EUR 850.00 For Business Accounts Only

Morningstar | Conmed Bets on Surgical Smoke Evacuation With Buffalo Filter Acquisition

Conmed has undergone significant change since 2014, after shaking up most of the board and C-suite executives in response to an activist shareholder’s campaign against the firm. Curt Hartman, former CFO and interim-CEO of Stryker, was installed as CEO to lead a turnaround at the company, replacing the founding Corosanti family leadership. After business segment restructuring efforts, a re-alignment of salesforce incentives, and a handful of acquisitions, Hartman's strategy appears to be on the right path. In his relatively short time in the role, his achievements have included stemming organic revenue declines across a majority of the portfolio and closing the acquisition of SurgiQuest, which has added a novel and high growth laparoscopic access product to the surgical franchise. While the balance sheet appears stretched post-acquisition we expect further portfolio optimization efforts over time and see opportunity to prune legacy, noncore assets. Conmed is generally the second-, third-, or fourth-tier player within its product lines, and the firm remains sub-scale when compared with its primary competitors, in our opinion. In a healthcare environment increasingly focused on a suppliers’ ability to reduce cost, we believe scale represents an ever more important source of strength for device businesses. As such, we think acquisition activity will remain core to Conmed’s strategy both to enhance its internal development efforts and expand its touchpoints within the hospital. While we think this is the right direction for the business, our expectations for success remain muted given the disappointing return on acquisition and development activity the firm has earned historically.Returns on capital markedly improved in 2018, as the firm begins to show some operating leverage and more durable sales growth. Over time, the firm is likely to earn returns near its cost of capital, but we are less confident in the company’s ability to exceed WACC over a market cycle. This forms the basis for our no-moat rating.