CONMED

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

CONMED is a medical technology company specializing in the development, manufacturing, and sale of surgical devices and equipment, primarily in orthopedics, general surgery, and endosurgery, serving a diverse range of healthcare professionals.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

CONMED Corporation (CNMD) is a global medical technology company specializing in the development, manufacturing, and sale of surgical devices and equipment. The company’s portfolio primarily serves orthopedic, general, and specialty surgery, along with a range of related healthcare professions, such as surgical centers, hospitals and other medical settings. The main goal for CONMED is to provide minimally invasive and traditional surgeries, and to be a good partner with doctors, and healthcare professionals.

Revenue Distribution

CONMED’s revenue is categorized primarily by product line, encompassing:

Orthopedic Surgery: This segment includes devices, implants and instruments for knee, hip, shoulder and extremity repair. Historically, this segment has had a larger share of the revenue pie but that has decreased over time in favor of General surgery.
General Surgery: It consists of instruments and devices used in various surgical procedures, ranging from gastrointestinal and bariatric surgeries, to procedures in the lungs and other organs. Has taken over orthopedics in revenue generation.
Outside the US: International revenue is derived primarily from Europe, Asia, Latin America, and Canada.

Industry Landscape

The medical device industry is characterized by the need for constant innovation and regulatory compliance. Major trends influencing the sector are:

Aging Population: The demand for medical procedures has been increasing due to aging global population.
Technological Advancement: The move towards minimally invasive procedures and advanced imaging technologies drive demand for new devices and equipment.
Healthcare Costs: Increased scrutiny over healthcare costs is leading to a push for greater value for money, forcing companies to prove better quality and more effectiveness of new medical devices and procedures.

Competitive Landscape

The medical device sector is highly competitive, and is crowded by many large players. Key competitors for CNMD are:

Large Medical Device Manufacturers: Companies with massive product lines and global reach, often with well-established brand recognition. The biggest among these include, Johnson & Johnson and Stryker, among others.
Specialized Medical Device Companies: These companies operate within the same special markets as CONMED but also focus on other markets as well, creating very competitive environments.

What Makes CONMED Different

Focus on Specific Niches: While they do not offer as extensive of a product line as larger competitors, CONMED seeks to be very competitive within the niches that they operate in.
Global Reach: By having a global presence, CONMED has managed to increase sales across many diverse geographies, making them less sensitive to regional swings in economic activity.
Long-term relationships with surgeons and their teams: CONMED prides itself on being a good partner to doctors and seeks to provide training and educational resources.
Broad portfolio: CONMED operates in many different markets within the medical devices industry, which can make it more resilient through economic swings or regulatory changes.

Financial Performance (Based on most recent reports)

Net sales for the three months ending September 30, 2024 were $307.6 million, down 0.8% as reported, but up 2.8% in constant currency.

Gross profit stood at 175.5 million, with a margin of 57.1%.
Selling and administrative expenses were reported at $159.4 million, a slight decrease.
Research and development expenses were $25.1 million.
Net income was $27.9 million, a significant decrease from last year.
Diluted earnings per share (EPS) were reported at $0.91.
Net cash provided by operating activities for the nine months was $163.7 million in 2023 and $132.3 in 2024.
Net loss for the nine months ended September 30, 2023 was $96.6M.
Net income for the nine months ended September 30, 2024 was $49.6M.

Moat Analysis

Moat Rating: 2/5 CONMED does have some characteristics of a moat but struggles to maintain consistent performance in any one category due to the competitive environment.

Intangible Assets (Brand): While CONMED has a recognizable name in specific surgical segments, its brand lacks the broad recognition of larger competitors like Johnson & Johnson or Medtronic. Their brand loyalty is also not very high.
Switching Costs: Although there are some switching costs present in the form of familiarity of use and training, surgeons and institutions can easily move to competitor devices for various reasons. These are not particularly high switching costs.
Network Effect: This concept does not really apply to CONMED’s product line.
Cost Advantages: It’s important to note that there are not large structural cost advantages present in this company. It does not have unique access to low-cost suppliers of raw material and does not operate in any niches that are incredibly low cost. However, they do try and use scale efficiencies to be as competitive as possible.
Size: While CONMED does operate on a reasonably large scale, it is nowhere near as large as its competitors.

Justification for Moat Rating: CNMD has built some strengths through niche expertise and a global presence, however they haven’t managed to create any type of competitive advantage. They rely mostly on brand recognition and familiarity of their products which are not long lasting or difficult to replicate. Thus, it has weak economic protection, and competitors can come in and easily steal their market share. For these reasons, a moat rating of 2/5 is appropriate.

Risks

Technological Disruption: This remains a clear threat for the business as it is a technology-focused business and new innovations, advancements and new procedures can leave the company behind.
Regulatory Changes: Any changes to regulatory standards or approvals can significantly impact costs and reduce access to the markets.
Competition: Fierce competition from both large, and small specialized competitors is a constant threat to the long term profitability of the company.
Acquisition Integration: CONMED is an active acquirer. Integrating companies into the business can be difficult to get right and could lead to reduced profitability if not managed correctly.
Macroeconomic Pressures: With high inflation and interest rates, the economic situation is not as favorable for companies that also rely on debt to fund growth.
Raw Material Prices: The cost to produce medical devices has not come down and as seen in the previous financial results, is rising.

Business Resilience

Diversified Portfolio: Having operations across multiple surgical areas provides a level of resilience to CONMED, since problems in one area might be offset by others.
Focus on the Healthcare Industry: Regardless of the economic situation, the demand for health services will remain strong, making companies in this sector more resilient.
Stable Customer Base: By having long-lasting relationships with doctors and hospitals, CONMED has some predictability of revenues.
Geographically Diversified: Revenue base across many different countries may offer certain benefits.

Understandability

Understandability Rating: 3/5 CNMD’s business is quite complex for the average individual to understand. Some of the reasons are:

Technical Products: Surgical devices and equipment are technical, making it harder for non-specialized people to truly assess.
Regulatory Complexity: Navigating regulatory approvals can also be complex, adding another layer of difficulty to the business.
Accounting: Some of the accounting methods used in this industry, regarding acquisitions, amortization, and impairment can be quite complicated, and not always clear. However the core business is simple, providing surgical devices and equipment to healthcare providers, which is easy to understand.

Balance Sheet Health

Balance Sheet Health Rating: 4/5 CONMED’s balance sheet is quite healthy, but not perfect and might come under pressure in the following years if business performance doesn’t improve.

Adequate liquidity: Current assets ($1.13 billion) outnumbers current liabilities ($674 million). This provides some comfort and indicates sufficient liquidity.
Manageable Debt: The debt of the company is reasonably high but not unmanageable. They may need to generate more cash to make the payments.
Good Book Value: The book value of the company is very similar to their total liabilities, meaning they are not over leveraged with debt.
Some Risks with Cashflow: The cash flow of the company is not incredibly strong and they may have some difficulty with payments in the following years.

Recent Concerns/Controversies

In recent reports, management has noted the current economic difficulties, where inflation and global economic uncertainty remain headwinds. Specifically, the economic downturn has led to lower growth in some countries. They have also cited several supply chain and material challenges, which are putting pressure on margins. They expect the margins to improve in the future due to cost-cutting initiatives, but this is still a concern. They have noted an increase in competition in their orthopedics division, due to competitors releasing new products at attractive prices.