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Neutral View on Conmed

Zacks Equity Research

We retain our Neutral recommendation on medical technology company Conmed Corporation (CNMD) following its mixed fourth-quarter 2011 results. Its adjusted earnings of 46 cents per share outpaced the Zacks Consensus Estimate of 39 cents. However, the company swung to a loss in the quarter, hurt by a hefty goodwill impairment charge.

Revenues rose just 0.8% year over year to roughly $185.6 million, missing the Zacks Consensus Estimate. Sales grew narrowly as gain in the disposable business was offset by lower capital equipment revenues.

Conmed saw growth across its Arthroscopy, Endosurgery and Endoscopic Technologies franchises while Electrosurgery and Powered Surgical Instruments businesses recorded lower sales in the quarter. The company raised its guidance for fiscal 2012 factoring in the contributions from its recent collaboration with Musculoskeletal Research Foundation (“MTF”) in sports medicine.

Conmed is a medical products maker specializing in surgical instruments and devices. The company is experiencing healthy demand for its single-use disposable products, which remain the mainstay of its business.

A large percentage of the company’s products are designed for minimally invasive surgery, a trend that is extremely popular these days. The use of minimally invasive surgery lowers costs by reducing patient trauma, recovery time and the length of hospitalization.

We are also encouraged by the company’s distribution deal with MTF and new product launches. Under the pact, Conmed’s Linvatec unit will be the exclusive global marketing representative for MTF’s sports medicine allograft tissues and will assume responsibility for the global distribution of the entity’s platelet-rich plasma product. In return, MTF will provide Conmed a portion of the sales associated with these products.

Moreover, Conmed recently launched a host of new products across its sports medicine and powered instrument product lines. These products (including the Hip Preservation System and Hall Lithium Power Battery System) are expected to drive top-line growth in the years ahead.

However, Conmed operates in a highly-competitive orthopedic surgery market against much larger, more technically-competent companies, such as Johnson & Johnson (JNJ), Smith & Nephew (SNN) and Stryker Corporation (SYK).

The orthopedic industry is highly susceptible to the economic softness and Conmed is no exception. Moreover, it is exposed to pricing pressure, currency exchange headwinds and a still weak hospital capital purchasing environment. Conmed currently retains a short-term Zacks #2 Rank (Buy).

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