UTICA — It all began with a single product. The year was 1973. Eugene R. Corasanti, a 1952 accounting graduate of Niagara University, had assembled a group of investors in 1970 to enter the medical-equipment supply business. To expand the existing distribution business, he studied the potential of manufacturing medical products. In 1972, Corasanti re-named […]
UTICA — It all began with a single product.
The year was 1973. Eugene R. Corasanti, a 1952 accounting graduate of Niagara University, had assembled a group of investors in 1970 to enter the medical-equipment supply business. To expand the existing distribution business, he studied the potential of manufacturing medical products. In 1972, Corasanti re-named the holding company he had originally created, Concor Enterprises, Inc., to Consolidated Medical Equipment, Inc. A year later, the corporation produced its first product — a disposable EKG electrode.
In 1973, the Consolidated Medical manufacturing arm posted less than $100,000 in revenue. But, 40 years later, the company, which was renamed CONMED (NYSE: CNMD) in 1985, recorded annual revenue of $767.14 million (according to its year-end 2012 financial statement).
“The manufacturing company that started with two employees in 800 square feet in downtown Utica now [boasts] 3,600 employees, of whom 800 are in Central New York,” says Robert D. Shallish, Jr., the company’s CFO and vice president of finance.
“The 800 square feet has grown to 1,513,376 square feet spread over North America, Europe, Asia, and Australia. CONMED currently has 30 locations worldwide for manufacturing, sales, and distribution. The company owns the majority of the property, and leases the balance.”
CONMED’s sales growth has never resembled an electrocardiogram print out with its peaks and valleys; rather, the sales curve has been straight up. Following its success in producing EKG electrodes in the 1970s, the company began in the 1980s to manufacture products used in electrosurgery, a method of channeling high-frequency current to cut tissues and stem bleeding.
“At the time of its initial public offering (IPO) in 1987, revenues equaled $12 million,” notes Shallish. “By 1990, revenues had jumped to more than $30 million, in 1996 they hit $125.6 million, and by the end of the decade [nudged] $400 million. Three years later, the company approached the half-billion dollar level. Nine years later, CONMED had posted another $270 million in annual revenues, a 54.3-percent increase in net sales.”
Exporting
Exporting has played a major role in CONMED’s growth.
“Much of our success in growing the company comes from an early commitment to exporting,” says Alan Fink, the company’s vice president for global physician products. Fink, who joined the company in October 1976, found himself two years later in charge of sales to Europe and the Middle East. “Gene Corasanti attended a trade show in 1977 in an effort to identify a distributor for our products. He met with G.D. Searle & Co. and contracted with them to distribute for us both in the U.S. and overseas. I learned on-the-job in the days when we handled everything by letter and telex. CONMED sent me to Paris in 1981, where I remained for 18 months, building our European business.
“Until 1997, we exported everything from our facilities in the states. When CONMED acquired Linvatec, we structured sales offices in the U.K., Canada, France, Germany, Spain, Australia, and Korea where we were now selling the new orthopedic lines. After 1997, the company continued to add direct-sales locations by opening overseas offices and by buying distributors.”
That has taken the company past the century mark in number of nations its products reach, with international customers producing more than half its revenue.
“Today, CONMED sells to more than 100 countries from 16 sales offices both through its own distribution channels and through independent distributors. Gene Corasanti was committed to international sales and set the culture for the company. [Currently], we have in excess of 300 people dedicated to exporting. Fifty percent of our revenue comes from customers outside the U.S. — that’s about $385 million, making CONMED an export leader in the Central New York region,” avers Fink.
Acquisitions
The plan for sustained growth depends in part on the company’s approach to strategic acquisitions, which today number 25. The ink was barely dry on the IPO (2.3 million shares offered at $2.07, adjusted for stock splits) when CONMED bought Medac for $126,000. “The first significant acquisition occurred two years later with the purchase for $5 million of Aspen Laboratories, Inc., a division of Bristol-Myers, which produced electrical-surgical generators,” says Shallish. Bristol-Myers merged with Squibb in 1989, creating Bristol-Myers Squibb Co.
Other significant acquisitions included Andover Medical from Medtronic in 1993, Birtcher Medical in 1995, and a competitor, NDM Corporation, in 1996.
“The most important [M&A] deal was completed in 1997 when we bet the farm on Linvatec Corporation, another unit of Bristol-Myers [Squibb] (the purchase price was $370 million in cash). Linvatec manufactured and distributed arthroscopy products and powered surgical instruments … We more than doubled our business overnight, because the Linvatec deal brought $190 million in annual sales. It also gave us an entry into the orthopedic field,” recalls Shallish.
CONMED bought a powered-instrument business from 3M in 2001; Bionix Medical in 2003, a company producing sports-arthroscopy products; and a product line for gastroenterologists from CR Bard in 2004. “We didn’t make any more acquisitions until last year,” notes Shallish, “when CONMED purchased Viking Medical Systems, a small public company that specialized in 3D surgical visualization, for $22.1 million.”
The company has also found other ways to grow besides acquisitions.
While CONMED’s growth is boosted by its mergers-and-acquisition strategy, “we also pursue strategic partnerships,” notes Shallish. “In January of last year, CONMED announced a partnership with the Musculoskeletal Transplant Foundation (MTF), the world’s largest tissue bank. This positions us to promote our surgical devices along with MTF [allograft] tissues for sports medicine and other arthroscopic procedures.”
