Hello, everyone. My name is Kristen Stewart, and I'm the medical device analyst at CL King. I'm very pleased to be joined by Curt Hartman, ConMed's Chairman of the Board, President, and CEO, and Todd Garner, Chairman-- ConMed's Executive Vice President and CFO. This will be a moderated Q&A session. If you'd like to ask a question, please type it in the box to your screen and send it over to me. With that said, let's begin. Gentlemen, I'd like to start off with just taking a look back at your most recent quarter. One of the areas of weakness was your orthopedic business. You highlighted it was due to supply challenges. Can you just provide some background context and comment on the nature of those supply challenges and why they are occurring?
Sure, and thank you, Kristen, for hosting us today. Appreciate the opportunity. If you look at our recent history, go back to the third quarter of 2023, we noted in that call that we were having some supply challenges in our orthopedics business, really highlighting three categories. One would be the more recently acquired foot and ankle business. We had some issues with MTF's supply of tissue, which was an industry-wide issue. And then we noted some issues with our legacy orthopedic business, meaning our sports medicine franchise, specifically. We thought we would clear that as we came into 2024 and really thought by the midpoint of the year, most of those issues would be resolved, and we'd be back fully on offense. MTF issue resolved in the fourth quarter last year.
The foot and ankle challenges resolved towards the end of the first quarter, coming into the second quarter, kind of as we had planned and expected, and as we got to the end of the second quarter, we just weren't seeing enough uptick in what I refer to as a procedure-specific categories. Those are the implantables. If you're going to schedule surgery for soft tissue repair and you don't have the implantables, they don't cancel surgery, they use somebody else's, so our reps are not as efficient. They're not able to maintain existing customers while chasing new customers because they're spending all their time with existing customers, so it slowed down our offense, and that's why we pulled the second half of the year down. Challenges specifically have been around a few key items, some vendor delays.
I think Todd has referenced that probably 75%-80% of the challenges are vendor-driven issues. The other 20% are kind of ConMed internal issues. We've got all hands-on deck to remediate and feel like we have everything going in our direction as we sit here today, but we, we've got to execute these, you know, we own the totality of this, and we've simply got to execute. So, we wanted to make sure we gave ourselves enough time and didn't keep running into this issue. Todd, I don't know if you want to add anything to that.
No, just that, you know, I think we were having... These supply challenges kind of linger, the sports medicine supply challenges specifically, linger really from early 2023, when all the sports medicine companies were talking about these similar challenges. And so, I think simply what's happened is the larger, our larger competitors, you know, who have more weight with the vendors and, you know, I think admittedly are probably a little more sophisticated and, you know, we're climbing up the sophistication curve. I think they just got out of the woods, a couple of quarters before we did. So we're making progress. We're way better than we were a year ago, like everybody is.
We're just trying to build those safety stocks, as Curt said, so that the reps can run at all accounts, and we're not kind of having to prioritize and still play a lot of defenses. So, as Curt said, we've given ourselves now to the end of the year, and I think things are tracking to that, so we should be able to be on offense as the calendar flips to 2025.
You don't anticipate them lingering into 2025 or and you think that you can resolve these all in 2024?
Right. That's the expectation.
Okay. And how do you think about losing market share because of these supply issues? You mentioned that the surgeries still get done. Do you think that this is a permanent impairment of your market share, or do you think you can get it back pretty quickly?
No, I don't think it's a permanent impairment, Kristen. I think you have to keep in mind, these are surgeon-specific products. They chose the ConMed product for a reason. This industry goes through this even, you know, in normal times, so customers do rotate. Now, there may be periods where the customer will have to sign up for some short-term delivery with the new vendor. And we would do the same if we were asked to provide coverage of a product category that somebody else had a shortage on. But ultimately, over time, we typically win the customer back. I won't say 100% of the time, that's just not reality, but I don't see it as a permanent impairment to our market share.
