Earnings Call Transcript - IART Q3 2023

Operator, Operator

Good day, and thank you for standing by. Welcome to the Integra LifeSciences’ Third Quarter 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there'll be a question-and-answer session. Please be advised, that today's conference is being recorded. I would now like to introduce your host for today's call Chris Ward, Senior Director of Investor Relations. Please go ahead.

Chris Ward, Senior Director of Investor Relations

Thank you, Justin. Good morning, and thank you for joining the Integra LifeSciences third quarter 2023 earnings conference call. Joining me on the call are Jan De Witte, President and Chief Executive Officer; and Lea Knight, Chief Financial Officer. This morning, we issued a press release announcing our third quarter 2023 financial results. The release and corresponding earnings presentation, which we will reference during the call, are available at integralife.com, under Investors, Events and Presentations and a file named Third Quarter 2023 Presentation. Before we begin, I would like to remind you that many of the statements made during this call may be considered forward-looking statements. 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 reference reported and organic revenue growth, and organic revenue growth excluding Boston. Organic revenue growth excludes the effects of foreign currency, acquisitions, divestitures, as well as discontinued products. Organic revenue growth excluding Boston also excludes the revenues from products manufactured in our Boston facility in both periods. Management believes that excluding revenues from all products manufactured at the Boston facility provides useful information when evaluating the company's organic growth because of the unusual nature of the manufacturing stoppage and voluntary global recall. Unless otherwise stated, all the segregated and franchise level revenue growth rates are based on organic performance. And lastly, in our comments today, we will include certain non-GAAP financial measures. Reconciliations of any non-GAAP financial measure 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 will now turn the call over to Jan.