CONMED is also the worldwide distributor of MTF’s “Platelet Rich Plasma” kits, which use the patient’s own blood components to aid in the healing process, according to the company’s 2012 annual report. “CONMED’s $147 million price tag to collaborate with MTF has already had a positive effect on earnings,” observes Shallish, “and has increased our brand visibility among surgeons.”
CONMED’s products are used today by surgeons and physicians in a variety of specialties including orthopedics, general surgery, gynecology, neurosurgery, and gastroenterology. In 2012, the different product lines produced the following percentages of consolidated revenues: orthopedics, 54 percent; general surgery, 37 percent; and surgical visualization, 9 percent. “Eighty percent of our sales are derived from disposable products,” Shallish points out. “It’s the razor-blade model where we have the opportunity to promote the hardware at modest or no cost to encourage consumption of the consumables.”
R&D
CONMED has also generated organic growth. Eugene Corasanti’s son, Joseph J. Corasanti, the current president and CEO of the company, says in the 2012 corporate annual report: “Our strategy … remains the same, continued focus on organic growth through the introduction of innovative products, coupled with complementary acquisitions.” In 2012, CONMED invested $28.2 million into research and development (R&D) to enhance its organic growth. “We typically budget 3.5 [percent] to 4 percent of our revenues in R&D,” says Shallish. “CONMED employs 140 people in research with a high percentage [holding] advanced degrees. Most of our research is conducted in Utica, Florida, Denver, and Westborough [Massachusetts], Shallish notes.” The company holds more than 700 patents.
The executive team steering the company’s growth includes both Corasantis, Shallish, and Fink. It also includes William W. Abraham, who joined CONMED in 1977 and currently holds the title of executive vice president, business development; Joseph G. Darling, executive vice president, commercial operations; Heather L. Cohen, executive vice president, human resources; Gregory R. Jones, executive vice president, quality assurance/regulatory affairs; Daniel S. Jonas, executive vice president, legal affairs and general counsel; Luke A. Pomilio, executive vice president, controller, and corporate general manager; and Mark Snyder, executive vice president, manufacturing operations and supply chain.
Challenges
“The company’s growth has not come without challenges,” says Shallish. “Physicians are demanding less invasive procedures, and the health-care community keeps applying pressure to contain costs. Add to this a growing burden of regulatory compliance in most countries, currency-exchange volatility, a sluggish economy, and assorted taxes, including the new 2.3 percent gross-receipts tax imposed on medical-device manufacturers. The impact alone of this new tax was a $7 million, pre-tax reduction in CONMED’s shareholder income and a $4 [million] to $5 million post-tax hit. This tax alone reduced our earnings-per-share by 18 cents and caused us to adjust our 2013 forecast.”
Fink highlighted the growing regulatory problems by citing the cost and time just involved in import registration. “Most countries require us to register. In China, it now takes one to three years just to get a license to do business. In Brazil, it’s more than a year, Mexico takes a year, and Argentina requires seven months to a year. All of Asia and South America (except Chile) require registration, and there is a high cost to register … [Further], the company’s license is for a short period, requiring us to constantly re-register and pay the licensing fee.”
“CONMED has had an ongoing commitment to education and training,” says Shallish. “To share the latest innovations in surgery, the company has long focused on surgeon training. We currently have three educational facilities located in Florida, New York City, and Gross Gerau (20 miles from Frankfort, Germany) and are discussing opening a fourth center to cover Asia. These advanced centers feature multiple, hands-on learning environments, state-of-the-art auditoriums, and a showcase for CONMED products. The facilities include surgeon-specific labs with a hands-on approach to teaching new skills and techniques.” In addition to the centers, CONMED also participates in more than 400 medical-association courses and workshops annually, reaching out to distributors and the company’s sales people, as well as to physicians.
To put CONMED’s growth in perspective, the amount of cash used to pay dividends declared in 2012 was greater than the company’s revenues were when it first went public 26 years ago. Despite continuing annual restructuring costs of $4 million to $13 million for the past three years to improve manufacturing efficiencies, CONMED has posted growth in net sales of $713.7 million in 2010 to $767.1 million in 2012 and at the same time an increase in net income from $30.346 million to $40.481 million.
The basic earnings-per-share during the same period have grown from $1.06 to $1.43. When adjusted for the restructurings and unusual items, the earnings-per-share in 2012 were $1.80. Over the last decade, the company’s retained earnings have jumped 94 percent, rising from $194.5 million in 2003 to $377.9 million in 2012. CONMED is also in the midst of a stock buy-back. The board of directors has authorized a stock repurchase — through March 31, CONMED has bought back $30 million. Shallish expects the company to spend another $25 million by year-end. The gamble on arthroscopy in 1997 is certainly paying off. While consolidated sales rose 5.8 percent in 2012, arthroscopic products surged 14 percent. CONMED’s share price closed at $32.06 on July 9, up nearly 15 percent year to date. The stock gained almost 9 percent in 2012.
“Our product lines are number two or three in every market,” says Shallish. “The company is known as an innovator, and we want to [enhance] our reputation going forward. We need to continue focusing on being more efficient through lean-manufacturing techniques, leveraging our technology, and pricing our products appropriately. Our financial performance is matched by our presence as a global company.”
Contact Poltenson at npoltenson@cnybj.com