Summary
CONMED concluded the second quarter with a mixed performance: while earnings
exceeded the Zacks Consensus Estimate, revenues fell short. The company operates in a
competitive landscape, particularly within the General Surgery sector and amidst stringent
regulatory requirements, which has been challenging. Despite this, CONMED's resilience
has shone through, as the company has managed to grow its sales both domestically and
internationally. Although the Orthopedic unit faced challenges, the company's adaptability
during the resurgence of COVID-19 is commendable. CONMED benefits from a strong
product portfolio and a solid recurring revenue base, with favorable market trends supporting
its products. While margin contraction is a concern, the company's robust solvency position
provides a solid foundation for future growth.
Overview
Headquartered in Utica, N.Y., CONMED Corporation is a major medical products
manufacturer specializing in surgical instruments and devices for minimally invasive
procedures and monitoring. CONMED has roughly 4000 employees and several
manufacturing facilities.
A significant portion of the company’s revenues are derived from products designed for the
orthopedic surgery markets of arthroscopy and powered surgical instruments. The company
also sells products for general and other surgical specialties such as electrosurgery systems
for all types of surgery, and endosurgery instruments for minimally invasive laparoscopic
surgery. Patient Care products, including ECG electrodes for heart monitoring and pulse
oximetry for blood oxygenation monitoring, are provided for various clinical settings.
The company operates in two revenue segments: Orthopedic Surgery and General Surgery.
The orthopedic surgery product line includes CONMED’s sports medicine instrumentation
and small bone, large bone, and specialty-powered surgical instruments and service fees
related to the promotion and marketing of sports medicine allograft tissue.
General surgery consists of a complete line of endo-mechanical instrumentation for
minimally invasive laparoscopic and gastrointestinal procedures, a line of cardiac monitoring
products as well as electrosurgical generators and related instruments.
2023 Results at a Glance
CONMED reported full-year adjusted earnings per share of $3.45, which improved 30.2%
from 2022. On a full-year basis, CONMED reported revenues worth $1.24 billion, which
climbed 19.1% from the previous year.
For CONMED, U.S. sales reached $185.4 million, marking a 6.1% year-over-year increase.
International sales totaled $146.7 million, up 2.6% year-over-year on a reported basis and
4% at constant exchange rates (CER)
Reason to buy
Solid Market Trends: CONMED is poised to benefit from the growing adoption of minimally
invasive techniques, as a significant portion of its product line is designed for these
procedures. Minimally invasive surgery reduces costs by minimizing patient trauma,
shortening recovery times, and decreasing hospital stays, which will likely drive CONMED's
top-line growth over the long term. According to a Markets and Markets report, the global
market for minimally invasive surgical instruments is projected to reach $28.9 billion by 2026,
growing at a CAGR of 7.4% from 2021 to 2026. Such positive market trends are expected to
strengthen CONMED’s position in this specialized sector.
Per management, the AirSeal and Buffalo Filter product lines will continue to reap the
benefits stemming from the increased focus on boosting operating room safety. In fact,
AirSeal and Buffalo Filter witnessed a significantly robust demand in past couple of quarters.
To reduce inefficiencies and to contain costs arising out of using multiple suppliers,
healthcare providers are reducing the number of vendors. To enter into contracts with fewer
vendors, providers need manufacturers that can offer a broader array of products at lower
prices. CONMED benefits from this trend as it can provide multiple products under the same
roof.
Broad Product Spectrum: CONMED offers a broad line of surgical products. CONMED’s
product portfolio consists of several new devices in the Orthopedic, Laparoscopic, Robotic,
Open Surgery, Gastroenterology, Pulmonary and Cardiology sections. Innovative products
like Hi-Fi Tape and Hi-Fi suture interfaces represent a critical component of repair security in
rotator cuff repair space. Per a report in Grand View Research, The global microsurgery
market, valued at $ 2.2 billion in 2022, is projected to grow at a CAGR of 5.5% from 2023 to
2030. This market is gaining momentum due to the increasing number of surgical
procedures, driven by the rise in lifestyle-related disorders, an aging global population, and
enhanced access to healthcare in developing economies. These factors are fueling the
growth and expanding the reach of microsurgery worldwide
In 2022, CONMED inked a deal to acquire privately-held In2Bones Global, Inc. (on a cash-
free, debt-free basis) for an amount of $145 million on completion and up to an additional
$110 million in growth-based earnout payments over four years. The buyout is likely to
expand CONMED’s Orthopedic portfolio, as the acquisition is likely to contribute to
CONMED's top-line growth by adding In2Bones' revenue stream. The integration of
In2Bones' products into CONMED's global distribution network can further boost sales.
In2Bones even specializes in orthopedic solutions, particularly in extremities and trauma,
areas that complement CONMED's existing orthopedic offerings. This acquisition allows
CONMED to broaden its product portfolio and address a wider range of surgical needs
Other notable offerings include the MicroFree platform in Orthopedics, the TruShot, the Y-
Knot Pro and the CRYSTALVIEW Pump. Of the most unique products under General
Surgery, the Anchor Tissue Retrieval bag deserves a mention. This is one of the major
platforms in CONMED’s specimen bag portfolio. With increased product offerings, the
company can accelerate its dwindling top-line growth. Products like the IM8000 surgical
visualization system and the Edge Ablation system will drive top-line growth going forward.
