This evening I am looking into the details of the Integra Product Recall, to understand its potential implications for $PNV. As I uncover more information, I will edit this forum post.

Integra Immediate Market Reaction

First up, Integra LifeSciences ($IART) shares closed down 20% on the news. Clearly, the market sees this as a material event.

The news broke on 23rd May before the market opened. Shares opened immediately down 11% and continued to fall throughout the day as the implications of the release were digested to be -20% at the close.

$250m of shares trades, vs. market cap at close of $3.315bn

Remarkably, if you go onto the $IART website you wouldn't know anything was amiss, unless you dig into the Investor section, and look up the SEC filings! (God Bless America)

What does the Form 8K Say?

Here are the details from the official filing: (I've omitted the regulatory boiler-plate content)

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ITEM 2.06 Material Impairments

As more fully described in Item 7.01 of this Current Report on Form 8-K, Integra LifeSciences Holdings Corporation (the “Company”), after consultation with the U.S. Food and Drug Administration (the “FDA”), initiated a voluntary global recall of all products manufactured in its Boston, Massachusetts facility (the “Boston facility”) distributed between March 1, 2018 and May 22, 2023 (the “voluntary recall”). As a result, the Company concluded on May 22, 2023 that it expects it will incur an impairment charge related to the write-off of inventories, net, of approximately $22 million. The Company expects this charge will be recorded in the quarter ending June 30, 2023. The Company does not expect this charge will result in any future cash expenditures.

ITEM 7.01 Regulation FD Disclosure

The Company identified through an internal investigation process in its Boston facility deviations with endotoxin testing that may have resulted in the release of products with higher levels of endotoxins than permitted by the product specifications. Higher levels of endotoxins can induce an immune response, leading to a post-operative fever. Although there is no specific indication of any reported product complaints related to high endotoxin levels, the Company, in accordance with its commitment to patient safety and product quality, has decided to initiate the voluntary recall and extend the temporary halt of manufacturing at its Boston facility to implement additional detection and quality controls. The Company expects to resume manufacturing at its Boston facility following implementation of such controls. The voluntary recall includes the SurgiMend , PriMatrix , Revize™ and TissueMend™ products. The Company expects that the voluntary recall and manufacturing stoppage will have the greatest impact on the Tissue Technologies segment, including Private Label, and has revised guidance. For the second quarter, the Company expects reported revenues in the range of $372 million to $376 million and adjusted earnings per diluted share to be in the range of $0.55 to $0.59. While it is difficult to estimate at this time the impact of the voluntary recall for the full year, if the manufacturing stoppage continued through the remainder of 2023, the Company estimates full-year revenue and adjusted earnings per share guidance provided during the Company’s April earnings announcement would be negatively affected by approximately $60 million and $0.35, respectively. Products manufactured at the Boston facility represent approximately 5% of the Company’s consolidated revenues. The Company expects to provide updated details on its full-year guidance during its second quarter 2023 financial results conference call. 

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What can be deduced from the communication?

By way of context, in FY22, the Wound Reconstruction and Care segment had total revenues of $406.7m plus whitelabel of $131.4m for a total of $538.1m total for "Total Tissues Technologies"

The company estimates that the FY23 revenue guidance given in April of $1,602 - $1,620m will be negatively affected by $60m.

Now the rough split of surgical to tissue segments is 2:1. So, in ballpark terms, that's a hit of $60m in about $520-$550m segement revenue, or 11-12%. The hit to eps of $0.35 in $3.43 - $3.51 is similar.

That hit would be a mix of inventory writedown ($20m), re-supply to customers and lost sales and is consistent with the statement "Products manufactured at the Boston facility represent approximately 5% of the Company’s consolidated revenues".

The company has several manufacturing sites, and the impact will depend to a large extent upon which are licenced to produce the Tissue care products. According to a search I have undertaken, impacted products can also be manufactured in New Jersey, Ireland and Germany in GMP-certified sites. (These should be able to supply the US market if the GMP-certifying authority is the FDA). (Thanks, Bard!) Again, this is consistent with the statement.

Endotoxins are produced by bacteria, and there is not enough information in the release to understand the source. Bacterial contamination in medical device operations can come from many potential sources: supply raw and processed materials, the processes themselves, process operators, cleaning water and materials etc. Testing is part of routine operations, so it is signfiicant that this failure has led to a recall for a 5 year production window. This may relate to the 5 year shelf life of products from the facility, which would imply that the endotoxin detection was not considered to be an isolated incident that could be localised to one batch. Of course, the quality and recall procedures will follow a precautionary principle. However, recalling all production from the facility over a 5 year window is about as bad as it could be. Its a nightmare scenario for the people on the site.

Given such a recall, I would not be surprised if the facility's GMP certification is revoked. If that happens, the process to re-establish operations and obtain re-certification can be many months. All this would require the root cause of the contamination to be found. This is not always easy. (I speak from experience as my first project as a technical officer in the pharmacetical industry 30 years ago was to identify root causes of bacterial contamination in a purified water system of a pharmaceutical manufacturing facility!)

What does it mean for $PNV

It is too early to tell what the full impact is. Certainly, there may be early opportunities for resupply that go $PNV's way, if there are stockouts of $IART's product.

The issue of contamination by an endotoxin plays into the key message for synthetics that they are safer from an infection perspective. But we will need to await the results of the $IART investigation to learn more.

$IART is the giant in the market. Its sales in the segment are 10x $PNV's, so even a modest let-up in $IART product momentum could be a significant opportunity for $PNV.

Of course, BTM and MTX may not be able to substitute alll licenced indications for the affected $IART products. I don't have that level of understanding.

$PNV stands to benefit from reputational harm than medical product recalls invariably produce.

Finally, I hope DW and SR recall my question to them at the last investor call, about concentration risk in having all their manufacturing coming from one site. I may drop him a line to remind.

Disc: Held in RL and SM.