And I also think because of what's going on in our portfolio with BioBrace and Argo anchors for the shoulder and aim, all inside meniscal repair for the knee, we've got a lot of new reasons to talk to customers, and that's what really gets them excited and gets them moving forward with us. So, I feel good about our outlook in the, what I would call the legacy sports medicine business.
Okay. And at this point, it seems the supply challenges are limited to orthopedic. Is that a fair statement, or do you think we could see some supply disruptions within general surgery as well?
No, this has been very orthopedic specific, and I feel very good about the general surgery side of the business.
Okay, great. And then maybe talking about general surgery, I'd love to talk a little bit more about AirSeal. I was wondering if you can provide your thoughts on the market's initial reception to the Intuitive Surgical insufflator and what trends you're seeing in the market?
So I'm going to punt part of that, Kristen, to the folks at Intuitive. That's their product. They should probably answer how the market views DV5. I think what we tried to comment on in the second quarter call is, do we see the DV5 in its very early days, which at the end of the second quarter, they had noted that 78 units had been shipped to the field? We're getting a little bit of feedback here. But, oh, Todd, do you want to try here? I'm hearing a lot of feedback.
Yeah. Yeah, we said on our Q2 call, the early surveillance has been good. You know, we're obviously very close to AirSeal customers, and so for those AirSeal customers that have tried the new integrated insufflation, after they've completed their requisite commitment, to give the new integrated system a full fair shot, we see that they're returning to AirSeal, especially, for those longer, deeper, more complex surgeries. And that's. Those are really the surgeries where AirSeal gets used today on the Xi robot as well. So, you know, Curt and I have been saying since last summer, since this story kind of broke, that the laws of physics just will not allow a standard insufflator with valves to keep up, and perform like AirSeal does in those types of cases. And that does appear to be now shown.
Now that it's in the market and we can see it in use, that does seem to be the case. Those AirSeal customers who have prioritized clinical insufflation for their patients are returning to AirSeal once they've completed their requisite number of cases, and that appears to be the case.
Okay, great, and can you just remind us what percentage of AirSeal is tied to Intuitive's robot and what percentage is used in laparoscopic procedures?
Yeah. So, when we gave that disclosure about a year ago, it was 60% of AirSeal revenue came from Intuitive procedures, and 40% of AirSeal revenue came from non-robotic procedures.
How has that been trending?
It's definitely trending towards the non-robotic. The non-robotic is growing faster than the robotic side. But it, you know, so that people understand, we don't get a report at the end of the month that tells us where AirSeal is used. Hospitals order AirSeal disposables, and they use it, you know, many hospitals use it in both, and so we don't actually have precise information for this. The way we got to our current disclosure is we surveyed all of our territory managers, all of our sales reps, because they're closest to the action. They would have the best feel and understanding for in their territory, where is AirSeal being used, at what percentages? And so, this is a survey that we have to perform.
There is no report that comes out of the medical system that tells you those answers. And so, as you can appreciate, it doesn't make sense to do that every month or even every quarter, right? But we will redo that survey, and I'm confident that because of the growth on the non-robotic side, it will continue to trend that way. As a data point, we do know that when we bought SurgiQuest, it was the company who had the AirSeal product. We bought them in 2016. At that point, virtually 100% of the AirSeal revenue was tied to Intuitive procedures in 2016. So, we've gone from 100% to a 60/40 ratio, you know, eight-year, or I guess seven to eight years later.
And so, it is definitely trending as we increase the use in the non-robotic, starting with international, because you know, international, especially when we bought AirSeal, did not have the robotic footprint that the U.S. had. And so, our OUS team has been selling into the non-robotic very successfully for eight years. And we grow just as fast outside the United States as we do inside the United States. So AirSeal is completely relevant and applicable to non-robotic cases, and our U.S. folks are learning that more and more and developing the sales skills. It's a little longer sales cycle. It's more of an economic discussion, so you got to be a little sharper on those facts.
But, you know, for an extra $100 per patient, there's proven, documented, published results that it reduces length of stay by 50%, and that's the number one thing hospitals care about. So, it is relevant and applicable in both robotic and non-robotic, and the robotic side is growing faster than non-robotic.
