Good day, and welcome to the Integra LifeSciences Third Quarter 2021 Financial Results Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mike Beaulieu, Director of Investor Relations. Please go ahead, sir.

Thank you, Cecilia. Good morning and thank you for joining the Integra LifeSciences third quarter 2021 earnings conference call. Joining me on the call are Peter Arduini, President and Chief Executive Officer; Glenn Coleman, Chief Operating Officer; and Carrie Anderson, Chief Financial Officer. Earlier today, we issued a press release announcing our third quarter 2021 financial results. Along with the release a corresponding earnings presentation, which we will reference during the call, is available at integralife.com under Investors, Events and Presentations with the file name Third Quarter 2021 Earnings Call Presentation. Before we begin, I'd like to remind you that the statements made during this call may be considered forward looking. Factors that could cause actual results to differ materially are discussed in the company's Exchange Act reports filed with the SEC and in the release. Also in our prepared remarks, we will make reference to both reported and organic revenue growth. Organic revenue growth excludes the effects of foreign currency; acquisitions, including ACell; divestitures, including the sale of our Extremity Orthopedics business; as well as discontinued products. Unless otherwise stated, all disaggregated and franchise level revenue growth rates are based on organic performance. Lastly, our comments today will include certain non-GAAP financial measures. Reconciliations of any non-GAAP financial measures can be found in today's press release, which is an exhibit to Integra's current report on Form 8-K filed today with the SEC. With that, I'll now turn the call over to Pete.

Thank you, Mike, and good morning, everyone. If you please turn to Slide 5, I'd like to make a few brief remarks regarding the CEO transition. Last Thursday, we issued a press release announcing that after a comprehensive search of candidates, our board has pointed Jan De Witte as its next President and Chief Executive Officer. Jan brings significant leadership experience and capabilities, including digital innovation and new product development, commercial acceleration, and international market expertise and operational excellence as well as a global mindset. As I noted on the second quarter earnings call, Integra has an outstanding leadership team capable of executing our strategic plan with a robust pipeline of innovative new products to drive global growth and market expansion for years to come. I have every confidence that Jan will build on Integra strong foundation to drive the next phase of our profitable growth strategy and I'll work closely with him over the coming months to ensure a seamless transition. Jan will be joining us prior to the end of the year as we work through the logistics of moving him and his family from – to the United States from Belgium. I'd also like to extend my sincere thanks to Stuart Essig and the board of directors, Integra's exceptional management team and the more than 3,700 employees around the world. It's been an amazing 11 years at Integra and I remain a huge supporter and look forward to Jan's many contributions as Integra next CEO. Now, I'd like to turn the call over to Glenn to discuss our accomplishments and performance in the third quarter. Glenn?

Thanks, Pete, and good morning. Please turn to Slide 7. Our third quarter operating performance was strong despite the challenging environment. I'll highlight few of the factors that drove our results and provide an update on several of the key catalysts that positioned the company to achieve its near and longer-term financial targets. Third quarter sales were $387 million, near the high-end of the guidance we provided in July, adjusted earnings per share were $0.86 compared to $0.80 in the prior year and was $0.13 above the mid-point of the guidance. We're pleased with our continued sales recovery across geographies and product lines during the quarter. Despite the impact of the Delta variant and hospital staffing shortages, that resulted in procedural referrals in parts of the U.S., Europe and Australia. Sales performance in July was strong continuing the recovery trends seen in the second quarter with the most pronounced COVID impact in August followed by a gradual improvement towards the end of September. We experienced a strong recovery during the quarter in our indirect markets and benefited from pent-up demand in our instruments business. Despite the variability in deferral and procedures, third quarter organic revenue growth was 6.7% demonstrating the benefits of our diverse portfolio with products and market leading positions. In the third quarter, we achieved positive organic growth in each of our businesses, including neurosurgery, instruments, wound reconstruction and private label when compared to both 2020 and 2019. Geographically, sales in the U.S. increased mid-single digits and sales outside the U.S. increased approximately 10% compared to 2020 with strong growth in Japan and China. We believe there is a significant opportunity in these markets as we continue to introduce new products and expand our commercial presence. Moving to new product updates, we launched Cerelink in the U.S. and…

Thanks, Glenn. And good morning, everyone. I'd like to start with a summary of our third quarter highlights on Slide 9. Third quarter, total revenues were $387 million representing an increase of 4.5% on a reported basis and 6.7% on an organic basis compared to the prior year. With our strong performance in the third quarter and our outlook for the remainder of the year, we expect our organic growth in the second half of 2021 to be approximately 5% over 2019. Adjusted gross margins in the third quarter was 68.3%, down slightly compared to the prior year, but in line with expectations and up slightly, when compared to the first half of 2021. As we discussed on our July earnings call, we continue to monitor material inflationary pressures closely and impacts in the third quarter were largely related to increased freight and packaging cost and some supply chain disruption. We have supply contracts that help to mitigate near-term exposure to these issues. And we have an opportunity to recoup, a portion of increased cost through pricing adjustments as we move into 2022. Our Q3 adjusted EBITDA margin with 27% compared to 27.9% in the prior year, as the benefit from higher revenue was offset by higher operating costs as our expenses continued to normalize. As we discussed last quarter, operating expenses are gradually increasing following the reduced levels of spending we put into place last year in response to the global pandemic. We continue to prioritize our spend in the second half investing in new product growth strategies, further geographic expansion and clinical studies. Given our year-to-date spending and outlook for Q4 we now expect full year adjusted EBITDA margins to be above 25%, which was the high end of the range we provided in July. Adjusted earnings per…