Jan De Witte, President and CEO

Thank you, Chris, and good morning, everyone. I want to begin our remarks today with an update on our progress on the quality system remediation at our Boston manufacturing facility and our return to market plans for SurgiMend and PriMatrix and our private label products. We recognize this remains top of mind for our investors and analysts as it is for me and our leadership team. So before going into the broader business updates, let's turn to slide four. As a reminder, during our last call, we told you we expected to resume manufacturing by the end of the fourth quarter this year. We also highlighted that the final external audits of the updated quality system would be conducted in the first quarter 2024, with results submitted to the FDA by the end of March 2024. This then paves the way for the resumption of commercial distribution in the mid-to-late second quarter of 2024. For the past four months, we have worked diligently on the remediation of our quality system in Boston, consistent with the holistic plan we built in alignment with the FDA expectations. We've bolstered our Boston operations leadership, quality expertise, project management capabilities, and capacity with internal resources, and we further engaged external subject matter experts as well. We recently completed several interim external reviews that confirmed the adequacy of the changes we are making. So I'm pleased to report that as a result of all this progress, we remain on schedule with the restart timelines we communicated last quarter. I also want to provide insight into a couple of critical milestones along the way. We have plans for an external review shortly after we restart the factory. This review will be in addition to and in preparation for the independent audits we intend to submit to the FDA before the end of March. These activities will then clear the way for us to build sufficient inventory ahead of our re-launch into the market. In the meantime, we have also been working closely with our customers to manage through the recall and have now substantially assessed and reconciled our customer's inventory. Our Tissue Technologies sales team is also working closely with our customers to facilitate product substitutions in about 10% to 15% of cases, on-track with our expectations. Finally, our manufacturing and clinical progress keeps us in-line for PMA approval for SurgiMend in the first half of 2025. The right side of the slide shows the updated financial impact. Financial results for the third quarter reflected the effect of $7 million of returns, which Lea will discuss in more detail, in addition to the lost sales for the third quarter, we previously communicated. The additional returns impact, albeit isolated to the third quarter only, has impacted our revenues by $7 million. Adjusted gross margin by 60 basis points and adjusted earnings per share by $0.07. In summary, we're making significant headway towards completing the necessary remediation requirements in Boston to bring these critical technologies back to the market for our customers and their patients, and we are on-track with our communicated timelines. With that, let's move to slide five, for some overall third quarter business highlights. I am starting on the right side of this page. Our third quarter revenues were $382.4 million, and decreased by 0.4% on an organic basis. These results reflect the Boston impact, including the $7 million return reserve increase, which offset otherwise strong organic growth performance. Our topline performance was below our guidance for the quarter, and I realized this will be frustrating for our investors, but we are making things right with our customers and we're taking the necessary steps to get through this period as quickly as possible to position our business for long-term sustainable growth again. Our end markets for both CSS and Tissue Technologies remain strong and continue to grow in-line with the expectations we outlined during our May Investor Day. In the third quarter, we saw strong demand for our unique technologies across the portfolio. Excluding the Boston impact, we delivered organic growth of 7.1% at the high end of our LRP range. In our CSS business, we saw organic growth of 7.4% above our LRP range for this segment. In our Tissue Technologies business, we delivered organic growth of 6.7%, excluding the Boston impact. Our international growth was strong once again at nearly 12%. Now turning to our bottom line. Our third quarter adjusted earnings per share came in at $0.76 within our July guidance range. This result included the approximate $0.07 headwind from the increase in the Boston recall return provision. As we look beyond our third quarter revenue results and back to the left side of the page, we continue to deliver several proof points along our path to the growth commitments we laid out during our Investor Day. First, on innovating for our customers, we're excited about the return to the market of the CereLink monitors for our customers and their patients. We re-launched in our first international markets, and we'll be broadening our re-entry in the fourth quarter. We also filed the updated 510(k) in the U.S. in mid-September with an expected launch of the product in the U.S. in early first quarter 2024. In addition to CereLink, we also submitted 510(k) for the next generation Aurora Surgiscope, which brings enhanced usability to the 8 millimeter Surgiscope based on customer learnings from our initial limited releases. Second, we advanced our international growth strategy with further geographic expansions, expansions of our CUSA platform, and registrations of DuraGen, DuraSeal, Mayfield, and our Duo LED lighting in EMEA and Latin America, as well as the launch of DuraGen Plus in China. Although each product alone won't be material to our overall revenue growth, collectively, they showcase our strategy to bring our existing technologies to international markets and leverage our commercial footprints. We also made a significant step forward with our In-China-for-China strategy by starting the build-out of a leased manufacturing facility near Shanghai. Finally, on inorganic opportunities and broadening our impacts on care pathways, we're delivering on the successful integration of the SIA business with greater than 100% revenue growth year-to-date and advancement of our clinical program for a second PMA approval in the high growth breast reconstruction market. We have also expanded our UBM platform with a 510(k) clearance for MicroMatrix Flex, bringing the first organic line to the A-Cell UBM portfolio. We've also strengthened our executive leadership by appointing Chantal Veillon, as Chief Human Resources Officer. Chantal brings a rich experience in driving cultures of talent enrichment, leadership development, and accountability. And finally, sustainability remains an integral part of how we do business. Effective ESG Management enables us to produce life-saving products, reduce business risks, minimize our environmental impact and drive strong financial results. As part of our continued commitment to transparency and accountability, we issued our second annual ESG report for 2022. This report details the progress we have made, particularly in our commitments to our customers and patients, building a more rewarding diverse and inclusive workforce and improving our environmental sustainability. It also lays out our plans for the coming year. And with that, I will now turn it to Lea, for updates on our financial results and full year guidance.