Furthermore, CONMED’s Assist Arm technology delivers unique limb positioning techniques.
Other products including 3 sports medicine products, 3 endomechanical offerings, an
electrosurgical council, and a new 2D Arthroscopy video system is worth a mention.
CONMED continued to derive benefits from robust sales of both AirSeal and Buffalo Filter.
Management also anticipates this strong performance momentum from each of these
products to continue. AirSeal is currently utilized in about one-third of robotic surgeries,
particularly in complex procedures like prostatectomy, nephrectomy, hysterectomy, and
bariatric surgery. Patient outcomes and clinical studies suggest that these procedures will
likely continue using AirSeal with the introduction of new robotic systems. The product line is
experiencing strong global growth, reinforcing its potential as a solid investment opportunity
in the expanding field of robotic surgery. This raises optimism in the stock as well as this
business unit
Solid Recurring Revenue Base: Approximately 80% of CONMED’s revenues are recurring,
derived from the sale of disposable single-use products. Hospitals and clinics are expanding
the use of single-use, disposable products, which reduce overheads from sterilizing surgical
instruments and products following surgery.
Utilizing one-time disposable products also lowers the risk of patient infection and reduces
the cost of post-operative care, which is no longer covered by Medicare. The remaining 20%
of revenues comes from sales of capital equipment (such as powered drills and saws for
surgery, electrosurgical generators, video-imaging cameras, fluid control systems, and
surgical hand-pieces), which in turn creates demand for complementary single-use items
Reasons To Sell:
CONMED’s operation in a stiff competitive and regulatory requirement space is worrying.
Other headwinds like healthcare reform legislation, forex woes and data security threats
prevail.
Macroeconomic Challenges: CONMED continued to be affected by supply chain
challenges in our sports medicine and foot and ankle businesses and inflationary headwinds
in the second quarter of 2024, which does not bode well. Moreover, declining sales of
Orthopedic unit is a cause of concern. Additionally, ongoing economic softness is leading
organizations to manage healthcare costs, which could impact sales across the industry. In
such a situation, competition for available business typically increases and any cost
escalation, even on account of unfavorable currency translation assumes greater
significance.
Highly Regulated Market: CONMED’s products are subject to regulation by numerous
agencies and legislative bodies. The time required to obtain approvals from foreign countries
may at times be longer than that required for FDA clearance, and requirements for such
approvals may differ from FDA requirements. More regulation typically translates to
increased cost and longer time to market.
Substantially all of CONMED’s products are classified as class II medical devices subject to
regulation by numerous agencies and legislative bodies, including the FDA and comparable
international counterparts. As a manufacturer of medical devices, the company’s
manufacturing processes and facilities are also subject to on-site inspection and continuing
review by the FDA for compliance with the Quality System Regulations
CONMED is subject to various healthcare legislations, where attempts to reform or manage
healthcare costs in other markets could meaningfully change the way health care is
developed and delivered. This may adversely affect the company’s business and results of
operations. CONMED’s products are subject to regulation by numerous agencies and
legislative bodies. The time required to obtain approvals from foreign countries may be
longer or shorter than that required for FDA clearance, and requirements for such approvals
may differ from FDA requirements. CONMED’s operation in a stiff competitive is worrying.
Other headwinds like forex woes and data security threats prevail.
Healthcare Reform Legislation: CONMED is subject to various healthcare legislations.
Provisions of healthcare legislation, including provisions of the Patient Protection and
Affordable Care Act (ACA) in the United States, and similar attempts to reform or manage
health care costs in other markets could meaningfully change the way health care is
developed and delivered. This may adversely affect the company’s business and results of
operations. For example, the ACA includes provisions aimed at improving quality and
decreasing costs of Medicare and governing comparative effectiveness research.
CONMED also faces uncertainties that might result in the modification of health care laws or
reimbursement in the United States and other markets. The uncertainty associated with
modifications could generally cause healthcare markets to be unstable, and the company
could be subject to some interruptions, the magnitude of which cannot be determined.
Regulatory Requirements: Substantially all of CONMED’s products are classified as class
II medical devices subject to regulation by numerous agencies and legislative bodies,
including the FDA and comparable international counterparts. As a manufacturer of medical
devices, the company’s manufacturing processes and facilities are subject to on-site
inspection and continuing review by the FDA for compliance with the Quality System
Regulations.
CONMED may have future inspections at its sites and there can be no assurance that the
costs of responding to such inspections will not be material. Manufacturing and sale of the
company’s products outside the United States are also subject to international regulatory
requirements which vary from country to country. Moreover, CONMED is generally required
to obtain regulatory clearance or approval prior to marketing a new product. The time
required to obtain approvals from foreign countries may be longer or shorter than that
required for FDA clearance, and requirements for such approvals may differ from FDA
requirements.