Thanks, Carrie. If you all turn to Slide 14, I'd like to wrap up our prepared remarks with a few key messages. We're pleased with our performance in the third quarter, despite the lingering effects of COVID and as growth in many of our businesses exceeded 2019 pre-pandemic levels. We expect these positive revenue trends to continue to the fourth quarter and into 2022 and remain confident in achieving our long-term growth targets. We're focused on executing our strategies, which is about leveraging our optimized portfolio Ex-Orthopedics, penetrating deeper into our existing markets and expanding into higher growth geographies and market adjacencies. The global launch of CereLink, our investments in the development of the Aurora Surgiscope, nerve 3D, and the pursuit of a PMA for SurgiMend in breast reconstruction are just a few of the examples of our progress in 2021. In closing, on my last evening earnings call here at Integra, I'm incredibly humbled by what we've accomplished over the last decade and the positive impact we've had on patients’ lives. And that's really what matters, doing well by doing good. The company is in a position of strength with an outstanding leadership team and a deep pipeline of new products. And with the appointment of Jan was a proven global business executive with deep experience in healthcare and technology. I have no doubt that the company will continue to excel for many years to come. That concludes our prepared remarks. Thank you for listening. And operator, if you would now open up our lines for questions.

Hey Matt.

Great. Thanks so much. Good morning, and congrats on the quarter. Congrats Pete, on the new position, it's been a pleasure working with you and looking forward to keeping in touch.

Thanks, Matt.

You bet. So, couple things, I guess I wanted to highlight, heading into the quarter, I think for everyone, the expectation was for tough trends, particularly in the U.S. And I think what is surprising folks to the upside here a little bit in your results is sort of the performance in the U.S., despite I think what everybody understands is the reliance of the business to a large degree on availability of ICUs. And then the outperformance OUS and look to get your additional color on those areas of sort of you held in there and outperformed as I just mentioned then I have one follow-up on Q4 if I could.

Yes, Matt. I’ll take a stab at that and then if Glenn wants to add color. But I would say, as we went through the quarter, as Glenn made in his prepared remarks, the COVID impact that we saw certainly peaked in August and we saw some nice recovery. I think as we think about the path that gave us the final result of $387 million. We certainly benefited from a late quarter launch of CereLink about $5 million worth of benefit coming from CereLink in the quarter that was towards the end of the quarter. And I would say the pent-up demand that we talked about with instruments certainly helped us achieve the near the high end of our guidance range. There was still a COVID impact in the quarter. So, as I think about procedural deferrals, plastics and reconstruction and surgical reconstruction did see procedural deferrals, and even in some of our neural procedures had some deferrals, but overall, I think, there was some enough diversity in our portfolio that pushed us there. And then capital, as I mentioned earlier, certainly capital benefit from CereLink, but even when you exclude capital, we even saw double-digit growth compared to 2020, but when compared to 2019 still not at those same levels. So, we still have some full normalization of capital to go that will help us as we move into Q4 and into 2022. So, with that Glenn anything else that you would want to add?

Just in terms of the international business and obviously, we saw some of the COVID impacts in Europe, and in Australia, New Zealand. But even with that, we put up a really strong quarter outside the U.S. double-digit organic growth for the international team. So that was outstanding. A lot of that coming from Japan and China, I mentioned both of those markets doing exceptionally well, but even Europe put up mid-single digit growth organically versus 2020 despite some of the challenges. And we did see a bit of a bounce back with our indirect markets as well. So, on the whole, the international performance was quite good and could have been better had we not seen some of the COVID headwinds. Pete, anything else…

Yes. Just to reinforce what you guys said, I think this is the beauty of the Integra model, a diversified midcap. I think you saw some of the benefits of it this quarter, as Carrie mentioned. And the fact that life sustaining, life supporting products, such as neurosurgery get prioritized to the top of the it even when ICUs are under pressure. And so, I think we benefited from that as well.

That’s great. And then if I could just on Q4, it, – you’ve raised on the bottom line for the beat mostly. And – but it – I think the Street was looking for maybe a little shallow or Q3 and a little steeper increase into Q4 and you’ve sort of level that. I’m just wondering, what kinds of things are you contemplating in your Q4 guide? Given that there’s still some concerns over hospital staffing and some other issues, I guess what goes into that assumption for organic growth in Q4?