Lea Knight, CFO

Thank you, Jan. Now on to our third quarter financial results and I'll begin on slide six. Our third quarter total revenues were approximately $382 million, representing a decrease of 0.7% on a reported basis and a decrease of 0.4% on an organic basis. As Jan mentioned, the increase of the Boston returns provision was a headwind to our third quarter results, impacting our revenues and organic growth and driving declines in our gross margins, adjusted EBITDA margins, and adjusted EPS. In the second quarter, we estimated the returns provision based on the best available information we had at that time. However, during the third quarter, we were working closely with our customers to assess and reconcile their returnable inventory, and we recognized the need to make an adjustment to our returns provision. We believe we have adequately provided for any remaining returns. While Boston remains a significant headwind, there is much more to our results for the quarter. We continue to see solid performance across our business outside of Boston with organic growth of 7.1%, once again, demonstrating the breadth and resilience of our portfolio. Adjusted gross margin for the quarter was 64.6%, down 210 basis points versus the third quarter of 2022, primarily driven by the Boston impact. Adjusted EBITDA margin for the quarter was 23%, down 430 basis points, and adjusted earnings per share were $0.76, down $0.10 compared to the prior year. Gross margin pressures, largely driven by Boston, are planned growth investments, and the year-one dilution from the SIA acquisition impacted our adjusted EBITDA and EPS metrics. If you turn to slide seven, I will go deeper into the third quarter revenue performance of our CSS segment. Reported third quarter revenues in CSS were $268 million, an increase of 7.4% on a reported and organic basis from the prior year. Overall, the CSS segment delivered quarterly results exceeding the growth range outlined during our Investor Day. Global Neurosurgery sales were up 8% with low-double-digit growth in CSF Management driven by Certas Plus valves, low-double-digit growth in Neuro Monitoring driven by ICP microsensors, and high-single-digit growth in Dural Access and Repair, driven by DuraGen, DuraSeal, and Mayfield. We saw a mid-single-digit decline in Advanced Energy due to the timing of CUSA capital orders, offsetting some favorable timing benefits in the second quarter. Overall, excluding CereLink, capital sales for the quarter were down low-double-digits due to CUSA capital. Year-to-date, our capital sales excluding CereLink monitors are up mid-single-digits, and we remain encouraged by the continued momentum in the market for capital and the demand funnels for our capital portfolio. Instruments grew approximately 5% benefiting from strong demand. The performance of our instruments business continues to exceed long-term growth expectations for the market with high-single-digit growth year-to-date as the market remains stable and the team continues to take market share and win new business. Shifting to International. Sales grew low-double-digits in the quarter, led by China, indirect markets, Australia, and Canada. Our growth in China is driven by our regional expansion strategy outlined at our Investor Day with our team in China delivering double-digit growth with strong performance across the Neuro portfolio as we grow beyond tier one cities. Moving to our Tissue Technologies segment on slide eight. Tissue Technologies was down 15.6% on a reported basis and 15.1% on an organic basis compared to the prior year; excluding Boston, organic growth was 6.7%. Third quarter sales in the Wound Reconstruction franchise, which includes a majority of the Boston products, decreased by 15%. Excluding the recalled products, we experienced organic growth of 7.5% driven by double-digit growth in MicroMatrix, Cytal, Gentrix, and our amniotic portfolio as our sales team refocused their selling efforts this quarter following the recall related activities in the second quarter. We are pleased to see such strong demand and commercial execution in this franchise, which continues to provide us with confidence in the long-term growth potential of this business. In our private label franchise, sales declined 14% versus last year due to lost sales from private label partners associated with the recall. Finally, international sales in Tissue Technologies were down double digits due to Boston, which offset double-digit growth in Integra Skin, MicroMatrix, and Cytal. Turning to slide nine, I will now review the rest of our third quarter P&L metrics. As we look at our gross margin and profitability metrics, we continue to see Boston as the primary headwind to our gross margins representing an approximate 180 basis point impact with 60 basis points coming from the third quarter return provision adjustment and approximately 120 basis points coming from the impact of the lost sales from the recall. The remaining 30 basis point impact is due to production inefficiencies in other sites. In addition to the impact on gross margins, our adjusted EBITDA margins and adjusted EPS also reflect planned investments and the strategic priorities for the business, we originally outlined in the beginning of the year, including the year-one dilution from the SIA acquisition. On our second quarter call, we highlighted these investments as critical to our long-term growth and we continue to protect them. Finally, we saw an approximate 150 basis point benefit to our tax rate in the quarter from jurisdictional income mix and improved utilization of R&D and international credits. The third quarter tax rate also included a year-to-date true-up. We expect approximately 50 basis points of the benefit to carry forward beyond 2023. If you turn to slide 10, I will provide a brief update on our balance sheet, capital structure, and cash flow. During the quarter, operating cash flow was $27 million and free cash flow was $14 million, reflecting increased working capital primarily from investments in inventory bills. Our investment in inventory is to rebuild our safety stock levels and increased inventory for our European markets in preparation for EU MDR. Free cash flow conversion was 43% on a trailing 12-month basis. Our balance sheet remains strong with ample liquidity to support our short and long-term plans. As of September 30th, net debt was $1.2 billion, and our consolidated total leverage ratio was three times. The company had total liquidity of $1.5 billion, including $274 million in cash and the remainder available under our revolving credit facility. Our balance sheet flexibility has enabled us to execute the accelerated share repurchase we announced on our July earnings call. If you turn to slide 11, I will provide an update to our consolidated revenue and adjusted earnings per share guidance for the fourth quarter and full year 2023. Fourth quarter revenues are forecasted to be between $397 million to $403 million representing reported growth in the range of approximately minus 0.4% to positive 1.1%, and organic growth in the range of approximately minus 0.8% to positive 0.7%. Our reported revenues reflect the strengthening U.S. dollar. Excluding Boston, we are forecasting organic growth of approximately 5.1% at the midpoint, driven by continued strong global demand for our products. For the full year 2023, revenues are forecasted to be in the range of $1.541 billion to $1.547 billion, which reflects the third quarter additional Boston recall returns provision and current FX rates. The updated guidance represents reported growth of minus 1.1% to minus 0.7% and organic growth in the range of approximately positive 0.1% to 0.5%. Excluding Boston, we are forecasting organic growth of approximately 6%, reflecting the stable growth in our markets and strong global demand and performance we have demonstrated year-to-date. Turning to adjusted earnings guidance for the fourth quarter, we expect adjusted EPS to be in the range of $0.89 and $0.93 down from the prior year, driven by the Boston recall, our planned strategic investments, OpEx management to offset part of the impact of the recall, and our tax rate improvements. During our July earnings call, we estimated a modest improvement in gross margin for the full year. We saw an impact to our gross margins in the third quarter due to the increased Boston recall returns and unfavorable sales mix, driven by stronger international performance. We are also seeing a slower uptake on net productivity and yield improvements. We now expect a moderate decline in gross margins versus 2022. Our full year adjusted EPS guidance is being revised to $3.10 to $3.14 per share reflecting the strength in the U.S. dollar, Boston recall returns provision, adjusted gross margin outlook, second half expense management, our recently completed ASR, and tax favorability. Now, I will turn the call back over to Jan.

