CONMED Corporation, a $716 million (sales) manufacturer of powered resection instruments, arthroscopes, recon systems, tissue repair sets, implants, electrosurgical generators and surgical accessories of all kinds, has plunked down $265 million for a $50 million (sales) manufacturer (SurgiQuest, Inc.) of radically different laparoscopic trocar designs and control units (brand names AirSeal and AnchorPort) which have transformed laparoscopic surgery.
At $265 million, this SurgiQuest deal is the largest acquisition in CONMED’s history.
CONMED, which has a market value of approximately $1.13 billion, plans to pay for the purchase in cash and fund the purchase with a combination of available cash (which stood at $65 million as of September 30, 2015) and borrowings under its existing credit agreement. Pre-deal, CONMED’s total liabilities are $516 million while stockholder’s equity is $577 million.
Wall Street Seems to Like the Transaction
Mike Matson, Needham and Company’s senior research analyst for healthcare, wrote to investors on the same day the deal was announced saying:
“We think that the acquisition makes sense both strategically and financially. If we assume that SurgiQuest’s sales grow by a CAGR of 20%, we estimate that it would add ~1.2% to CNMD’s overall revenue growth. Additionally, since AirSeal prices are substantially higher than conventional trocars, while we believe that manufacturing costs are similar, over the longer term we expect SurgiQuest’s gross margin to move significantly higher than the 53% seen year-to-date through 9/30/15.”
Matson did not update his modeling with this announcement but will have new numbers ready once the deal closes.
CONMED’s New Direction
So much has changed at CONMED in just the past two years.
As the table illustrates below, there has been a near complete changing of the guard since 2012.
In his annual report to shareholders, new CEO Curt Hartman wrote:
“There is a renewed focus on research and development initiatives. We also expanded the number of independent sales agent groups selling our orthopedic products. We will look to expand our footprint through organic growth and acquisitions that fit into our business model.”
“We plan to continue to restructure both operations and administrative functions as necessary throughout the organization. We have successfully completed our restructuring plans over the past few years.”
He also said that he and his team would pursue strategic acquisitions, introduce new products, diversify geographically and drive operating efficiencies.
Harder Than It Looks
But the news for the September 2015 quarter wasn’t good.
Sales, which came in at $169 million, were down 3% from 2014’s third quarter and missed Wall Street’s estimates of $173 million.
Net income for the third quarter was $10.6 million, down 13% from the same period last year, but actually in line with Wall Street’s estimates.
Still, the immediate reaction when Hartman and his team announced the results was a sell off of CONMED’s stock. Before the announcement, CONMED’s market capitalization was $1.3 billion and afterwards it was $1.1 billion, a difference of $200 million or 15%.
What Have You Done Lately?
Essentially, Curt Hartman was hired at the behest of CONMED’s shareholders in 2014. CONMED’s shareholders, who had become dissatisfied with the pace of CONMED’s growth and profitability, had pushed hard for a changing of the guard.
They got what they asked for.
The shareholders replaced CONMED’s founding family, the Corasanti’s, with Curt Hartman, a 22-year veteran of Stryker Corporation where he’d served as CFO and briefly as interim CEO in 2012.
In the intervening months and quarters, Hartman has engineered a vast overhaul of CONMED’s board of directors and senior management in the hope of addressing shareholder concerns.
On the day that Hartman assumed the leadership of CONMED, the company was valued at approximately $1.1 billion and annual sales were coming in $740 million.
Before the SurgiQuest acquisition announcement, CONMED was being valued at $1.13 billion, a 6.9% gain from when he took over.
After the SurgiQuest announcement, investors voted their approval by adding nearly $40 million to CONMED’s value and making the gains since Hartman arrived over 10%.
How SurgiQuest Changes CONMED
In many respects the SurgiQuest deal delivers on the expectations that shareholders had when they recruited Hartman to take CONMED’s helm.
As Needham analyst Mike Matson described it in his note to institutional investors on November 16, 2015: SurgiQuest “provides CNMD with a new differentiated growth driver for its Advanced Surgical business. We also think that AirSeal may function as a “door opener” that helps to drive increased sales of CNMD’s other Advanced Surgical products.”
Indeed, CONMED has long been focused on the tools and instruments for MIS surgeries. The key to all MIS is the trocar. Trocars are disposable ports which allow the surgeon access for endoscopes and other instruments. The most common trocar based interventions are laparoscopic surgeries.
Abdominal laparoscopic procedures require insufflation (using gases to “blow up” the abdominal cavity) to create a working space. Maintaining gas pressure during the procedure is an issue and conventional trocars use mechanical seals/vales. But SurgiQuest’s AirSeal uses a gaseous barrier instead.
There are many advantages to a gaseous barrier approach—abdominal pressure is more stable, constant smoke evacuation, easier specimen removal and, potentially, reduced pressure levels which lower post-operative pain.
SurgiQuest has sold more than 1, 600 AirSeal systems to upwards of 700 institutions worldwide. Of course, with each AirSeal sale there are ongoing disposable sales and as of September 30, 2015, SurgiQuest had sold more than 135, 000 disposable sets (source: Needham’s November 16, 2015 report).
Finally, AirSeal’s prices are quite a bit higher than conventional trocars so that could push CONMED’s gross profit margins higher.
With SurgiQuest, CONMED moves from a company expected to report about $730 million in sales for 2016 (down from $740 million reported for 2014) to a company reporting more than $780 million—a new record.
And, what shareholders were hoping to see when they dramatically pushed for a change of CONMED’s management and direction in 2014.