Well, Matt, I think you said it exactly in terms of what we’re thinking about. So, as we digest our Q3 results certainly, there was some impact of COVID in there and that uncertainty still exists in the fourth quarter. So, a bit of caution as we move into the fourth quarter. Like what we’re seeing in terms of October, it came in as expected first month of a quarter typically is the lowest of the three months. So, October came in as expected, but I would say just wanting to reflect the fact a more of a cautious view of continued COVID uncertainty with flu season. Staffing challenges are still – there still persisting and likely will persist even into 2022. And then just supply chain disruption, certainly managing through expedited freight and getting product where it needs to be all those things factor in, and a little bit of FX headwinds as we think about where the dollar has strengthened against some of those European currencies reflecting some FX headwinds there as well. So, all those things kind of mix into the lower end of our guidance range.

Hey Matt, I would just add to that. We feel quite good about how the second half of the year has played out. I mean if you think about the organic growth versus 2020 in the third quarter, 6.7% that’s a good number. We expect Q4 based upon our guidance to be above 6%. So, we’re exiting the back half of the year above 6% organic growth. And so, we feel like that’s going to bode well as we go into next year. So, I just wanted to highlight that as well.

Terrific. Thank you.

Yes, thanks.

We will now take our next question from Steven Lichtman from Oppenheimer. Please go ahead.

Thank you. Hi guys and best of luck, Pete. Just a couple questions for me. First on CereLink outlook, certainly understand your comments about the 3Q, Q4 dynamics here. But just bigger picture, what are you seeing in the early days of the reintroduction as you talked to the field and how are you thinking about CereLink as a driver in 2022, now we bid out on the market again?

Yes, thanks, Steve. I’ll take this one. This is Glenn. Again, just why we’re excited about CereLink, a few things. One, the new monitor is more accurate than other monitors on the market. It has less drift. It’s more compatible. It’s got this wave form on it that enables continuous monitoring and better clinical decisions and better patient outcomes. And so, we’re real excited about that along with the flexible micro center that goes with it. We did see some pent-up demand when we launched here in the third quarter in the U.S. and Europe, so we mentioned $5 million. We’ll see obviously more revenues coming in in the fourth quarter, but not to the extent of the third quarter revenues because of some of those initial orders. But as we go into next year, in the next couple years, this should be a nice growth driver for us in many markets outside the U.S. as well. Longer-term China is a big opportunity for us, but that’s still a few years down the road I’ll say, but certainly for 2022, this is going to be one of the growth drivers for us and even into 2023. But we’re launched, we’re moving forward and we feel like we’ve got differentiated capabilities with our monitor versus others on the market.

Great. Thanks, Glenn. And then just, secondly, obviously the organic business is offsetting ACell coming in light of your initial expectations. As you look at that business and how it can be a stronger driver ahead, can you talk about what you’ve identified as potential fixes and what your outlook for ACell is overall over the next say 12 months to 18 months?

Sure. Just a couple things I want to highlight in terms of the positives around ACell. We still think this is going to be a great asset and a synergistic fit to our business. If you just look at the third quarter, I called out in my prepared remarks, MicroMatrix the powder formulation and actually growing sequentially that was a good positive sign. We did grow ACell sales in a number of our existing accounts where we already have relationships established. And so that was a big positive. We still have some COVID challenges in terms of getting account access, especially to the newer surgeons, but we have put plans in place to get better performance moving forward. And a big part of those plans is putting in more resources and getting better coverage, especially around the top 250 accounts across the portfolio. And so those plans are underway. We’re hiring more people. I think as we get more access in the fourth quarter here, you’ll see more product trialing taking place. We’ll do more with the value assessment committees. So, we feel like we’re on a good path there. And then more education and just to give you some context around this, we completed 13 specific ACell education events alone in the third quarter, and that’s obviously going to have a positive impact as we go forward. So, we’re going to be adding more resources, getting better account coverage. I think access will open up for us better in the fourth quarter. And this is going to take us a few months to get to where we want to be, but certainly expecting to see an improvement in the business and we’re already starting to see some positive signs, which I’m encouraged by.

Great. Thanks, Glenn. Thanks everyone.

Thank you.

We will now take our next question from Anthony Petrone from Jefferies. Please go ahead.

Thank you. And I want to congratulate you Peter as well on the role of GE, good luck and we hope to stay in tough going forward. And of course, good luck to the Integra team as the transition is finalized here into the end of the year. Couple of questions just on COVID and then I’ll have a follow-up on SurgiMend. So just on COVID in the quarter on two specific areas related to delta, hospital access, and then maybe even an impact to trauma cases. Is there sort of a way to quantify your sort of lowering ACell here, for instance, and other 6 million or so versus or 7 million versus the lower end of the range? How much is actually linked to limitations on hospital access and then just going into tissue technology specifically, did the company see a lower incidence rate of trauma that led to the Q over Q downtick and then I’ll have a follow-up on SurgiMend. Thanks.

