Executive Summary / Key Takeaways

• CONMED Corporation is a medical technology company with a portfolio focused on orthopedic and general surgery, driven by high-growth platforms like AirSeal, Buffalo Filter, BioBrace, and Foot & Ankle.
• Despite ongoing supply chain challenges, particularly impacting the Orthopedics segment, the company delivered solid Q1 2025 results with 3.8% constant currency revenue growth and a significant increase in adjusted EPS to $0.95.
• Management is intensely focused on resolving operational inefficiencies, engaging external consultants with the goal of achieving at least $20 million in annual savings starting in 2026, which is critical for unlocking the portfolio's full potential.
• Full-year 2025 guidance projects 4% to 6% constant currency revenue growth and adjusted EPS between $4.45 and $4.60 (excluding potential tariff impacts), reflecting confidence in underlying demand and profitability leverage despite near-term operational and FX pressures.
• Key competitive advantages lie in specialized, cost-efficient technologies and clinical differentiation, though the company faces larger, more diversified competitors with greater scale and R&D resources, necessitating successful execution on operational improvements and innovation to capture market share.

CONMED's Strategic Pursuit of Surgical Excellence

CONMED Corporation, a medical technology company with a history spanning over 55 years, has established itself as a provider of devices and equipment essential for a range of surgical procedures, from orthopedics to general surgery. The company's business model is strategically built around providing both capital equipment and, crucially, a high proportion of single-use disposable products, which constitute approximately 86% of its revenues. This creates a valuable recurring revenue stream tied to the utilization of its installed base of equipment. Operating in dynamic markets like minimally invasive surgery, laparoscopy, and arthroscopy, CONMED benefits from underlying healthy demand, as hospital systems continue to prioritize these areas, which are less reliant on large capital purchases compared to other medical technology segments.

Under the recent leadership of Curt Hartman, who guided the company for a decade until the end of 2024, CONMED underwent a significant transformation, marked by substantial growth in sales, EPS, and operating cash flow, alongside strategic acquisitions that have shaped its current portfolio. This period emphasized building talent and fostering innovation, setting the stage for the company's next chapter under new CEO Pat Beyer.

CONMED's strategic focus is increasingly centered on four key growth drivers: the AirSeal clinical insufflation platform, Buffalo Filter smoke evacuation products, the BioBrace soft tissue repair device, and the Foot & Ankle portfolio. These are viewed as unique platforms still in the early stages of their growth trajectories, positioned to drive above-market performance.

Technological Differentiation Powers Key Platforms

A critical element of CONMED's strategy and competitive positioning is its differentiated technology embedded within its core platforms.

The AirSeal system provides advanced clinical insufflation during laparoscopic and robotic surgeries. Unlike standard insufflation, AirSeal maintains a stable pneumoperitoneum even with frequent instrument exchanges and smoke evacuation, offering tangible benefits, particularly in longer and more complex procedures. Management highlights that AirSeal is clinically proven to reduce both length of stay and post-operative pain for patients, directly addressing key hospital priorities around patient outcomes and efficiency. While understanding the precise "attachment rate" to newer robotic systems like the da Vinci DV5 is complex due to varied hospital usage, the company noted that a specific SKU used only in conjunction with robotic procedures saw healthy double-digit growth in Q1 2025, indicating continued adoption in this critical area. Surgeons are reportedly returning to AirSeal for complex cases even after initial trials on new robotic platforms, validating its clinical preference.

In orthopedic surgery, BioBrace represents a highly differentiated technology for soft tissue repair. This biointegrative material is designed to provide mechanical support while promoting tissue healing. It is currently used clinically in over 50 procedures, including rotator cuff, ACL, and Achilles repairs. The company is actively building a body of clinical evidence, with 14 peer-reviewed publications already in print and nine clinical studies underway. A large randomized prospective clinical study involving 268 patients is over halfway enrolled, with results expected in 2027. The recent FDA clearance in early April 2025 for a new delivery device specifically for BioBrace rotator cuff repair is expected to make the procedure easier and faster for surgeons, potentially accelerating adoption.

The Buffalo Filter portfolio addresses the growing awareness of surgical smoke hazards in the operating room. As a leader in the smoke evacuation market, CONMED is capitalizing on a market still in its early stages of growth, supported by increasing legislative mandates in various U.S. states and globally aimed at protecting healthcare workers.

These technological differentiators provide CONMED with competitive advantages, enabling it to command market share and potentially support favorable pricing, contributing to its gross margin profile. However, the company operates in a landscape dominated by larger, more diversified players.