Jan De Witte, President and CEO

Thank you, Lea. Please turn to slide 13 to conclude our prepared remarks. And as we wrap up, I'd like to cover a few highlights from what Lea and I walked you through. First, our progress in addressing the Boston facility and returning to the market remains on-track. Interim external reviews confirm the adequacy of our remediation plan and the changes made so far, and they reflect significant steps made towards the resumption of manufacturing by the end of the fourth quarter ‘23 and commercial distribution in mid-to-late second quarter ‘24. Product substitutions are within the expected range of 10% to 15%, highlighting the breadth and depth of our Tissue Technologies portfolio, and we remain on target for SurgiMend PMA approval in the first half ‘25. Second, despite the Boston recalls impact and the additional returns provision, our underlying third quarter growth performance has been strong. Our Global CSS and Tissue Technologies segments, excluding Boston, delivered over 7% organic growth. Many of our product lines exhibit double-digit growth, underscoring the appeal of our diversified portfolio and the health of our markets. Additionally, our international business has delivered strong growth again. Finally, related to our long-range commitments, we've taken a big step, bringing CereLink back in our international markets, and with the regulatory filing, CereLink should be back in U.S. early first quarter. Advancing our growth drivers with a 510(k) submission for the next generation Aurora Surgiscope, and we continue to progress on our breast reconstruction PMAs. We're also continuing to expand our international presence and portfolio, and we're investing to capture future international potential. In conclusion, our journey has been marked by both significant achievements and significant challenges. The regulations and improvements we're bringing to Integra are making us stronger and are de-risking the path to our LRP, and will enable us to consistently deliver our financial commitments. As an organization, we remain dedicated to our purpose of advancing healthcare to restore patients' lives. And we'd like to thank our dedicated teams for their unwavering support and hard work. Together, we're shaping a future in which we continue to make a meaningful impact on patients and deliver lasting value to our shareholders. Thank you for your time this morning. This concludes our prepared remarks. And operator, we can open the lines for questions.

Operator, Operator

Thank you. And one moment for our next question. And our first question comes from Young Li from Jefferies. Your line is now open.

Young Li, Analyst

Thanks so much for taking our questions. This is actually Young, in for Matt. I guess, maybe to start, just on Boston, I mean, it seems like it had a bigger impact than expected. Good to hear the substitution rates are in-line. But maybe if you can provide a little bit more color on, why the $7 million increase in return provisions, and as you're going forward, Boston impact assumptions right-sized, maybe you can also talk a little bit about customer attrition and how you can regain their business, post-remediation?