Yeah, Anthony, I’ll take that. If you recall our original guidance for the third quarter was $382 million to $389 million. And I would say that $389 million, which was about sequentially flat from where we ended up in Q2 really represented very little COVID impact, essentially, continued recovery from COVID trends. So, I would say that as where we landed, certainly, we saw a COVID impact, it pushed us closer to the mid to – slightly higher than the midpoint, and then we have the CereLink benefit. So, if you kind of look at that, we probably would have been more closer to the lower end of our guidance had it not been for the successful launch of CereLink, but all in all, as I go back to my comment and Pete’s comment, the diversity of the portfolio really showing through the third quarter and overall producing a really balanced result of $387 million. But I would largely say that, if the COVID headwinds had not been there, we certainly would have been at the high end of that range, for sure. And so, I’d quantify that as kind of that’s the headwind from COVID. As it relates to the areas that were more impacted, certainly the surgical and reconstruction area of our tissue technologies business is probably the area that sees the largest impact. These are breast reconstruction, these are complex hernia repair procedures that can be deferred for a period of time. So, as I mentioned in my prepared remarks, against 2019 surgical plastics and surgical reconstruction was still down compared to 2019 levels. So, I would say, within one reconstruction that was probably the area that was more COVID impacted within tissue. Anything else, Glenn, if you want to add?

No. I think that was well said.

Just a quick follow-up on SurgiMend, I know, one of the nuances here was the company was not able to see the real-world evidence heading into the ADCOM Meeting. Just wondering, if – I believe now the company has actually been able to see that real world evidence. So maybe just a comment on those data and how you think it influenced the outcome of the panel and any early thoughts here on, how the path forward in breast reconstruction may change. Thanks.

Thanks, Anthony. I’ll start and then Pete feel free to add some comments. Let me just give you some context. So maybe start off. So, you have the right frame and framing out of the situation and then go through a little bit of the MROC data in the FDA panel discussion. Just for context purposes, the FDA has stated that all ADMs, including human ADMs require PMA. And that was actually reiterated last week at the American Society of Plastic Surgeons. So, I think that’s an important point. And today, as I mentioned earlier, there are currently no FDA approved ADMs with a specific indication for breast and we are the only company to file a PMA for a breast reconstruction indication. So, I want to make sure that that context as well understood. As it relates to the MROC data, the clinical data that’s part of our PMA is partially based off of MROC. And as I mentioned earlier, it’s best-in-class multi-site study that’s been done looking at the outcomes from thousands of breast reconstruction procedures. This is high quality real-world data. And the FDA has stated to us that it can be used to support our PMA. I also indicated that the FDA has worked with us to design a statistical analysis that’s based upon this MROC data. And the data demonstrates that the results from surgery and PRS are superior to the results in such procedures where there’s no acellular dermal matrix that’s being used. And as I mentioned earlier, we recognize that there are some limitations to the data and we’re working with the FDA to design a post-approval study to supplement the existing safety and effectiveness data. So, there’s a lot of work going on. We’re still moving forward with it. The FDA panel itself is a milestone in the process. Obviously, the panel’s decision is important, but the FDA is not bound by the committee. Their recommendation is really advisory. And so, we’re going to continue to move forward with the work that’s going on here. The vote from this panel, obviously it doesn’t change any current practices that are going on among surgeons and there is still an urgent clinical need for an FDA approved acellular dermal matrix to help restore the quality of life for women following breast reconstruction. So, we’re confident that the existing clinical evidence supports approval and obviously we remain focused on the mission to improve outcomes for breast cancer patients. Pete, I don’t know if you want to add anything else to it.

Just to emphasize three points. So, I think we have had access with the submission to the MROC data knowing what I said, and we know that there are certain limitations to it and have been open and interacting with the agency on it, so there’s no surprise here. And I think always expecting coming through a PMA of having some type of data follow-up was part of our plan. And so that doesn’t change. I just want to make that point. I think the other aspect here about this that is really important is the fact that we believe strongly that SurgiMend has unique characteristics no other product has including human-based category product. And that is two things it’s unbelievable strength that it has and as the procedure volume changes to new procedures with wider coverage, we believe it’s going to bear out to be the leading product. Secondly, our process for how we actually cellularize, it’s acceptance and it’s the body low rejection rate is second to none. And the third is its characteristic it’s on revascularization, which again becomes very, very important if you want this to be actually an integrated part into the body. And so those are the three things that we keep as the beacon tied to what Glenn said, which is fighting for women to have the right, to have a product and reconstruction post-mastectomy. And so, it’s a really important part of the plan and the journey’s long, but we think we’re on the right path here.

Thanks again. Good luck, Pete. Thank you.

Thanks.

We will now take our next question from Sam Brodovsky from Truist. Please go ahead.