Stiff Competition: The market for CONMED’s products is highly competitive and its
customers have numerous alternatives of supply. Many of the company’s competitors offer a
range of products in areas other than those in which it competes, which may make such
competitors more attractive to surgeons, hospitals, group purchasing organizations and
others. Additionally, many of its competitors are large, technically competent firms with
substantial assets. Competitive pricing pressures or the introduction of new products by its
competitors could have an adverse effect on its revenues.
Forex Woes: CONMED derives a significant portion of its revenues from customers outside
the United States. The company has sales subsidiaries in a significant number of countries
in Europe as well as Australia, Canada, China, Japan and Korea. In countries where the
company has a direct presence, its sales are denominated in the local currency. Per the
fourth-quarter 2023 earnings call, management estimates immaterial impact to 2024
financial guidance from currency.
As a significant portion of CONMED’s operations consist of sales activities in jurisdictions
outside the United States, its financial results may be affected by factors such as changes in
foreign currency exchange rates or weak economic conditions in the markets in which
CONMED distribute products.
Data Security Threats: CONMED relies extensively on information technology (IT) systems
for the storage, processing and transmission of its electronic, business-related information
assets used in or necessary to conduct business. The data that the company stores and
processes may include customer payment information and other types of sensitive business-
related information. In limited instances, CONMED may also come into possession of
information related to patients of its physician customers.
Numerous and evolving cybersecurity threats pose potential risks to the security of the
company’s IT systems, networks and services, as well as the confidentiality, availability and
integrity of its data. Additionally, the laws and regulations governing security of data on IT
systems and otherwise collected, processed, stored, transmitted, disclosed and disposed of
by companies are evolving, adding another layer of complexity in the form of new
requirements.
Weak Liquidity Position: CONMED exited second-quarter 2024 with cash and cash
equivalents of $29 million, down from $34 million on a sequential basis.. This figure is much
higher than the quarter-end cash and cash equivalent level, apparently indicating weak
solvency. However, the company has $1 million short-term debt. This is not good news in
terms of the solvency position of the company, at least during the year of economic
downturn, implying that the company does not have sufficient cash for debt repayment.
As the current ratio is nearly 2 the liquidity positions well in the economy.
Total debt amounted to $966 million for the period, down from $991 million sequentially. The
quarter’s total debt-to-capital ratio of 52.3% stands at a higher level, indicating a slightly
leveraged balance sheet but down from 53.7% sequentially. Considering the fact it is down
but debt cap is not too bad.
Last Earnings Report
CONMED Q2 Earnings Beat, Sales Rise Y/Y, '24 View Cut
CONMED Corporation delivered adjusted earnings per share of 98 cents in the second
quarter of 2024, which beat the Zacks Consensus Estimate of 92 cents by 6.5%. The bottom
line improved 18.1% from the year-ago quarter’s level.
GAAP earnings per share for the quarter was 96 cents compared with 43 cents per share in
the year-ago period.
Revenues in Detail
CONMED’s revenues totaled $332.1 million, up 4.5% year over year. The top line missed the
Zacks Consensus Estimate by 0.7%. At constant exchange rate (CER), revenues increased
5.2%.
CNMD’s second-quarter sales were driven by strong growth in the United States as well as
international markets. The second quarter witnessed steady surgical volumes. The
performance of CONMED’s BioBrace in the foot and ankle space seemed encouraging.
Segmental Details
Revenues in the Orthopedic Surgery segment totaled $139.5 million, down 0.9% from the
year-ago quarter’s level on a reported basis. At CER, revenues decreased 0.1%.
Sales declined 0.4% on a reported basis in the United States. Sales decreased 1.2% (up
0.1% at CER) from the prior-year quarter’s level in the international markets.
Revenues in the General Surgery segment amounted to $192.6 million, up 8.9% year over
year on a reported basis and 9.4% at CER. U.S. sales increased 8.9% year over year.
International sales improved 8.8% on a reported basis (10.5% at CER).
Margins
CONMED’s gross profit improved 7.6% to $183.7 million. The gross margin improved 160
basis points to 55.3%.
Selling & administrative expenses decreased 5.5% to $122.5 million. Research and
development expenses rose 3.9% year over year to $14.1 million.
The company recorded an operating income of $47.1 million compared with $27.4 million in
the prior year quarter. The operating margin was 14.2%, up 560 basis points.
2024 Guidance Revised
CONMED lowered its revenue and earnings guidance for 2024 based on incremental foreign
currency headwinds.
The company expects revenues between $1.305 billion and $1.315 billion for 2024
compared with the prior guidance of $1.330 billion and $1.355 billion. The Zacks Consensus
Estimate is currently pegged at $1.34 billion.
Adjusted earnings per share is expected to be in the range of $3.95 to $4.02 compared with
the prior guided range of $4.25 to $4.35. The Zacks Consensus Estimate is currently pegged
at $4.30