Yeah, Kristen, I would double down on that. I think it's a really important point that I'm not sure all investors appreciate how much of our revenue does come from the laparoscopic surgery, and literally, we built that from zero up to that 40%-ish range. So, it's not as if we need to turn that direction. We've already been going in that direction, but we're not walking away from the robotics because we still have a best-in-class technology that enables robotic surgery. And if you look at the footprint that Intuitive has, whether it's U.S. or globally, we have a very high footprint ratio with them. So, when the surgeon walks into that robotic room, they're making a decision every day: Do I use AirSeal or do I use a standard insufflator?
In some cases, that's based on the type of case they're doing, which Todd brought up that point earlier, those long length procedures, that's where AirSeal really shines. That stable pneumo to create the working volume, consistent working volume, keep any gas out of the abdomen so that you have great visibility. Super important points that really you can only accomplish with a product like AirSeal and a clinical insufflation that it provides.
I think when you guys started the year, you came in forecasting that AirSeal with the worst case scenario. How has that been tracking relative to your expectations?
Yeah, you're right. In January, with this, you know, significant concern on Wall Street, we included in our assumptions that our attachment rate for the robotic procedures would be about half, with the new robot compared to what it was with the existing robot. So, to put that in numbers, we get about a third of Intuitive procedures on the Xi robot, on the previous robot. So, we had about a third of their procedures. And so, we assumed in guidance that, we'd get about half that attachment rate with the new robot. Again, still early, but we're seeing a stronger attachment rate than that, once the customers have been through their requisite initial trial cases.
Okay, great. Maybe switching gears to another one of your growth drivers, Buffalo Filter. I think we're up to eighteen states having passed legislation. What are you seeing in those states that have passed legislation, and is there any state you would see that say that they're having more rapid adoption than others?
I think we've been consistent that when legislation is implemented, first you have to look at the intensity, if that's the right word, of the legislation. There are some states where the legislation doesn't have a lot of teeth in it. There are other states, Oregon, Colorado, are great examples, where they have a lot of teeth. They have a quick window from approval at the legislative level to implementation in the state, and we do see acceleration of growth in those states, states like Colorado, states like Oregon. And that is consistent. Then the next line would be when they come in and get audited, have you fully implemented the smoke evacuation process across all your ORs?
You know, people probably think about ORs as the center of that, these open procedures, but you also have to think about dermatology clinics, and there's a lot of different places where energy platforms, therefore smoke, is created when energy platforms are used. So, I think that the short story is when legislation does go into play, there is a ramp-up period. The growth rates in those states is higher where there's not than the states where there is not legislation. But even as I go back to Oregon and Colorado, our estimates are still that only about 40%-50% of the institutional implementations are done. There's still a lot of ground to go there. So, it's still a relatively small market versus its total addressable potential that we see in the future.
But legislation does matter, and it is helping move things in that direction.
Okay, great. In the past, you've commented Buffalo Filter was growing at or above 20%. You mentioned it was a bit softer in the most recent quarter due to a quality issue. Is that now behind you, and how sustainable do you think the growth is going forward?
You would rather Todd?
Yeah. Yeah, that was a temporary issue with the product that we got resolved, and the corrected, improved product is, was back in the field before the end of Q2. So that was a temporary issue that we, we believe is behind us. Yeah, look, as Curt said, we're still in the very early days of this market that's going to. You know, we estimate that the market today is somewhere between $250 million and $300 million, probably. And by all accounts, based on the science, based on what we know, based on the desire to keep people safe from toxic smoke, this is gonna be a multi-billion-dollar market, right? So, product leadership one on one in med tech, we need to, we need to keep our leadership position by continuing to move the bar.
As folks try and catch up to us, we need to be advancing the technology and moving up the curve, getting closer to the surgeon experience with a non-smoke pencil, right? The surgeons have been the biggest barrier to adoption here because they like their smaller, more flexible pencils without smoke evacuation on them. That's, and so we're the closest to that in the market by a lot, but there's still lots of room we can go to be better. And so we continue to focus on keeping our leadership position in this market, and as the market grows, there's a lot of growth potential here.
