All right, we're good to go. Morning, everybody. Thanks for joining us. I'm Matt O'Brien. I cover MedTech here at Piper, part of a three-person MedTech team here at Piper. We're really excited to have the management team from CONMED with us this morning. From the company, we've got Curt, who's the CEO, and then Todd, who's the CFO. Gents, thanks so much for coming out. Really do appreciate it.
Thanks for having us.
Of course. So, you know, Curt, I usually start with you, but I'm gonna start with Todd this time. The commentary that you made about next year was really interesting on the call, and I wanted to start there. If you wouldn't mind just maybe deconstructing for some of us, the growth of this double digits for next year.
As I'm looking at the business, you know, I'm thinking that smoke's probably half of that growth that you need to put up. And then, you know, the Biorez plus In2Bones is probably 15% to 20%, and the rest is legacy. Is that the right way to kinda characterize how to think about the growth for the business as we head into 2024?
Yeah, I mean, so the way I'd frame it. In fact, I'll back up a little bit just to give some historical context. It's kind of a terrific story, actually. You know, Curt came into a business in 2014, 2015, that was declining. I mean, you know, everybody else in MedTech was growing, and CONMED was declining. That's what Curt walked into. And so he said at the time, "You know, first, we're gonna get revenue positive." That was the goal. First goal was positive, and then to get to market growth was the second milestone, and then to get above market growth.
So that's always been the goal, and it's been a terrific transformation. What he's done and we've done is simply invest in faster-growing spaces, and then we've done some through acquisition, obviously, that have been very successful.
So over time, we've just shifted the mix of the portfolio to faster growth. And what that looks like today is we disclosed in first quarter of this year that the combination of AirSeal, Buffalo, and then our 2 new acquisitions from 2022, In2Bones and Biorez, those are now greater than 30% of the portfolio. Those are growing in the neighborhood of 20%, right? If you put them all in together, it's in the 20% neighborhood. So if you have 30% of the portfolio or a little more, growing 20% or hopefully a little better...
Yep.
T hat's 6% growth if everything else was flat. That means if you're gonna get to double digits, you need that other 70% of the portfolio to grow, you know, 6, a little, a little, a little below 6 is what you need to hit 10, right, for the whole portfolio. We think our markets are somewhere in that mid-single... Right now, I think 2023 has been a fairly stable, normal MedTech market for the first time since 2019.
Yep.
It kinda has some stability, and we think the spaces we're in grow in that mid-single-digit range in aggregate. So if we can be our success, and the bar here has always been grow faster than your markets. We expect that of that 30% high growth stuff that we talk a lot about.
We also expect it of the 70%. You know, we don't ignore 70% of our business. We're focused on that 70%, and everybody knows, every sales rep knows, every business knows, success is defined as growing faster than your markets. So if we do that, if we're able to do that, and you do that math, it's. You can be at that 10%, you know. Could there be a quarter where you're high singles? Sure. Given a healthy, normal MedTech market, we think we should be in that zone, going forward.
Got it. Okay. So what I'd love to talk a little bit more about the faster growth part of the business for now, and AirSeal specifically. How... What percentage of AirSeal is done on the robot?
We estimate about 60% today.
60% are done on the robot.
So when we bought SurgiQuest in 2016, it was virtually 100%, right? They had made their strategy of following the robot, which was a very intelligent strategy. Over time, obviously, we have a big international business, way less robot penetration there, and so those reps had to go learn how to sell it, where you're just replacing standard insufflation with no, you know, $1 to 2 million-dollar robot lead blocking the way and making that easier. And we grow just as fast internationally as we do in the US. And so it's a very successful.
You can definitely sell it very successfully in the non-robotic space. In the US, that's been a more gradual view as, you know, as doctors get converted to the technology, they take it wherever they're doing procedures.
Then our reps, you know, our best reps have figured out that there are 10 times the procedures in the non-robotic space of, you know. Yes, Intuitive continues to grow at a very nice growth rate, and you can live very comfortably in that wake, but there's way more opportunity outside of that, and the reps that have figured that out the fastest are doing the best.
