Enovis Corporation (ENOV) Earnings Call Transcript & Summary

Jason Wittes, one of the health care analysts here at ROTH. Today, we have Enovis. We've got a group Recon President, Louie Vogt; and Kyle Rose, Head of IR. So with that, gentlemen, thank you for joining us. Maybe Louie, we could just start with a quick introduction and your background and role at Enovis.

Sure. So I was -- I spent the first 17 years of my career at Zimmer, at Zimmer Biomet. I started there in 2001. And I came to Enovis in 2017, have been there for just under 8 years. And in terms of Zimmer, I had various levels of responsibility commercially and as a general manager and came over to run the commercial side of the equation at Enovis and quickly became the General Manager of the U.S. business and then migrated into the Group President of the Recon businesses as we sort of enhanced our strategic position in the Recon spaces in 2022.

Got it. Great. So the Orthopedics business is really -- Enovis is a really interesting company. So it's not a small company. It's $2 billion plus. But at the same time, you compete against very large players. Multi-billion -- Stryker, $150 billion, et cetera. Yet you constantly, I'd say, punched above your weight in terms of growth, basically beating out the market in terms of growth rates. So maybe just from a general standpoint, we'll start here. What are the dynamics behind the growth? I mean how is Enovis positioning itself that it's basically being able to consistently grow well above the market and especially above these larger market players?

Yes. We like that saying, out punch our weight class. We say that a lot as well. So I think you have to understand our story a little bit. We were, 5 years ago, very much a focused differentiator in -- within what we call the Recon space and that was primarily hip, knee and shoulder. And the focus differentiation where we really had a big clinical advantage was in the shoulder and also in the knee. And the -- that position was really brought to life in the shoulder with the reverse shoulder arthroplasty and the -- what we call the AltiVate system. And we were the first inlay reverse shoulder in the market in the United States, which is now known as the, "the American philosophy", if you look at the global shoulder market. And because of that differentiation in that position, we've been able to take a lot of market share in shoulders. We have about 17% share in the U.S. and 28% outside the United States in that market. That's the fastest-growing market that we compete in as well. And we see our position there is very, very strong. Knees, on the other hand, we were also on the front end with a technology that made the knee feel more normal to the patients, right? And we have a couple of studies that have our knee in one and a competitive knee in the other and patients strongly preferred our knee. And so we rode that philosophy a lot and drove it really, really hard. And that was the reason that we got a lot of attention. That was the reason we were able to take quite a bit of share and the growth that you've seen over the years in the knee franchise. Now about 5 years ago, we made the strategic decision to kind of go from a focus differentiator to more of a scaled innovator. And you've seen that in a lot of our M&A plays, which kind of balance the company revenues between what we call Recon and what we call P&R and then, of course, our global mix and where the sales come from. Both now, our mix between P&R and Recon are about 50-50 and our global mix is about 50-50 within the Recon franchise. And that was important because it reflects where the market is. It also gives us the infrastructure, the scale and the muscle to be able to apply those clinical differentiators around the world. And so that was a big impetus behind what you've seen with the...

You're talking about the recent acquisitions including the Lima acquisition.

Including the Lima acquisition, yes. And also, we had 5 big plays in foot & ankle. And we put together a great string of pearls in foot and ankle and have a $100 million plus business there. And 2024, we were the fastest-growing company in the foot and ankle space as well. So that transition from a sort of focused differentiator to a scaled innovator has been a fun ride and it gives us the muscle now and the strength to take what we're really good at, which is the innovation and the clinical differentiation piece to -- around the world.

You brought up Lima, I do get a fair amount questions from investors about what Lima brought to the table. Clearly, scale but also you just mentioned foot and ankle. How about -- what -- is that the right way to think about it -- or in terms of what Lima added to the business, you'd -- love to get your take.

Sure. Yes. Lima added a lot to the business. So I think when people first see it, they say, oh, it's a big -- 85% of the sales were outside the United States, it gives us much more of a footprint there. Of course, 300 -- almost $350 million. So I mean, it added a lot of revenue and muscle there, too. But I think the biggest things that Lima brought to the table, those things are huge, don't get me wrong and we needed to accomplish that to accelerate our strategic position. But Lima brought a lot of technology to the table that I think is -- I think we talk about a lot but has not been really recognized a lot of -- there's a whole host of them but the big one is their custom implant program. They have the -- what -- we -- excuse me, have the largest additive manufacturing mix. So 3D printed products of any company in orthopedics and we think that implant personalization is a big part of the future. And so the convergence of tech and what we know today is implants and where we think it's going to be going with bone loss defects, et cetera, that implant personalization is going to play a really big role and Lima put us in sort of a market-leading position with that. So the foot and ankle is separate from Lima. Lima didn't -- Lima had a very small foot and ankle piece but they did have a little bit. But foot and ankle was sort of let's venture deeper into the extremities category where we think we can win and we're entitled to a strong share position there. We did it through, as I mentioned, a string of pearls and that business now is thriving and is the fastest-growing business within the Recon umbrella at Enovis. So I think that was more of a strategic play to say, hey, look, we love this space. It's big. It's growing really, really fast. There's no reason we shouldn't be in and we shouldn't have our own entitlement there. Combined, when you combine what we call extremities, which is the foot and ankle and the shoulder, that's the strongest part of the portfolio and the highest share and we're healthier there than ever. Lima also had a very big shoulder business, which is another thing we liked about them.

So I wanted to drill down on some of these business. Well, actually, before we get there, you do have a prevention recovery business, which I've always thought it was pretty synergistic with orthopedics. So what is the interplay there? And how important is that business in terms of pull-through, customer relations, things like that to the orthopaedics business?