Lea Knight, CFO

Yes. So when I talk about, kind of, the impact that we saw in Q3, and then Jan, I can turn it over to you for any sort of customer dynamic. And thank you for the question. So, as we mentioned, when we announced the recall and then in our Q2 call, we were about, call it 45 days post the recall. So at that point, while we had obviously already done some initial work working with customers, we had limited visibility to all of the inventory that was out there and potentially returnable. So based on the information we had at that time, we projected what the appropriate provision would be for returns. Since that time, as you can imagine, we've had an opportunity to now work with essentially all of our customers and get more insight and visibility into their inventory to be able to more accurately assess what's returnable. And so that's the incremental $7 million that you saw impact our Q3 results. We're confident based on the work that we've done that and the visibility that we now have that we've accurately captured that and provided for it in our reserve, as of the end of September. As we move forward, we wouldn't expect to see any impact from a P&L perspective for any future returns, because it's been provided for as part of our reserve. That's the only incremental Boston impact we saw for Q3. As you think about the full-year dynamic for 2023, we had originally called out a Boston impact of about $60 million topline. That number is now $67 million topline. We had called out an EPS impact of $0.35, that number is now $0.42, but it is isolated to 2023. In our July call, we mentioned we did not provide guidance on 2024, but we did articulate our expectations of the Boston impact on 2024. At that time, we had communicated an impact of $50 million topline and $0.30 to EPS. That projection remains unchanged. The nature of what happened in Q3 really was isolated to returns and does not have an impact on what we called in 2024. So hopefully that answers your question.

Young Li, Analyst

Yes. That's been very clear. Appreciate the color. I guess maybe for the follow-up question, I was wondering, in terms of share loss, how much do you expect to recapture following the re-launch in mid ‘24? And how are the impacted reps during this time? If you can comment about what they're focused on, what they're doing?

Jan De Witte, President and CEO

Let me get in three parts, right, all linked to how are we prepping for commercial return. First, the sales force, the reps, a lot of attention, both from a perspective of communication, but also compensation, we're planning with them. We stay close to them, keeping closely informed. We definitely have some higher attrition than normal, but well in control, I would say. Second, yes, that sales force remains in touch with our customers. And that's where the substitution is important, both in the Wound Reconstruction as well as in the Surgical Reconstruction. We have substitute products, which that allows sales force to be in the door, be in the procedures, and work with customers to maintain the relationships. As we indicated, in between 10% to 15% of the procedures that have substitutes. And then third, from a re-launch perspective, our sales teams and sales leadership estimates that yes, we will be back to about 100% of our business in about 12 months after the allowance. That's really driven by two elements; one, the strength of the relationship; and then second, the merits of the products that come out of our Boston facility. These were products that were gaining market share before we did a recall, all for good reasons. And those reasons will still be there when we announce the re-launch.

Operator, Operator

And thank you. And one moment for our next question. And our next question comes from Vik Chopra from Wells Fargo. Your line is now open.

Vik Chopra, Analyst

Hi, good morning and thanks so much for taking the questions. Two for me. I'll start with the first one. We've heard about increased anti-corruption issues in China that could make access to hospitals more difficult. Maybe just remind us what percent of your sales are from China and what impact this could have on Integra? And then I just had a follow-up.

Jan De Witte, President and CEO

Okay. So I'll take that, Vik. Our China sales are about 5% to 6% of our total. Specifically, to your question on the anti-corruption, I think like many companies, we've seen confusion and the freezing of some commercial and professional education activities in the first week. Specifically in the month of August, we've seen it improve over September and then continue to significantly improve over October. When we look at our impact on the business, it's not material. That's linked to our portfolio we have in China. That 5% to 6% of total is essentially the neurosurgery portfolio, a lot of consumables, and therefore linked with procedures. Neurosurgery procedures cannot be delayed for significant times. We've seen that also during COVID. Additionally, the procedures themselves don't lead to overuse. The tightening of some controls doesn't translate into tightening what goes on with neuro procedures. We have strong internal controls and policies in place. From a process perspective, there's no change that we're using in our operations. We've seen some of the struggles in August, but as you see in our third quarter numbers, we expect no material impact on our business.

Vik Chopra, Analyst

Great. Thank you for that color. And then my follow-up question, pretty topical, I guess. It's on GLP-1. Maybe just any thoughts on what you have, about GLP-1's near-term and long-term, kind of, what it means for Integra. I don't think that the impact is as clear for Integra, as for some other companies. Thanks so much for taking the questions.

Jan De Witte, President and CEO

Yes. So GLP-1, we have not seen, and we don't foresee any material impact. That's also what we hear back from interactions with our customers. If you look at our business and our LRP growth drivers, and then the link with GLP-1, it's very limited. If you look at neurosurgery, it's difficult to argue that the incidence rates of traumatic brain injuries, tumors, and hydrocephalus would be impacted by a decline in the prevalence of diabetes or obesity. The same applies to Tissue Technologies; the vast majority of our sales are in acute settings and for non-diabetic foot ulcer linked wound care. Again, here, it's difficult to see the link. We have not seen, and we don't foresee any material impact.