Competitive Landscape and Strategic Positioning

CONMED competes against major global medical technology companies such as Stryker (SYK), Johnson & Johnson (JNJ), Medtronic (MDT), and Zimmer Biomet (ZBH). These competitors possess significantly greater scale, broader portfolios, and larger R&D budgets.

Compared to these giants, CONMED often positions itself with specialized, clinically differentiated products that may offer cost efficiencies or unique procedural benefits. For instance, while SYK leads in robotic surgery integration and ZBH in implant longevity, CONMED's technologies like AirSeal offer distinct clinical advantages in insufflation, and its orthopedic tools like the Y-Knot anchors are noted for potentially better soft tissue fixation and faster deployment. The company's direct sales model, particularly in the U.S., allows for close customer relationships, although larger competitors leverage extensive global distribution networks and broader portfolios for cross-selling opportunities.

Financially, CNMD's TTM gross profit margin of 55.46% and operating margin of 13.02% trail those of larger, more efficient peers like SYK (64% gross, 16% operating), JNJ (69% gross, 25% operating), and MDT (66% gross, 18% operating). ZBH, primarily focused on orthopedics, shows a higher gross margin (71%) but a similar operating margin (17%). This highlights that while CONMED's mix tailwind is positive, its smaller scale and operational costs currently result in lower overall profitability margins compared to market leaders.

CONMED's vulnerability lies in its innovation speed and scale. Larger competitors can invest more heavily in cutting-edge technologies like robotics and AI integration, potentially outpacing CNMED in certain areas. Furthermore, reliance on single-source suppliers for some components, as highlighted by recent supply chain issues, exposes the company to disruptions that larger, more diversified manufacturers might mitigate more effectively through redundant supply chains or internal manufacturing capabilities.

The company's strategy to counter these challenges involves focusing on its high-growth, differentiated platforms, investing in targeted R&D (4.0% of sales in Q1 2025), and critically, improving its operational foundation to ensure product availability and efficiency. By strengthening its supply chain and manufacturing, CONMED aims to remove self-inflicted impediments to growth and allow its sales teams to compete more effectively, taking market share from competitors who may face their own challenges or whose offerings lack CONMED's specific clinical benefits.

Operational Challenges and Recent Financial Performance

CONMED's recent financial performance has been significantly influenced by ongoing operational challenges, primarily related to its supply chain. Issues stemming from supplier variability, unexpected closures, machine downtime, and material availability have particularly impacted the Orthopedic segment, limiting its ability to fully meet demand and capitalize on market opportunities since Q3 2023. This led to Orthopedics sales growth lagging the General Surgery segment and the company's overall potential in 2024 (2.5% constant currency growth for Ortho vs. 7.5% for General Surgery for the full year 2024).

To address these persistent issues, CONMED engaged a top-tier consulting firm in late 2024/early 2025 to evaluate and propose improvements to its supply chain and manufacturing operations. This initiative is expected to yield at least $20 million in annual savings, though these benefits are anticipated to materialize primarily in calendar year 2026. While progress is being made, and the number of SKUs on back order is declining, management acknowledges they are "not where we need to be yet" but expect to be in a "better position by the end of the year."

The impact of these operational factors is evident in the Q1 2025 results. Net sales increased 2.9% year-over-year to $321.3 million, representing 3.8% growth in constant currency. This growth was balanced across segments, with Orthopedic Surgery sales increasing 2.5% (3.9% constant currency) to $138.3 million and General Surgery sales increasing 3.2% (3.8% constant currency) to $183.0 million. The Orthopedic growth was driven by Foot & Ankle and BioBrace, while General Surgery benefited from AirSeal, Buffalo Filter, and biliary products.

Gross profit margin saw a modest improvement, increasing 20 basis points to 55.3% in Q1 2025, primarily due to favorable product mix, despite incurring $3.4 million in consulting costs related to the supply chain initiative. Selling and administrative expense increased significantly to $148.8 million (46.3% of sales) in Q1 2025, primarily due to $12.2 million in cash and stock-based compensation for the former CEO's advisory services and a $10.5 million increase in contingent consideration expense (moving from income in Q1 2024 to expense in Q1 2025). Research and development expense decreased slightly to $12.9 million (4.0% of sales), influenced by project timing.