Still pretty good, isn't he?
Yeah. Yeah. Good. Pretty good, yeah. I bet keep looking at you like, "I swear I'm gonna ask you a question".
I'm happy to let him go. We're pretty aligned.
Yeah. To that end, Todd or Curt, the other 10x opportunity, what are you seeing there as far as starting to penetrate that part of the market? Because it is so big. I mean, in the US, everybody obviously was falling off da Vinci, and now they're going elsewhere. How does that rollout or that mushrooming happen at a hospital level outside of, you know, with the robot?
Well, I think it's like where Todd started. Outside the US, that is the muscle they've had to build, and they've done a wonderful job doing that. Inside the US, as our sales penetration, feet on the street grows, as our robotic penetration has continued to grow, sales professionals are still looking for the next opportunity, and it's taking them into general surgery. And that's a harder road. It truly is, because you've got a lot more procedures, you've got a lot more physicians, you've got a lot more room to upgrade OR-wise, and it's more expensive.
Yeah.
They're not following in a really expensive robot. They're saying, "Here's a standard insufflator, $10,000 to 15,000. I need you to buy AirSeal, which is north of $30,000.
Yeah.
Here's a standard trocar tube set, $70 to 80. I need you to use Tri-Lumen tubing, $180." Well, why do people do that? Because the body of clinical evidence on length of surgery, length of recovery, both being reduced substantially, and pain reduction, postoperative pain reduction.
When people see those studies, which are done now over thousands of patient lives, it changes their opinion, and they go through the Value Analysis Committee, they go through the implementation, and it really is doc by doc, room by room. But it's a, it's a wonderful trajectory, and it's a big piece that we're going to go after today, tomorrow, and well into the future.
Okay, and at that runway, it seems like it's multi years. Is that fair to...
Absolutely.
Okay, got it.
Absolutely.
Just back to the robot real quick. Which cases is AirSeal typically used in? Is it urology, gynecology, general surgery, elsewhere?
The majority or the number one procedure that we're in is the GYN procedures.
Okay.
It's followed by general surgery.
Okay.
That would be kind of one, two stack up.
Yep, and general surgery, if I'm not wrong, at Intuitive, is growing pretty... Is, I think, probably the fastest growth area for those guys.
Off the top of my head, Matt, I'm not sure I remember their exact category breakouts, but, you know, their procedure volumes are growing just generally in the high, you know, mid to high teens.
Yeah.
So it's a pretty good path to follow.
Yep.
But you got the other category, which is really large, so.
Okay. And then last one on this point, which comes up all the time, but just your relationship with Intuitive and partnership with Intuitive, where is that at this point? Because it's, you know, this, "Hey, they've got their own smoke evacuation system coming out, it's going to kill AirSeal," is the wrong analysis. But, I'm just curious, you know, what kind of relationship you have with those guys, what kind of dialogue you have with those guys specifically?
Yeah, we continue to work collaboratively with Intuitive. We work at the street level, we work at the training level, we work where they're going with their product and what we need to do with our product to ensure we continue to support robotics cases. It's an important part of the business, and we would never underestimate what they can do, what they're capable of. They have not said they're coming to the market. People have said they are coming to market with a standard insufflator.
And if you go back to our second quarter call, where we clearly delineated the differentiation between a standard insufflator and AirSeal, I don't think I could add anything beyond what we scripted out in that call. We thought we addressed that issue pretty head on.
Yep.
Um...
Got it. Okay, appreciate that. Can we flip over to the Buffalo side of the business for a sec? Why wouldn't the Olympus recall be a tailwind for that business?
Olympus was a standard insufflator. Buffalo is open case smoke evacuation.
Okay, so...
Two different items. You could then follow that up and say, why wouldn't AirSeal be a replacement for Olympus?
Yeah.