Hey, thanks for taking the questions. Just I wanted to touch on the supply chain issues that you talked about. And I know you’ve highlighted certainly on the freight side some cost issues. But at this point, are you seeing anything that’s leading to the company not being able to fulfil demand or any restraints there’s to that point yet?

Yes, I’ll take that. And certainly, as we think about the third quarter impacts that we saw, I would characterize it as some freight expense increases that was probably the majority, some packaging, particularly in the corrugated side of packaging and then other supply chain disruption. So, our ability to get product in and get it to where we need to be, yes, there has been some challenges. I would say not to a level in the third quarter where it interrupted our sales performance, but something that we want to continue to watch very closely. And we’re continuing to manage that very closely. But I would say, supply chain disruptions are factoring into our thought process, as we think about Q4 and even as we move into 2022. Glenn, anything you wanted to add on that?

Yes. I just want to recognize the incredible work that our global operations team and logistics teams have done as well as procurement. I mean, it’s a challenging environment, but we’ve pushed our way through it. And have had some disruption, but it’s been very manageable. And so, I want to recognize our colleagues that are in these areas because it’s certainly a challenging environment, but we’re managing through it.

Got it. Thanks. That’s helpful. And then just quickly on the capital market. You talked about getting back to more normalized levels next year. How should we think about the cadence there? Is it maybe first half is still below historical levels and then the second half was above that or is it going to be more of a uniform sort of steadily improving over 2019? Thanks.

Yes. Sam, I would say that I would expect continued gradual improvement. In the fourth quarter, we are expecting sequential improvement of capital from third quarter to fourth quarter. Fourth quarter normally tends to be higher capital because it’s the end of the most fiscal year hospital budget. So hopefully, some of that capital – some of that cash will be let loose and into some capital purchases. So that’s figuring into our thoughts for the fourth quarter. But as we move into 2022, I think it’ll be a continued gradual recovery back to 2019 levels. So, I think you’re probably thinking about that correctly that more normalization, but when that will happen, not for certain, but certainly I would expect it to be more gradual.

Yes, I would just add to that. A big part of our capital business is outside the U.S. I’m very encouraged by what I’m seeing in certain markets like Japan, even in the fourth quarter here in terms of what the capital funnel looks like. The customer’s willing this to move forward. So, I’m expecting in places like Japan, as an example, to see maybe even a faster recovery and hopefully some good news as we exit the year relative to our capital business. You may remember this part of our business used to be sold through a distributor, and now we’re selling through our direct sales force. We have a dedicated channel, specifically selling capital, and we’re seeing some really good benefits as a result of that change we made about 12 to 15 months ago.

Yes. And I would say that the smaller capital, small to mid-sized capital is seeing a faster recovery relative to the larger capital. And for us larger capital is a couple hundred thousand dollars. it’s our CUSA. So that’s the one that’s probably slower to come back, even though we had a good – again, even if you excluded CereLink, which is our new ICP monitor, our capital did see double-digit growth, low double-digit growth in the third quarter. So, some nice recovery even on the larger capital, but certainly smaller and mid-sized capital bouncing back even stronger. And as one mentioned a really strong funnel that we have good visibility on in. And so, our view is the capital –competitive landscape has not changed. It’s more of just an extended selling cycle.

Next question operator.

We will now take your next question from Robbie Marcus from JPMorgan. Please go ahead.

Oh, great. Thanks for taking the question, and congrats on a good quarter. And Pete I’ll add – we’ll miss you and best of luck.

Thanks, Robbie.

Maybe to start off. I was hoping you could spend a minute on ACell, it looks like the guidance is moving down again would just love to hear sort of what’s going on there? Why the step down? And also, if you could touch on just quickly, what’s assumed for some of the one-time items in fourth quarter? Is there, any further CereLink purchases, and in bulk or restocking, or just, how do we think about what’s assumed in the guidance there?

Robbie, in terms of ACell, as I mentioned, we are seeing some positives here as we exit the third quarter, it’s just going to take us a little bit more time to make more progress on the ACell business, a big part of that is getting better account coverage that I mentioned earlier and getting better access as COVID hopefully dissipates a bit here as we get towards the end of the year. So, it’s going to take us a little bit more time, but we should see a sequential improvement in the ACell business in the fourth quarter. And we do expect that we’ll see much better results as we go into 2022, as it relates to kind of new one-time items in Q4. So, we’re still expecting to see more CereLink purchases in the fourth quarter, but not to the same extent as we saw in the third quarter, because of the initial orders that we received. So that would be one that I would call out. Carrie, you want to call out?

Yes, I would say obviously instruments at 15.5% growth in the third quarter was a bit of a step up. So, I wouldn’t expect instruments to be as strong in the fourth quarter. But as I mentioned earlier sequentially capital should be stronger than the third quarter as fourth quarter normally is. So, I don’t think there’s much, lumpiness other than just continued gradual recovery. I think our fourth quarter guidance at the low end at $403 million basically reflects the back that we would expect continued gradual in revenue from Q3 to Q4.