Okay, great. And then I'd like to shift to talk a little bit about BioBrace. For those who are not as familiar with the product, can you just provide us some commentary on what it is and where it's used?
Yeah, it's a super exciting product, and glad you brought it up because its design is for healing of soft tissue, where disease exists anywhere in the body. You need to think about that in the context of what sports medicine surgeons do today, before products like BioBrace came into the market. They're looking at tears, partial tears, full thickness tears in rotator cuffs, in ACLs, very well-known procedure, MCL, PCL, Achilles tendon, glute medius, all of those places, and they're using mechanical fixation. They're using anchors and sutures to reattach, hold that tissue back down to the bone tendon interface, and hope that they get regrowth and repair. By the introduction of a product like BioBrace with type I collagen, type I collagen, you actually can facilitate the regrowth of that tissue, so you're fundamentally providing healing of the underlying disease tissue.
The, the precedent products, Regeneten, sold by Smith+Nephew, is specific to the rotator cuff, whereas BioBrace has applications all over the body, anywhere soft tissue disease exists. And what's unique about BioBrace is we have the collagen, just like Regeneten, but our collagen is embedded in a three-dimensional PLLA matrix, and what that means is, at the time of repair, you have strength at time zero, and if you have talked to a surgeon who does full thickness rotator cuff tears, there's, like, this quiet little secret, like, we hope they don't re-tear that rotator cuff before they leave the hospital, because those tears are so large, it takes very little to re-tear and separate from the mechanical fixation.
By providing that PLA overlay, you give strength at time zero, and the collagen allows that tissue to regrow, and then at the two-year mark, everything is fully resorbed into the body, and on imaging, you're seeing the tissue is actually thicker than the native tissue. So, there's been some great early work. We're a couple of years into this. We're very focused organizationally on the shoulder and the knee because that's where the large procedures are. But when you talk to surgeons, they are trying it now. We're up to 47 different indications in the body that they are finding applications for, things like UCL, the Tommy John procedure, glute medius repair, the hand and wrist applications, foot and ankle applications. That's one of the exciting things.
Surgeons are taking us into new places and being at this meeting and having surgeons talk to us about new applications is really exciting. It takes time to get there. You've got to have procedure and technique approaches that are validated. But we're super excited about the platform. It is a very, very innovative platform for ConMed Corporation.
And how should we think about the financial opportunity with this? I think when you acquired it, it was tracking around $1 million in revenues. I think that's up to the double digits now. What, what's kind of the total addressable market, and how should we think about the growth prospects going forward?
Yeah, when we acquired it, they had literally just started their commercial launch, and we said by the end of 2022, we thought we'd be in the million range. In 2023, we thought we'd be in mid-single digits, and we updated that in Q1 of 2023 and said, "You know, we're going to be high single digits." And we said that in 2024, we'd be double-digit millions, and we're clearly on track for that. So, we're very excited, and I think Todd has commented that the gross margin profile here is north of 80%. So, it's a high-growth product, it's a great gross margin product, and it's one of the most innovative products I think you'll find in the world of sports medicine today. Can I give you an absolute range on the total addressable market?
I don't think I can, Kristen, because there's so many theoretical applications. We're still early in building that out. We believe, and I haven't seen a recent disclosure on this, the Regeneten product is doing in the nine-digit range, and that's very focused on the shoulder. So, we certainly know it's a large market, and with the variety of applications that we believe, we think it's, over time, it's going to be a very large total addressable market.
Okay, great. And is there any data that we should be looking for coming out for BioBrace?
We have a randomized controlled trial that's underway. That's a large cohort patient population. That'll be a 2026 timeframe. But in the meantime, we have a lot of individual surgeons publishing their data, their individual case data. I think you've been at Academy the last two years. We have one day that is BioBrace day. We've had surgeons now who are presenting their two-year data, and all the data is phenomenal. Their data, their individual respective data has been phenomenal, the reduction in re-tear rates, the mobility. I think I've said this many times, it's the one product in our portfolio that surgeons will send me videos of their patients and say, "Hey, John was just in for a rotator cuff three weeks ago. Can you show the range of motion that you have?
