Integra LifeSciences (IART) Tops Q3 EPS by 2c; Will Spin Spine Business

Integra LifeSciences (NASDAQ: IART) reported Q3 EPS of $0.76, $0.02 better than the analyst estimate of $0.74. Revenue for the quarter came in at $229.7 million versus the consensus estimate of $233.5 million.

The company also announced that it plans to spin off its Spine business to Integra shareholders on a tax-free basis. The spin-off will create a new publicly traded company called SeaSpine focused on developing, marketing and selling spine hardware and orthobiologics. Integra will continue to focus on providing specialty surgical solutions, orthopedics and tissue technologies to surgeons. The portfolio realignment is part of a larger transformation strategy, which began in 2012 and centers on optimizing the business and accelerating growth. Both companies will continue to be leaders in providing innovative regenerative technology solutions in their respective fields.

"These strategic changes create a much stronger platform for organic growth and execution, and we believe both companies will grow faster separately than together," said Peter Arduini, Integra's President and Chief Executive Officer. "Moving forward, Integra will have a simpler, more focused structure from which to operate, which should improve our ability to achieve our longer-term growth and margin improvement objectives. Further, we believe these moves create exciting opportunities for our shareholders and both organizations," added Mr. Arduini.

Spin-off of the Spine Business Creates Shareholder Value and Faster Revenue Growth

Following a strategic review by Integra's Board of Directors, Integra believes a separation will:

• Provide both companies with a faster top-line growth profile;
• Allow the new SeaSpine, a stand-alone spine hardware and orthobiologics company, to invest more in top-line growth initiatives, such as sales, marketing and R&D, and to access the capital markets;
• Accelerate Integra's operating margin expansion plans; and
• Unlock equity value for Integra's shareholders.

Under the proposed plan, the new spine business will operate as an independent, publicly held company with an estimated $140 million of trailing twelve month revenue as of September 30, 2014. The new SeaSpine will consist of a comprehensive portfolio of spinal hardware solutions, including unique interbody devices, minimally invasive surgery solutions, and deformity correction products, as well as IsoTis, a leading brand in orthobiologics, including a full range of osteoconductive and osteoinductive solutions utilizing unique demineralized bone, and synthetic matrices. The transaction is expected to be completed within twelve months and, due to its international scope, will entail the consultation in due course of any local staff representatives when required by law.

Following the spin-off, Integra management expects that both independent companies will have strong balance sheets and access to the capital necessary to invest in their respective business priorities.

Integra's Board of Directors plans to name Kirt Stephenson, former Chief Executive Officer and Co-Founder of SeaSpine, as Chairman of the Board of Directors of the new SeaSpine. SpencerStuart has been engaged to identify a chief executive officer. SeaSpine will operate out of the current locations in southern California.

"I'm excited about the opportunity to create another company focused on growth through new product development, strategic acquisitions and partnerships," said Stuart Essig, Integra's Chairman of the Board of Directors. "As a public company, SeaSpine will have a host of options to accelerate its growth and effectively invest in new business opportunities. The Board believes this will be achieved more fully as a stand-alone public company rather than through a strategic merger or divestiture of the business. Further, Rich Caruso, Integra's Founder, and I personally look forward to remaining shareholders of both great companies."

Alignment of Integra Portfolio: Creating the Specialty Surgical Solutions Division

• Integra expects in 2015 to operate in three global business areas, which will become two business areas after giving effect to the spin-off transaction:
  • Orthopedic and Tissue Technologies, focused on extremities and wound care;
  • Specialty Surgical Solutions, focused on neurosurgery and instruments with the ability to expand these strong platforms and more effectively invest in growth; and
  • Spine (ultimately to become independent), focused on spinal hardware and orthobiologics.
• Each business will have a leading portfolio of regenerative technology and a strong, balanced pipeline of organic and inorganic opportunities for growth.

Specialty Surgical Solutions

The new global Specialty Surgical Solutions division will leverage Integra's market-leading positions in both neurosurgery and instruments. The integrated organization will enable a larger potential market in which this business can achieve its communicated growth trajectory.

Orthopedics and Tissue Technologies

The Orthopedics and Tissue Technologies division will focus investments in developing a wound care channel and increasing clinical focus in extremities globally.

Dan Reuvers, Corporate Vice President, President, International will continue to run a commercial management structure to prioritize and focus Integra's sales and marketing investments in international markets. Robert T. Davis, Jr., Corporate Vice President, President, Specialty Surgical Solutions will lead the newly created division. Mark Augusti, Corporate Vice President, President, Orthopedics and Tissue Technologies will have global responsibility for this division.

"These proposed changes represent a continued focus on optimizing and accelerating growth," said Mr. Arduini. "We are excited about the opportunities for both companies and will provide updates on an ongoing basis as the transaction unfolds," added Mr. Arduini.

Transaction Details

Following the spin-off, it is anticipated that both independent companies will have strong balance sheets and the access to capital necessary to invest in their respective business priorities. The spin-off transaction is expected to take the form of a distribution that is tax-free to Integra shareholders of publicly traded stock in the new SeaSpine. The transaction is expected to be completed within twelve months and is subject to certain customary conditions, including final approval by the Integra Board of Directors, confirmation of the tax-free nature of the transaction, and the effectiveness of a registration statement that will be filed with the Securities and Exchange Commission, including information about the separation, distribution and related matters. The contemplated spin-off transaction will not require a shareholder vote. While Integra expects the spin-off transaction to close within twelve months, there can be no assurances regarding the ultimate timing of the transaction or that the transaction will be completed. In addition, due to its international scope, it will entail the consultation in due course of any local staff representatives when required by law.

Integra expects to incur one-time charges related to the transaction during the reporting periods preceding the separation. Integra provides full information regarding its expectation for 2014 financial results, including the impact of these one-time separation charges, in its financial results press release published concurrently with this announcement.

Integra has engaged Piper Jaffray & Co. as its financial advisor and Latham & Watkins LLP as its legal counsel in connection with the proposed spin-off transaction.

For earnings history and earnings-related data on Integra LifeSciences (IART) click here.

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