Again, it gets into that price point. If I just want standard insufflation, there's a lot of companies who provide standard insufflation, and candidly, most of them will place the standard insufflator to generate revenue on the tube sets and trocars, and that's fine. That's not the business we're in. We're in the clinical insufflation business with AirSeal. If, if the recall gets the surgeon who is interested in AirSeal an opportunity to say, "Let's bring in AirSeal and give it a try," we're right there to support it.
Got it. Okay, appreciate that. On Buffalo, I think something that gets missed by investors is the breadth of your offering. It's not just one product that you sell. You sell multiple different products. How important is that in the marketplace versus your competition?
Yeah, I mean, that's the benefit of this little company that nobody had ever heard of until we bought them in 2019. They've been in this space for 30 years. They've been uniquely focused on surgical smoke evacuation and protection for 30 years, and because of that, we have the best product on the market.
And when we bought them, they had about half the market. We estimate we still have about half the market, and the market is very fast-growing. And so, yes, we're generations ahead from a technical standpoint, from a design standpoint, breadth standpoint. This market will attract a lot of players as it grows. It's going to be a multibillion-dollar market, and a lot of people will come and make a lot of noise and say, "We're coming." And the job is...
You know, this is MedTech 101, product leadership 101. You've got to keep moving the bar so that as they catch up to your current device, you're, you've got the new device. So that's what we're focused on. We're also focused on effectiveness, how well you capture smoke. It's not hard to just put a vacuum on something and say, "Hey, we capture smoke now." But how well do you capture smoke? Buffalo Filter is the only product on the market that can prove and claim north of 90% smoke capture. Nobody else on the market is close to that, and it's because they've been focused on it for 30 years...
Yeah
A nd trying to get better and better.
How much more innovation is available on the, on the Buffalo side of things?
A lot. I mean, as good as our product is, it's still way more bulky and less flexible than a surgical pencil without smoke evacuation on it. And that's really what surgeons are comparing it to, right? Because they're used to using a tool without smoke evacuation. Every smoke evacuation device is bulkier, less flexible, less dexterity, and surgeons don't like that.
Surgeons have been the barrier to faster adoption here, and it's all about that feel and what they're used to. We're the close we believe we're the closest to that, but we're still there's still a lot of improvements we can make to get closer to what a surgical pencil feels like.
I think it's really important on that point. It's not like: here is your smoke evacuation. It's neurosurgeon, open neuro procedure, here's what you use. Spine surgeon, MIS spine, open spine, here's what you use. Hip surgeon, knee surgeon, and Buffalo Filter is the open procedure where energy touches tissue and smoke is created. That's what you want to get out of the face of the surgical staff and physician, and candidly get it away from the surgical site. So a very large volume of open surgical procedures across many specialties.
Think of the dermatological office. When they, you know, are removing cancer lesions, they're creating surgical smoke. That's a different device than what the knee surgeon's going to use and what the spine surgeon's going to use. So you've got a lot of innovation in each of those categories, and that's where Buffalo Filter had the head start. But to Todd's point, we just keep moving it forward.
How big is that market today?
We estimate between $200 million and $250 million.
You think it's going to be a multi-billion-dollar market?
Several billion, yeah.
What gets you to that kind of level?
So...
I know it's going to take a while, but...
Yeah. And I've always been skeptical when we talk about TAMs and, you know...
Yeah
'Cause not everybody always adopts the best technology, right? There are certain surgeons that just never go there.
Yeah.
But if you think about lead in, you know, protection from radiation...
Mm-hmm
W hich is by itself, any single incident, very low risk, but the repetitive exposure is serious risk, and the world now understands that. And if you go to the doctor or the vet or the dentist, if you go anywhere in the world where they flip on radiation, everybody is being protected. They either exit the room, or they put lead on. Lead is heavy, hot, expensive, it's a hassle. Nobody wants to do it, but we do it 100% of the time in every circumstance. That's what this will be. This smoke, we now can measure it. We now know what's in it. It's toxic.
Yeah.