And he hasn't even started physical therapy." So, there's just a lot of excitement in the marketplace about the product, but the randomized control clinical trial data is essential for the long-term prospects, and we're well underway with that.
Okay, great. And then maybe we could talk a little bit about your foot and ankle business. You mentioned there were some supply issues there, and those have now passed. How is the business trending, and what are the growth expectations for it?
Yeah, we're excited about Foot and Ankle. We think we bought an absolutely appropriate asset for ConMed. We were not in the space, so when we looked at it, we needed to have an organization that had people that were connected to Foot and Ankle. We needed to have an organization that had a full portfolio.
midfoot, hindfoot, forefoot, and in this case, a total ankle. So, they had a comprehensive portfolio. We didn't want to buy a product for foot and ankle, and we needed, probably most importantly, a dedicated sales channel, and they had that, plus the R&D engine to continue to support it, and our philosophy is kind of first, do no harm. Let these organizations continue to do under ConMed what they had already been doing. Obviously, over time, you go through the integration and the transitions, and we've gone through that. We had the supply disruptions that we noted that started in Q3 in last year, that we think we've got behind us now and feel like that team is getting back fully on offense.
And then finally, we've been able to take some of the ConMed products that were more geared towards foot and ankle surgeon and move that into that channel, including BioBrace and CartiMax and TruShot with Y-Knot, and those are all great foot and ankle products. So, we now have a dedicated channel focused on the foot and ankle surgeon or the podiatrist, whereas before it would be a sports medicine rep kind of drifting out of their principal call point into those spaces, so given a little bit of time, but not full-time. So, we feel very good about the asset. I think we said at the time of close that the market was growing 7%-8%. We should be a double-digit grower in this market, probably 2x the market.
And we still think that's a very reliable place for ConMed to be, given our size and given the sales channel and the portfolio that we have. Todd, I don't know if you'd add anything else to that. No, I think you covered it well.
Great. This year you started out guiding to sales growth of around 8%-10%, and now you're expecting 5%-6% because of the supply issues. Do you see any reason why you can't get back to that high single-digit or low double-digit revenue growth algorithm in 2025? And how should investors think about the long-term growth algorithm for the company?
Yeah, we are definitely our portfolio is built to be much better than five to six. So, you know, we define winning here as growing faster than your markets. We think our markets are probably in that kind of four to seven range, and so we would, you know, to be winning, which we expect to do in 2025, would be higher than that. We'll give 2025 guidance in January, but this portfolio is built to, you know, be high single digits with the potential, if everything is going great, you know, to maybe touch double digits. But this portfolio is built to grow much faster than the markets.
And then how do you think about M&A? Is that something you think will be needed to keep that level of growth, or how should we just think about the likelihood for M&A and the need for it going forward?
Yeah, we don't include future M&A ever when we talk about the growth profile, so obviously, that's everything I just said was organic. We continue to be active and be aware of what is out there. We're ahead on our leverage plan. We were at 3.8 times at the end of Q2, which was a little better than we expected to be by then. So, we're on a good trend. We are focused on getting leverage down. We think the market is clearly highly sensitive to that right now. I think if people would look at our cash engine, we have a very good cash engine. I think they're more concerned about leverage than they need to be, frankly. But we're excited about getting our leverage down.
It would take something pretty compelling for us to have leverage go up, but you never say never, and if we found another asset, like the ones we've bought recently, we'd have a hard time letting it go to the competition, I think. So, we're happy with the ones we've done, where our leverage is where it is for good reason. We've strengthened the portfolio from revenue growth, margin growth, and we'll continue to focus on doing that. But we're excited about getting leverage down in the near term.