Got it. And Carrie on SG&A, that was a big Delta came in a lot lower than what the street was thinking. How do you think about, what percentage of normal you’re at, on spending, how much was held back, how much might’ve been faster, ACell synergy capture, just trying to get a sense, as we all start thinking about next year, how much of that spending has to come back? How much is a structurally lower? Thanks.

Yes, I certainly do agree that there was a benefit of faster ACell synergy capture in our results. Definitely that is what you’re seeing as part of some of that improvement in SG&A. But we are not at normalized levels. I would expect that, that our SG&A areas will continue to move up sequentially from Q3 to Q4. I’d expect a step up in our quarterly spend and that will likely continue into 2022. And I think as we think about the growth catalyst that that Glenn had updated on in his prepared remarks, there was a lot of great things going in our favor as we think about our new product introductions, and some of those exciting products like the Aurora Surgiscope. So, we want to make sure that we’re supporting those market launches. As well as looking at further MPIs, we’ve got NeuraGen 3Dcoming into the market early 2022. So, a lot of really important projects moving forward clinical studies that we want to make sure that we’re supporting. So, I do expect that our OpEx will move gradually up from Q3 to Q4 and continue into 2022. I still think we can manage some margin expansion into 2022. But we want to make sure that we are supporting that top-line revenue growth, because I think it bodes really well as we think about our long-term 5% to 7% organic growth.

Great. Thanks a lot.

We will now take our next question from Craig Bijou from Bank of America. Please go ahead.

Good morning, everyone. Thanks for taking the question, and I’ll add good luck Pete, on your next endeavor. Couple of follow-ups here, just wanted to ask on the ACell access issues. So, I don’t know if this is for you Glenn, but you’re really just wanting to understand the access issue. So, is it not being able to get to some new physicians and get the products there, or is it an issue in the hospital? So just wanted a little bit more color on what those access issues exactly are?

Yes. So, the reality of it is with COVID where we have existing relationships, we’re actually seeing really good progress on those particular territories and those particular accounts. That’s really where ACell was selling prior, where we don’t have an existing relationship where we’re struggling to build those relationships in a COVID world. Having said that, I think that will start to improve here in the fourth quarter. And it’s not just a COVID issue. I think we have to add more resources and get better carver to do more educational events. And so that’s a big part about what we’re going to be doing. So, probably half of it’s an access issue and half of it’s a coverage issue. But that’s the way we think about ACell. And again, we’re expecting to see in a sequential improvement in the fourth quarter and better performance going into 2022. I feel confident we’re going to see that with the plans we have in place.

Got it. That’s helpful. And I mean, any way to quantify or to understand where you guys see sales going, obviously the expectations have come down from the low or mid-80s from where you were when you first made the deal. Lot of moving pieces COVID in there, but I mean, any way to understand how we should expect that business to grow in 2022 or beyond when can it get back to that original – your original guidance for the business?

Yes. I would generally say that we would expect that ASL will grow at in line with the rest of the TT business so expectations for Tissue Technologies is 7% to 9% organic growth. So, our expectation long-term is for ASL to grow at that type of rate. And I'm encouraged as Glenn mentioned that we have our plans in place. We know what we need to do, and it will take a little bit of time, but my expectation is that it will be a full contributor. And just remember that it turns to organic next year. So, we made the acquisition on January 20th and even if with a lower start, as we think about moving into 2022 and get all those plans in place, we will see a pickup in organic growth with ASL back on track. So, the expectation is, is that we will see some nice growth in 2022.

Great, thanks. Thanks for taking the questions and good luck, Pete.

Thanks.

We will then take our next question from Ryan Zimmerman from BTIG. Please go ahead.

Great. Thank you. And Pete, good luck it's a pleasure working with you. Maybe just, I want to circle back on SurgiMend for a moment, listening to the agent or the ad comes comments, one of the things that they were talking about was kind of longer-term follow-up data before approval or that they were looking for longer-term follow-up data. And so, I just want to understand, is there any chance that you think that the agency would want to see longer-term follow-up data before approval as the committee was kind of most focused on that and can that in any way prohibit approval at this point based on your discussions? And then, as a corollary to that, this just to be clear, this is for a specific label on breast utilization, but there is some utilization amongst surgeons today maybe using the SurgiMend for breast reconstruction, just not with a specific label?