It's dangerous. Yes, one, you know, a brief interaction once in your life, probably not a lot of risk. But repetitive exposure day after day, which is what nurses are going through, is. There's a landmark study from 2009. I think it's 50,000 something operating room nurses. They have twice the respiratory disease of the general population because they're exposed to this stuff every day.
Yeah.
So I do believe it's realistic that we are headed to a place where 100% of the time, if you create surgical smoke, you've got to do something to protect it. And that's what you're seeing in the legislation. We now have 15 states that have announced, made it law.
Yep.
This, it'll just keep going from there.
Yeah.
Because there's no other side to that argument that can sustain, right? It's dangerous work environment.
Yeah. You guys seem pretty bullish about the smoke business for the next several years. Is that fair?
Yeah.
Okay. Let's flip over to sports med for a minute, the two deals that you guys did and started to, you know, exclude the other 70%. But the foot and ankle market is massive, right? How have you done so far with In2Bones? And then what's what new is coming from CONMED in 2024 and 2025 from a product perspective? Because you've got to keep introducing new products into that market to be successful.
Yeah, it's a great question. We acquired the In2Bones business in June 2022, so we went through the one-year mark in June. And we bought the company because it was a standalone business. It had comprehensive R&D, dedicated sales, marketing, had a management team that was very deeply connected with the specialty.
And a year plus later, we're thrilled with the business. It's been everything that we thought it would be, and the synergies that CONMED's been able to bring to that really get into medical education, our platform for medical education, our back office, the consolidation of accounting, things of that nature. So you know, so far, so good. The business has been everything we thought it would be and then some.
And that, that's borne out in the results that we've been able to deliver, which we said we, we thought we could grow twice the market, which puts it at about mid-teens. As we look 2024, 2025, that R&D engine is critical, to your point. You've been around us long enough to know, Matt, we don't talk about new products till we introduce them, so you'll have to show up at Academy... if you want to see what we're gonna, we're gonna show for the, the world of foot and ankle. But we obviously have a platform with a continued growth trajectory that the R&D and marketing teams are working on.
Okay. So then, without getting specific, I mean, are these meaningful new product launches or new areas? I mean, any just general color?
Well, one of the great things about In2Bones was the comprehensive nature of the portfolio. So there's a few areas where we had product gaps. You might see some of those get filled in, where we did not have what we viewed as either a competitive offering, but some of the other stuff would probably be just next generation simplification.
You know, one of the things we have talked about is on the total ankle, we have patient-specific, but that was made internationally, and it had to be shipped into the market. So one of the things we did this year was bring that to the US manufacturing, which gives you a much faster turnaround time on those cases.
I can reduce my scheduling if I'm the doctor, if I'm the patient, just a much more satisfying event than saying we've got to wait for that to be made internationally, go through customs, and get to the surgical site. So those are, those are some of the smaller things that just make our business more efficient. But then there's other things that are going to be new to the portfolio.
Got it. Okay. Let's flip over to Biorez. You know, that was the belle of the ball at Academy this past February. You've increased your expectation for that business. What... Why is that? I mean, I know it's small numbers, but still up. And where are you seeing the most utilization? Because it's got a broad label.
It's got a very broad label. The technology is really a combination of Collagen I and this PLLA three-dimensional matrix, which gives it strength at time zero. Collagen I is a known quantity in the surgical community, and Gen 1 products in this space, surgeons understand the benefit of Collagen I. And we probably thought that was going to be a heavier lift in our initial due diligence than what it has proven to be.
And then, when they see strength at time zero, which that's what you get with sutures and anchors, which is standard sports medicine. So if you can put Collagen I with strength at time zero, intuitively, surgeons just get it. And our training vehicle here is really surgeon-driven. We're letting surgeons train surgeons.
We're providing the venues, we're providing the cadaveric workshops, but it's just been really exciting to see them gravitate to this. So we're focused on rotator cuff and the knee augmentation. Those are the two largest markets. Those markets, if you look, have very high revision rates. It's kind of that, that quiet little secret. Massive rotator cuff tears, you're going to re-tear about 40% of the time. Nobody tells you that, but that's the reality of the data. So when you provide a solution like that in rotator cuff, surgeons get very excited for strength at time zero.