Operator, Operator

Thank you. And one moment for our next question. And our next question comes from Robbie Marcus from J.P. Morgan. Your line is now open.

Robbie Marcus, Analyst

Good morning. Thanks for taking the questions. I wanted to start with 2024 and how we should think about the recovery of the lost sales from the Boston products. I seek clarification; is the $15 million headwind off reported 2023 or ex what you would have done without the recall? How do we think about lost sales and the recovery there? You'll have been off the market for a long time. This is a highly competitive market. Doctors will likely have moved on and tried other devices. How do we think about the ability to regain share? Is it 25%, 50%, or 75% of the lost sales? How long do you think that'll take?

Lea Knight, CFO

So, Robbie, I'll start with just framing kind of what the $15 million relates to. The full-year basis, what we thought the business was going to be, you apply the growth factor that we assumed as part of our Investor Day in terms of how we projected the business to grow. The $15 million is off of that. So that's how to think about the impact we characterize from Boston in 2024. I'll let Jan talk about the questions around getting back into the market.

Jan De Witte, President and CEO

For Robbie, as I also touched when addressing Young's question, if you look at our Boston portfolio, we were building market share. Getting back in the market first means getting back to where we were, and then getting beyond that. In terms of getting back to where we were say, mid-2023, our sales force is planning to have that happen in about a year after the re-launch. That's driven by the strength of the relationships and the merits of the products that we’ll be bringing out of our Boston facility. These were products that were gaining market share before we did a recall, and those reasons will still be present when we announce the re-launch.

Robbie Marcus, Analyst

Great. And if I could just squeeze one more in, as you think about your forecasting, it looks like CereLink is moving back a little bit in the US. How conservative should we think about that $15 million and is that something that may move around or down as we move through next year? Or is that a number you think will not move any lower?

Lea Knight, CFO

CereLink, we are anticipating an early Q1 launch. What we've said in the past, as you think about the size of that business once we've re-launched in all markets for monitors, we'd expect the business to be back at the run rates we saw previously, which is about $12 million annually. The $15 million impact I characterized earlier related to the Boston-based product portfolio and the impact to that as a result of coming back into commercial distribution in the mid to late Q2 timeframe, that's independent of CereLink. Not sure if I missed part of your question in there.

Operator, Operator

And thank you. And one moment for our next question. And our next question comes from Ryan Zimmerman from BTIG. Your line is now open.

Ryan Zimmerman, Analyst

Good morning. Thanks for taking the questions. I want to talk about the Tissue Technologies business for a moment. You guys did 6.7% organic growth, excluding Boston. If I'm not mistaken though, you estimate the markets are growing at 7% to 9% from the Analyst Day. So help me understand. Even if we remove Boston, is the market getting worse in the third quarter? Is that spillover from Boston? Just how do you think about your growth in tissue ex-Boston relative to the market?

Lea Knight, CFO

So, again, from a tissue tech perspective, we saw a growth of about 3.8% in Q2. We anticipated that growth would accelerate into Q3 as we started to reposition the sales team, which is exactly what we saw happen. The growth accelerated from 3.8% to 6.7%. It's not quite the LRP kind of rate, but a lot of that is due to the distraction in the sales force as they were managing the recall. I think the clear momentum pickup we saw in Q3 versus Q2 illustrates the potential this business has. As we look out to Q4, we would expect that to continue, such that on a full-year basis, we would expect, again, excluding Boston, to be in that 7% to 9% range communicated at Investor Day. The SIA acquisition is growing to 100%. We're confident regarding our portfolio outside Boston. We feel good with the markets.

Ryan Zimmerman, Analyst

Okay. That's very helpful. Yes. And then the follow-up question regarding the government shutdown. Does that impact the ability of the FDA to come into your facilities? Can you clearly walk us through what's required to get the Boston facility given the green light to proceed as normal to manufacture again?

Jan De Witte, President and CEO

The short is that the FDA does not have to come in. The requirements from the FDA are that when we decide that we're substantially complete with the remediation, we bring in an external auditor. We've shared that name of that company with the FDA. They've approved of that. They will come in, do the audits. Assuming that given all the preparation we've done, this will be a satisfactory audit. We decide on our own terms to restart the factory. The only thing that the FDA wants is that we send or share that audit report with them. There's no go or check by the FDA before we start the factory or start shipping again.