Okay, and maybe just turning to the P&L, I'd like to focus a little bit on gross margins. This year, you're expecting an increase of around 100 basis points, which is down from your original 100, 150 expectations. Can you maybe just talk about the drivers of gross margins and how we should think about it going forward? I know in the past you've talked about a 250-basis point increase in 2025 to reach 60% level. Is that still something we should expect?
Yeah, great question. Yeah, this year, the reason we're on the low end of our original guide was just because of the slowdown in foot and ankle and sports medicine, as we've talked about on this call. Those are both margin-accretive product lines for us, and so as they've had their issues in 2024, that's brought our gross margin guidance to the lower end of the original range. We have a really good mix tailwind, and it's not weakening, it's getting stronger, right? So that it's at about a hundred basis points just from mix tailwind, right? Now, the reason that...
So, in the fall of 2022, we gave a three-year kind of look at the gross margin path, and we did. So we had just come out of the pandemic, and we had digested four hundred basis points of inflation in gross margin, right? So, the logic I laid out for folks was that we would have this mix tailwind, and then I thought, you know, we won't get all of that inflation, back. But I thought it was reasonable that we could get a hundred basis points recovery from the four hundred basis points we digested, and I thought that would come in mostly on the material cost side.
So, when I gave that guidance in November of 2022, I thought it was very conservative to say, "We think we got a hundred basis points of inflation recovery in the twenty twenty-five calendar year." I thought that sounded very conservative. I thought we should get more than a hundred basis points, and I thought it could definitely come before twenty twenty-five, and so I thought that was crazy conservative at the time. Now, as you know, we're a few months away from twenty twenty-five, we haven't seen a lot of inflation recovery, actually. Now, part of that is we've been focused on supply chain and getting product in. I think we haven't probably been pushing back on costs like we could have, because we've been desperate to just get the supply from our vendors.
Generally, I don't think the industry has seen a lot of inflation recovery. Now, as we're a few months from 2025, it doesn't seem conservative anymore to think that you'd get 100 basis points of inflation recovery in 2025. I think that disclosures probably not aged well. We'll talk about margins, the 2025 margins in January, and I fully expect that we will continue on the path we're on of increased mix tailwind and improving margins going forward.
Is it fair to say that 60% is still a good target, but it's just not achievable in 2025?
Right. Yeah, we're on that trend line, but, yeah, we haven't attached a new date to it yet.
Is there kind of an operating margin level that you think is achievable if you're kind of at that 60% gross margin level?
Yeah, I think 60% gross margins and 20% operating margins is kind of what we're focused on getting to. You'd probably hit 60 a little before you hit 20, probably, but not, you know... Probably in concert, those travel together.
Okay. And then, are there any kind of puts and takes you think we should be mindful of when we're thinking about 2025 going forward? We already kind of talked a little bit about the supply issues being probably behind you. Anything we should be thinking of?
Yeah, nothing, nothing significant that pops out to me now, Kristen.
Okay, perfect. And then we have some time left. Any final remarks you guys would like to make?
I mean, I would just... I'll go first. Let Curt clean up. I think, we just encourage people to do math on the AirSeal question. It's been a huge overhang on our stock. You know, from my perspective, the entire value of Air- the AirSeal product line has been taken out of our stock twice. AirSeal's gonna continue to grow. This has been way overdone, but even the biggest bears on that story should do some math and realize that you can't lose it more than once. We don't believe we're gonna lose it at all, but the math has gotten fairly nonsensical, and so we just encourage the Street to do math on that issue.
And-
I don't think I can add anything to that, Kristen. Todd and I are completely aligned on that one, so...
So, you think people are really missing the boat on AirSeal, and that it's more sustainable than people give credit for?
Well, yes, we believe that. Even if it's worse than we think, it cannot mathematically be as bad as the Street has done it. I think the Street has been more emotional on this subject than mathematical, and we would just encourage people to do math.
Okay, perfect. With that, I think we're out of time. So, thank you so much for your participation today. I really appreciate it. It's a very informative presentation.
Thank you, Kristen.
Thank you, Kristen. Thank you, everybody.