Income from operations decreased substantially to $16.0 million (5.0% of sales) in Q1 2025 compared to $35.0 million (11.2% of sales) in Q1 2024, largely due to the increase in SG&A. Interest expense decreased to $8.3 million, reflecting lower weighted average borrowings and interest rates. Net income was $6.0 million ($0.19 per diluted share) in Q1 2025, down from $19.7 million ($0.63 per diluted share) in Q1 2024. However, excluding special items, adjusted net income increased 19.6% to $29.6 million, resulting in adjusted diluted EPS of $0.95, a 20.1% increase year-over-year, demonstrating underlying profitability leverage despite the GAAP impact of specific non-recurring or volatile items.

Cash flow from operations remained strong, providing $41.5 million in Q1 2025, up from $29.1 million in Q1 2024, driven by favorable changes in working capital accounts. This robust operating cash flow generation is a key strength, supporting the company's liquidity and debt reduction efforts.

Financial Health, Outlook, and Risks

CONMED maintains a solid balance sheet and liquidity position. As of March 31, 2025, the company had $35.5 million in cash and cash equivalents. Total debt stood at $892.2 million, with $100.0 million on the term loan and no borrowings on the revolving credit facility, which had $583.4 million available capacity. The leverage ratio was 3.2 times at the end of Q1 2025, slightly better than expected. Management is committed to further reducing leverage, projecting it to drop below 3 times by the end of 2025. The company was in full compliance with its credit agreement covenants. A share repurchase program has $37.4 million remaining authorization, though no shares were repurchased in Q1 2025. Management believes its liquidity is sufficient to meet anticipated operating needs, debt service, capital expenditures ($20M-$30M projected for 2025), and dividend payments ($0.20 per share quarterly dividend declared in May 2025).

For the full year 2025, CONMED expects constant currency revenue growth between 4% and 6%. Including an updated foreign currency headwind estimate of 50 to 70 basis points, reported revenue guidance is set between $1.350 billion and $1.378 billion. This guidance reflects a cautious stance, acknowledging the need to fully resolve supply chain issues to reach the higher end of the company's perceived mid-to-high single-digit portfolio growth potential (4-9% longer term). Q2 2025 reported revenue is guided between $335 million and $340 million.

Adjusted EPS guidance for 2025 was raised to $4.45 to $4.60, up from the prior range of $4.25 to $4.40, reflecting the Q1 beat and improved FX outlook. Q2 2025 adjusted EPS is expected between $1.10 and $1.15. Gross margins are projected to be relatively flat year-over-year in 2025, with sequential improvements expected throughout the year (mid-56% in Q2, mid-55s in Q3, approaching 57% in Q4), impacted by FX headwinds and operational improvement costs before savings materialize in 2026. Longer term, the company targets adjusted EPS growth at approximately twice the rate of constant currency sales growth, driven by mix tailwinds and operational efficiencies. Adjusted EBITDA is projected between $270 million and $280 million for 2025.

A notable variable is the potential impact of tariffs. While product from the Mexico plant is expected to be exempt, the company estimates approximately $5.5 million of supply chain exposure in 2025 from other regions, primarily China, translating to an estimated $0.14 EPS impact ($0.02 in Q3, $0.12 in Q4), which is excluded from the core guidance range.

Key risks to the outlook include the successful execution of supply chain improvements, the potential impact of tariffs, ongoing macroeconomic pressures (inflation, interest rates), and specific legal/regulatory matters such as the Italian medical device tax, a DOJ review related to royalty payments, and litigation concerning Ethylene Oxide exposure. While management does not currently expect these specific legal matters to have a material adverse effect, they represent potential uncertainties.

Conclusion

CONMED stands as a medical technology company with a compelling narrative centered on its differentiated growth platforms and a focused effort to overcome operational hurdles. The Q1 2025 results demonstrate underlying demand and profitability leverage, even as the company continues to address supply chain inefficiencies that have constrained its Orthopedics business.

The investment thesis hinges on CONMED's ability to fully unlock the potential of its key technologies like AirSeal and BioBrace, which offer tangible clinical benefits and operate in growing markets. Successfully executing the supply chain and manufacturing improvement initiatives is paramount; resolving these issues will not only drive cost savings but, more importantly, enable the sales force to fully capitalize on market opportunities and compete effectively against larger rivals.

While the company faces competitive pressures from well-resourced players and potential impacts from external factors like tariffs, its focused strategy, strong cash flow generation, and commitment to improving operational execution provide a foundation for future growth. Investors should closely monitor the progress of the supply chain turnaround, the performance of the key growth drivers, and the resolution of tariff uncertainties as key indicators of CONMED's trajectory towards achieving its longer-term growth and profitability targets.