But they're also taking the technology and saying: "Where else can we use it?" And I think our last clinical review is, there's been about 40 different surgical specialties where the BioBrace technology has been applied.
Biceps tenodesis repair, hand and wrist, Achilles repair, glute med repair, and on and on. And I'm sure you come to Academy this year, I'm sure we'll have another BioBrace day, and the surgeon presentations will now have data out multiple years.
And it's just really exciting. It's. In my med device career, it is the one technology that I've been associated with, where surgeons send me patient testimonial videos. "Hey, Curt, I want to show you this. This patient came in four weeks ago. Here's the pre-op, couldn't move," whatever. "Here they are, four weeks, they haven't even been to physical therapy." And it, it's just really encouraging.
That's great.
Really encouraging.
Where are you at from a data collection perspective to really broaden the, adoption?
Yeah. So there, there's a lot of data collection going on. There's surgeons collecting their own data, there's registry out there that they're collecting data on, and then the, what I would call the, I hate to use the word official, but a randomized controlled trial. We're early in enrollment. That'll probably push out before we get readouts, full readouts, until sometime latter half of 2025.
But I go back to what I said at the beginning: Surgeons understand this technology. There is a clinical and academic demand to have that randomized control trial, and we're doing that. We're funding it, and we're running it, but we won't rush it.
Yeah. Do you need that data to see a massive inflection in utilization?
Remains to be seen, the answer to that question.
Okay.
Coming into it, we thought we would need that. At this point in time, I've kind of moved that down the priority list.
Okay
M entally.
Yeah.
We're still doing it. I don't want to mislead anybody, but it doesn't feel like it was needed quite as much as we might have assumed.
Okay.
There are absolutely some academic surgeons who are like, "When you give me that data, I'll be able to jump on board." There's another group that says, "I, I see what it's doing, we want to do this.
Right.
You know?
This can be a $100 million product. Is that fair? That's the number we've thrown out there, again, over time, but...
We haven't given guidance beyond what we say 2024, we went to...
Yeah. We can go to 2020 right now.
D ouble digits. We, we think it'll be really big.
Got it. Okay, appreciate that. Just a couple of minutes left here. On the profitability side of things, Todd, I think you said 150 basis points for next year and then 250 in 2025. Can you just help kind of bridge us to get that kind of margin expansion over the next couple of years?
Yeah. We have a powerful mix engine that's giving us tailwind on the gross margin side. If you look at our margins from 2019 to 2022, through the global pandemic, our margins were flat. I think you won't find that with very many people, right? Very many companies. Our math says that during that time period, we digested 400 basis points of inflation between labor, freight, and material costs, and our margins were flat.
So, what that tells you is I had 400 basis points of offsetting positivity that's really driven by the mix of our business. All those growth drivers we talked about at the start of this session, they're all accretive to margin.
Our 22 acquisitions, both In2Bones and Biorez, what we just talked about, those are both north of 80% gross margin. So not only have we changed the mix of the portfolio to faster growth, revenue growth, it's also, in, in concert, been higher margins. And so we have a tremendous mix tailwind. If we could just get costs to stabilize and kind of be flat, which it looks like they should do, and maybe, maybe even get some relief, then that's when you see this margin improvement come through.
How much of the 400 basis points was labor? Wasn't that pretty small, though?
Yeah, the biggest part of it is material costs.
Okay.
That's been the slowest to kind of come back. It stabilized, but we really haven't seen a lot of relief there yet. It built into that assumption of getting to around what we said was around 60% by the end of 2025. Built into that assumption is about 100 basis points of inflation, recovery...
Yep
I n that timeframe.
Got it. Got it. Appreciate it. All right, well, it looks like we're all out of time, so I'll have to wrap it up there. Thanks so much for all the time today. Appreciate it.
Thanks, Matt.
Thank you, guys.