Story Stocks^®

Following this morning's Q2 earnings report, medical device company Integra LifeSciences (IART) is plunging lower, but the main cause for the steep sell off isn't due to its quarterly results. In fact, the company edged passed top and bottom-line estimates while revenue returned to positive growth at 9.7% following four consecutive quarters of yr/yr declines. Rather, the weakness is related to the company's downside Q3 guidance and its slashed outlook for FY24.

• After guiding for FY24 EPS of $3.01-$3.11 and revenue of $1.67-$1.69 bln last quarter, IART is now forecasting EPS of $2.41-$2.57 and revenue of $1.609-$1.629 bln. While demand is relatively healthy across the business -- revenue increased by 5.7% on an organic basis in the Tissue Technologies and by 0.9% in Codman Specialty Surgical -- IART is contending with operational and quality system issues.
• Last January, the company completed an initial analysis of its manufacturing facility in Boston and uncovered some gaps in its manufacturing quality compliance processes. Then, in March, a third-party auditor identified more issues, particularly relating to IART's water quality system, prompting the company to develop a compliance master plan to address quality system and GMP compliance learnings.
• As the company implements its compliance master plan, it will initiate temporary shipping holds on certain products that will mostly impact its Q3 results. The two products that will primarily be impacted are PriMatrix, a dermal repair scaffold used for trauma and burn wounds and other indications, and SurgiMend, an expandable collagen matrix for plastic and reconstructive surgery.
• Following the initial quality control review in January, IART planned to restart production of PriMatrix and SurgiMend at its Boston facility, but on July 15, the company announced that it will restart manufacturing at its Braintree, MA site. However, that facility won't be operational until 1H26.
• On the positive side, IART saw strong demand for CereLink, a neuro-monitoring product, following a global relaunch in Q1. Also, its $275 mln acquisition of Acclarent which was completed in April is progressing well and is contributing materially to the top-line. Acclarent, a developer of ENT instruments, contributed $30 mln in revenue in Q1, about $5 mln more than IART anticipated.

The bottom line, though, is that IART is working through some major quality control issues, and it may take several quarters before those are ironed out. Consequently, the company won't be operating at full strength in the near-term, but the longer-term benefits of implementing the compliance master plan should enable it to more fully meet demand.