Lea Knight, CFO

Also, Ryan, our 510(k) submission for clearance in the U.S. for CereLink occurred prior to any official government shutdown. Our understanding is that timeline will remain intact. If we had submitted it after the government shutdown, we would be at risk. But our understanding at this point is that our timeline for that is still tracking to what we communicated.

Operator, Operator

And thank you. And one moment for our next question. And our next question comes from Craig Bijou from Bank of America Securities. Your line is now open.

Craig Bijou, Analyst

Good morning, everyone. Thanks for taking the questions. I wanted to ask on CereLink. You started the relaunch in a couple of international markets. Can you talk a little bit about kind of the strategy and when you'll get to a full international relaunch? How should we think about any contribution from either the international launch or US launch and how it could potentially ramp once it's fully launched here and outside the US?

Jan De Witte, President and CEO

You're correct. End of the third quarter, September, we launched several countries: Canada, South Africa, the Nordic countries. The priority is determined by two factors; the timeline of the local regulators, which go from very short to reasonably short, and then there's logistics assumptions. In October, we're relaunching several other countries in Southern Europe, a bit of Eastern Europe; the UK and Switzerland are coming on. Every month, over the next two to three months, we will be bringing on more countries in Europe and targeting January for the U.S. relaunch. As for the ramp-up, we picture it similar to the first year of the previous launch where in the first 12 months, we sold almost $12 million, or roughly $1 million a month, so we model that ramp-up on that basis.

Craig Bijou, Analyst

Got it. That's helpful. On the Boston facility, I wanted to see if you've had any additional or incremental conversations with the FDA on your plan. If not, do you plan to, recognizing you've already set out the plan with the third-party? Will there be any other additional conversations that you expect with the FDA?

Jan De Witte, President and CEO

Yes. After we received the warning letter, we responded within two weeks with our plan to address those issues. We received confirmation from the FDA that they are aligned with this. We also had a call with the FDA to ensure that we are on the same page. We share updates with the FDA every two to three months, keeping them informed on the major stages of progress and actions on the Boston facility.

Operator, Operator

And thank you. And one moment for our next question. And our next question comes from Richard Newitter from Truist Securities. Your line is now open.

Richard Newitter, Analyst

Hi. Thanks for taking the questions. I was wondering if I had just asked on SurgiMend. We're getting close to the FDA, I think, providing feedback on the clinical addendum that you had filed for that product. What can we expect to come out of that? Is there anything in there that could potentially delay timelines for that?

Jan De Witte, President and CEO

We submitted in July, and there's further information being shared. We expect early next year to get feedback on the clinical part of the PMA. The critical path for the PMA is the pre-market inspection of the Boston facility, which can only happen when the factory and commercial operations are up and running. We expect market audits to happen either in late 2024 or early 2025, leading to PMA approval in the first half of 2025.

Richard Newitter, Analyst

Okay. And then, can you just bridge us between the gross margin from 2Q to 3Q, just one more time? I want to make sure I have all of the components right there. And any comments on M&A, just capital deployment given the space and valuation compression over the last few months.

Lea Knight, CFO

Absolutely. Our gross margin was 64.6% for the quarter, down about 250 basis points from where we had been tracking. That's made up of three elements: the Boston return has a direct impact on margins, about 60 basis points; the acceleration of growth internationally negatively impacted margin with roughly 90 basis points due to product mix dynamics; the remaining 100 basis points stemmed from slower uptake on productivity improvements. As we move into Q4, we expect to see changes, one being that we won't have the Boston return repeat, so that 60 basis points should come back. We would expect more normalized revenue mix growth dynamics, which should help alleviate some negative margin impacts. However, the net improvement in productivity is likely to be slower than anticipated. Therefore, we expect a moderate decline in gross margins versus 2022. I can go into M&A if you want.

Richard Newitter, Analyst

That was very helpful. Thank you.

Jan De Witte, President and CEO

M&A will continue to be a priority for capital allocation as part of our long range planning, though at this point, I would say we are tempering that. Specifically at Tissue Tech, management is focused on getting Boston back. That said, we continue to explore midsize tuck-in deals that meet our ROI requirements and fit within our financial discipline, which remains strong.

