Integra's regenerative medicine product portfolio. Preliminarily, Integra expects the acquisition to add US$57mn-US$60mn in revenue in the first full year of the combination, and to then grow by 3-5% in the longer term.
For Covidien, the transaction allows the company to better focus on its global strategic priorities, and expects it to be dilutive to FY14 earnings per share; however, the underlying strength of Covidien's existing businesses is expected to offset this dilution. As a result, Covidien does not anticipate this transaction will have a material impact on its FY14 outlook.
These ambitious changes form part of Integra's strategy to become a multi-billion-dollar global medical technology company, through improved planning and communication in its business, infrastructure optimisation and revenue and profit margin growth acceleration. These latest plans will allow the company to make great strides in achieving these goals.