So, to the last part, Ryan, the answer is yes, there is clearly utilization in multiple plastic and reconstructive procedures, but with an on-label indication we would obviously be able to promote it, focus on it and grow the market. And I think as you know, we're fundamentally have the access outside the United States in some markets like the UK, there is a pretty evolving approach to doing these procedures. So, we would hope to reach an approval here and then be able to do follow along studies to open up different approaches, this sub-pack and pre-pack approaches point. But to your question on the panel itself, I think the reality of it is, there's a lot of different ways this could go with the agency. We think there's a preponderance of direction that would go towards that we have a pathway to get there, and it ties back to, we knew what we were coming in with the Amarok data. We've been working with the agency quite closely as well as other companies have as well. There's been a lot of debate about the Amarok data, but it's the best that's out there. And I think with no products proved having that data that shows high safety levels, having European real-world experience is a really positive outcomes and procedures, and then being able to do an appropriate follow-up study along with approval, we think is a very realistic case. Now to your point, could it be that there needs to be a perspective study done? I'm sure that's one of the options that's out there, but we believe that that the pathway without having to do a randomized prospective study pre-approval is very much within our hands. And so, we've got work to do with the agency over the coming months. And as more data comes out, we'll be chatting with you about the progress on it.

Okay. And then just a follow-up, this is I'm sure [indiscernible] will have his views on this, but for Glenn and Carrie, there's been significant dislocation evaluation in the chronic wound market, as of late. And so, I want to just get your perspective on kind of how your views are, maybe your appetite to get in more to the chronic wound market, separate from reconstruction. And if that's something I guess of interest to you based on the balance sheet, strength and profile you have today?

No. So I think one of the big benefits we have Ryan is the, the breadth of our portfolio. And these are products that get sold both inpatient and outpatient today. And obviously we've got a big inpatient presence, but we do sell in the outpatient setting as well. And we'd like that to become a bigger part of our business. So, it's still a focus for us, but I would just say that the primary focus continues to be our inpatient business, but we have products that really fit both the inpatient and outpatient setting.

I would just add, Ryan, you mentioned the balance sheet strength. I think we've done a really great job of managing and generating cash flow as I mentioned in my prepared remarks, 12 – trailing 12 months, we're at record highs, both for operating cash flow and free cash flow. And so, we talk about a targeted leverage ratio up 2.5 to 3.5 and we're at 2.3 times. So certainly M&A is going to continue to be a priority for capital allocation. It gives us a lot of degrees of freedom to continue to be opportunistic and finding pockets of opportunities to expand not only on the tissue regeneration side, but also on the neuro side as well. So, we'll continue to want it to be active there on the M&A side, but we also want to use that cash for internal investments, as well as we think about some of the new product innovation opportunities that we have.

Yes. One of the big growth catalysts we've talked about Ryan is the reimbursement study that we have for PriMatrix. So, we're working forward with commercial payers now at a significantly get more coverage with respect to that product. And so that'll be a big win for us as we get into 2022 and 2023.

Got it. Thank you.

Thanks.

We will now take our next question from Jayson Bedford from Raymond James. Please go ahead.

Good morning. And before I forget, Pete, good luck at GE.

Thanks Jay.

Questions. You're welcome. Few questions, just you mentioned the pent-up demand in instruments, I'm guessing the market's not growing 15%. So, can you just quantify the level of pent-up demand and instrument sales in the third quarter?

Yes, Jayson, I mean, the instruments, I'd say when you go back to our May Investor Day, we expected instruments to grow probably 3% or so. So, the fact that we came in at 15.5 can articulate that we did see an incredible amount of pent-up demand in the third quarter. I would say a lot of that demand was coming from the alternative sites. So, kind of outside the inpatient settings, outside the hospitals, seeing a nice bounce back of order demand recovery in that alternative site of care.

And Carrie just thinking of fourth quarter and beyond, can instruments grow 10% plus for the next few quarters? Or when does this die down?

Yes, I mean, it's hard to know how much we'll continue to see. But I would say that with the performance in the third quarter, I think a lot of the pent-up demand is now satisfied. And so, I would certainly think that fourth quarter will normalize and our long-term expectations for instruments is around that 3%. So, I would say as we move to more of a normalized level, I think that's what you should expect instruments to be. So, both in the second quarter and the third quarter, we saw some healthy rebound in instruments business that I would attribute to largely to pent-up demand.

Okay. And I apologize if I missed this. But what was capital as a percent of sales if we include CereLink?

Capital, I don't have an exact number for the third quarter, but it's roughly about 7% of our revenue or so. So, it's not a significant amount. And as I mentioned, even excluding CereLink, we saw double digit – low double-digit growth in the third quarter compared to 2020. So, some nice performance in the capital side, good trends that encouraging trends, not yet back to 2019 levels. And as I think about 2022 that can continue to be a bit of a wind in our sail as we move into 2022, as capital continues to normalize, and we can start to see growth compared to 2019 levels. But encouraging trends, nonetheless, for sure, in the third quarter on capital.

Okay. And then just a quick question on SurgiMend. I assume that the FDA will opine over the next few months. Is it your expectation that the FDA doesn't follow the panel recommendation and you receive the PMA next year?