Operator, Operator

And thank you. And one moment for our next question. And our next question comes from Steven Lichtman from Oppenheimer and Company. Your line is now open.

Steven Lichtman, Analyst

Thank you. Good morning, everyone. Lea, just wanted to follow-up on gross margin. You talked about some of the near-term dynamics and the efficiency opportunities you see. Can you give us your updated thoughts on overall where you see gross margin tracking over the next couple of years? Any updated thoughts on drivers that you see?

Lea Knight, CFO

So, to be clear, we're not providing an update on LRP guidance at this point. I remain committed to the 300 to 500 basis point opportunity for gross margin improvement over our LRP, coming from three areas: volume mix price, productivity yield initiatives, and footprint optimization. The volume mix price remains viable, as seen by our Q3 results outside Boston, that business is growing at LRP levels. As we bring MPI to market, we will realize improvements related to this. The productivity yield represents a slower uptake, but the opportunity remains, and we need to redeploy resources to extract it. More details will come as we finish our LRP process.

Jan De Witte, President and CEO

The Aurora Surgiscope's first real commercial year will be 2024. We're not providing projections yet, but we expect a different commercial rhythm and slope once it's fully launched. We saw strong growth on Aurora in Q3 with high double digits, so momentum is building there.

Operator, Operator

And thank you. And one moment for our next question. And our next question comes from Matthew O'Brien from Piper Sandler. Your line is now open.

Matthew O'Brien, Analyst

Good morning. Thanks for taking the questions. Don’t you need the warning letter lifted at the Boston facility before you can submit the SurgiMend TMA?

Jan De Witte, President and CEO

Yes. We cannot submit before the audits, but the FDA will only approve after successful PMA audit.

Matthew O'Brien, Analyst

Okay. But you need to have it lifted before you can submit. Got it.

Lea Knight, CFO

The impact discussed is gross and does not include positive offsets from substitution products.

Matthew O'Brien, Analyst

Got it. That was it for me. Thank you.

Operator, Operator

And thank you. And one moment for our next question. And our next question comes from Jayson Bedford from Raymond James. Your line is now open.

Jayson Bedford, Analyst

Thanks. Good morning. Just a couple of quick questions. On the timelines to return to market, Jan, you mentioned in line with previously communicated timelines. Just to be clear, the expectation is late second quarter 2024. Is that correct?

Jan De Witte, President and CEO

Mid-May to end of second quarter.

Jayson Bedford, Analyst

Yep. Just to be clear. Thank you. Can you just remind me of the revenue breakout between private label and the rest of tissue tech from the Boston facility? Can we assume that the private label component is pretty sticky, and the challenge will be more on the rest of the business?

Lea Knight, CFO

Our private label business is about 20% of the Boston portfolio. Boston is about 5% of our total revenue base. We're continuing interactions with private label partners to share our remediation plan and give them insight and collaboration throughout the process. They must make their determinations, but we are being very collaborative.

Jan De Witte, President and CEO

At this point, it's strictly in the sense that private label customers take significant time to validate new suppliers. Our private label customers are frustrated with us, and we are maintaining close communication to provide necessary information.

Operator, Operator

And thank you. One moment for our next question. And our next question comes from David Turkaly from JMP Securities. Your line is now open.

David Turkaly, Analyst

Hey, good morning. Just a quick one on the guidance. It looks like you updated 2023. You offset some of the Boston impact with the lower tax and the lower share count. I know it's probably just high-level 2024, but you reiterated the impact in the EPS of $0.30. Could we view that as possibly conservative given that some of those, the share count specifically and the tax may carry through?

Lea Knight, CFO

Yes. We're not providing guidance for 2024, but when we quantify the Boston impact that's only looking at Boston in isolation. The tax benefit will carry forward and is not reflected in the EPS number I provided.

David Turkaly, Analyst

And your share count as well, I imagine, is fair.

Lea Knight, CFO

Correct.

David Turkaly, Analyst

And then just one quick follow-up, please. The 10% to 15%. You guys have so many options there, synthetics and biologics. Do you think that that might be too low? I know you said that you're in line with that now, but given the options you have, could that change?

Jan De Witte, President and CEO

Yes. This is a learning process for our sales force and our customers. We've seen the sales force getting better at understanding how to bring that portfolio to our customers each month, and we are driving to be above the higher end of the range.

Operator, Operator

And thank you. I am showing no further questions. This concludes today's conference call. Thank you for participating. You may now disconnect.