Well, I think in terms of timing, it's really the FDA will decide when and if we get the approval. But I think at this point in time, yes, I mean, just to keep in mind, the panel voted positive that was safe. There was a question jumped all relative to effectiveness based on what they can read through on the MROC data. And so, I think very much, there's clearly an opportunity for the agency with the right caveats and follow ups to find a pathway for approval. So that's what we believe in and we're focused on. So clearly there's other components that we will need to prove out. And for the most part, we had felt that there would clearly be some type of a follow-up study that would be involved with this always just again, because of the age of the MROC data, even though it's a high-quality study and the end level of surgery men used it at that was always in consideration.

Okay. Thank you.

We will now take our next question from Mark Taylor from UBS. Please go ahead.

Hi, thanks for taking the question and congrats Pete and good luck to you and take over the transition.

Thank you.

So, I just wanted to ask a clarification. No problem. Clarification on Q4 because you got into the low end of the range of sounds like October was, you said as expected, so decent start. So, is that guidance implying that you see some degradation in the environment through the last two months of the quarter with those risks that you called out around COVID and flu and staffing?

Man, I would say again, 403 is the guidance call for Q4. And so, as I think about October relative to that 403 came in line with expectations. But remember, first month of a quarter always is the lower – the lowest of the three months. If I look at any quarter in any given year COVID or non-COVID, typically the first month out of the gate is typically lower. So, and then you usually ramp your second month and your third month. So, as I think about October relative to that 403, my expectation is October came generally in line with those expectations.

Okay, great. And then, I had a follow-up on the, the spending and what it means for margin growth in the next year and couple of years, even with you coming, I guess now by the high end of the EBITDA range at Analyst Day you talked about, 28% EBITDA margins in 2023. I guess, can you answer kind of two questions related to this topic? One is if you're going to continue to ramp spending into 2022, can you still grow earnings double digits next year? Are you committed to that and then, help us understand whether you still feel confident in the bridge to the 2023 guidance that you gave at the Analyst Day?

Yes, I would say we're not providing 2022 guidance at this time. We would expect to provide guidance in February as part of our year-end earnings call. Certainly, we are focused on what we can control and we've got a clear execution focus at this point as Glenn and Pete has have shared, we've had the most robust pipeline of catalysts that we've ever had as a company. So, as I think about 2022 there's a lot of things to be positive about. And when it comes to spending a couple of things that I think as you think about where we are on our spending levels today, and as we move into 2022. There is no doubt that the staffing situation in hospitals is also affecting many companies like Integra, where we have open positions. We're not able to fill every role that we have, and certainly COVID is still restricting spending. We're not traveling as much; we're not going to as many shows. So, all of those things result in spending that is below what I call normalized levels. And also, fuller realization, faster realization of the ACell synergies have all benefited 2021, in terms of lower OpEx spend and higher margins. And as I move into 2022, we will normalize that spending. It's too important as we think about that opportunity to grow our revenue 5% to 7%, that we've got to make sure that we're positioned to support that revenue growth, because there's a lot of great things in the pipeline coming. So, I'm not going to comment at this point in terms of specific guidance on margins. I think I can still see some increase in margin expansion even into 2022. But we're still factoring a number of considerations in here over the next couple of months until we're ready to give more specific guidance on in February.

Okay, alright. Thanks for the color.

Thanks.

We’ll now take our next question from Dave Turkaly from JMP Securities. Please go ahead.

Congrats, Pete and I'll just try to make this quick back to SurgiMend, if I could, I think there were several iterations of the device, and I'm just curious, if were you able to see the efficacy data for both? And did you have sort of your best option in the MROC program or have you iterated it again? And I'm just trying to get a sense of whether the product might be a little different now than, what they looked at years ago.

So, Dave does the product is fundamentally the same from that study, that going forward, we do have derivative approaches and things that could fill this out. But when you speak about that study and what we're talking about today they are apples-to-apples comparison. There's different sizes and things of that nature, but the tissue, the processing and all those is actually quite consistent.

Dave, any other questions?

We will now take our final question from Larry Biegelsen from Wells Fargo. Please go ahead.

Hey guys. Good morning. Thanks for taking the question. I had to ask a question just, so I could wish Pete well in his new job. Just one question the Codman TSA or TMA expires I think at the end of Q4, you guys have said its material. Is there any chance maybe Pete is a parting gift? You'll give us a little bit of quantification of how beneficial that might be. Thanks for taking the question.

Larry. It's above my pay grade, but I'll let team here comment just about how they're thinking about the TMA exits?

I would just say Larry to the point where probably a year ahead of schedule from our initial plans and the CMA transfer is all going to be complete here shortly. So, the quantification, we haven't said specifically what it means other than it's one of the key drivers of our gross margin story over the next several years. So, plan optimization, plan transfers. This is one of them. We have another one in France as well that we're working on. So, it's all part of our gross margin improvement plans for the next couple of years,

Thanks, Glenn.

That will conclude today's conference call. Ladies and gentlemen, thank you for connecting. You may now disconnect.