Yes. When you think about the genesis of Enovis and Louie touched on the Recon business but the deep foundation that this company has within orthopaedics comes from the P&R business. That's about a $5 billion market. We're a little bit more than $1 billion. We're the market leader across a wide range of prevention, recovery and rehabilitation markets. So what it really provides is, one, we've got a brand and a presence in almost every orthopedic clinic and PT clinic around the United States and around the world for that matter. And it really allows us to encapsulate the patient and the physician journey from pre-surgical, offensive line, wearing the knee braces in games all the way through to surgery, where the Recon team steps in and then after surgery from a rehabilitation perspective. So it's a diversified mature market, where we're growing above those end markets and it provides a very stable foundation for both growth and cash generation for the organization.

Got it. And also, I mean, everybody is talking about ACS because so much -- so many procedures are migrating there. You guys -- I don't know if you've given your most recent percentage of the business that's coming from the ACS but it's well above, I think, most other players. So I assume that's partly due to the P&R business?

Yes, it certainly could be. There's a few factors that influence that. One of which is that we're a more -- we designed our portfolio within the last probably 15 years, if not 10 years, on the implant side. So we really designed it for that -- for the markets that needed those smaller sets, smaller footprints and lower cost type of instrumentation to -- that competes well in that space. I mean, space literally is the biggest concern at the ASC. A lot of the -- if you look at the ASCs in the U.S., there's sort of a twofold market. There's the piece of the market that is orthopedics that are trying to get into existing surgery centers to do their procedures and take advantage of the trend and the reimbursement there. Often those are not built for orthopedics. They were built for other specialties. And our specialty is unique in the sense that it requires quite a bit of instruments to make the procedure happen. And that footprint is not easy to clean and sterilize in those environments. And then there's the second piece of the ASC, which is the new infrastructure build-out that are much more tailored to what we typically need in orthopedics, right? And so we've been market leading in terms of the first category of being able to take our products and put it into existing footprints because we've built this portfolio for this type of market. And so it was built on high efficiency. It was built on small footprint. It was built on mobility. And we've taken advantage of that. And that's why we're there. That's it primarily.

Okay. No, kudos to you guys for seeing where the puck was going well before a lot of other people because it feels like everybody else is playing catch up here. Let's drill down a little bit more. The knees, you've had impressive growth for the knee consistently. It's a very well designed knee. Maybe just give a quick kind of description of the design and I guess what differentiates it. And I guess, why hasn't anyone successfully replicated it yet because...

Yes. Good question. Good question. So the philosophy that we were going for was a normal patient feel and function or sort of patient satisfaction. About 85% of knees, the patients are highly satisfied. If you look at hips, that number is like 98%. In fact, there's a clinical outcome called the Forgotten Hip Score and it's in the high 90s of people who, after 1 year, don't even know that they have it anymore. It's a ball and socket joint, the biomechanics are much easier to figure out and it's easy to do that. In the knee, there's still room for improvement even to this day. And what we were aiming to do was really attack that. And the way we did it was with something we call the dual pivot technology. And the dual pivot technology is a way that the knee itself or the way that the femur interacts with the tibia or the articular surface, the articulating geometries, really mimics the natural motion of a knee. And so it's a conforming bearing that drives the kinematics or the way that the knee wants to operate. And so that was sort of a new and interesting thing but nobody could crack the code on. I think we really did a good job there of cracking the code on that, in terms of why haven't others gotten -- others have gotten into it rapidly in the last 5 years. In fact, it's the fastest-growing articulating conformity in the space around the world and especially here in the U.S. So people are coming at it aggressively. We still feel that ours is quite a bit different than what they're able to do. I mean our -- we have designed the entire system around this philosophy, whereas others design their system around a different philosophy and they're trying to make this work, if that makes sense. So it really wasn't engineered from the bottom up to do what we've been able to do. So we still think that there's advantage there. But I think the key, if you look in the long run, is over time, IP expires and people can copy and mimic things. But we have a formula now that on the knee side has been clinically used for over 10 years and we'll put our results against anybody in the world with it. And it provides a lot of confidence to surgeons when they can see that data and be interested in the system. And it certainly opens the door for us to go play. That's half the battle.

Got it. That's helpful. You actually touched on this. Hips are -- much higher satisfaction rate, so it seems much harder to differentiate yourself in hips. Understandably, your hip growth hasn't been as strong as knee growth. But it sounds -- what are you looking in terms of future products to kind of change that dynamic?

Yes. Yes. Good question. So the hip is -- it does have a higher patient satisfaction but there's still a lot of unmet needs, right? So there's still fractures, there's still dislocations, there's still ways that we can do things better. And so we've been -- whereas the implants have been really, really good, we've been focused more as an industry on a technique itself, being more minimally invasive and hopefully, by doing so, reducing some of the incidents of some of those complications. Our hip franchise, we built this business really on the back of 2 stems. If you compare that to our competitors, I mean it's -- they're in the 20s, 30s, 40s, quantity of hip stem. So we've been able to build a tremendous business with very little, I guess, implant philosophies and then we haven't had to really explore out of that. As these techniques have advanced, it's created some new stem philosophies that we're a little later to the game on. And that's really been the only issue. And in fact, this year, just last week at Academy, just down the road in San Diego, we showed and revealed our new collar hip stem, which is tailored for that approach. Our new impactor gun, which is a powered mechanism that is designed to save the surgeons shoulder with impacting these things down. It's actually quite strenuous to put these implants in into the hip. And so that, the combination of those 2 things is really what's driven the hit market in the U.S. in the last few years. Now if you look at O-U.S., where the trend has been different, we've been relatively dominant in hips. And in fact, we have the least risk of revision of any hip stem in the world with the stem, the optimys stem. And we're excited to bring that optimys stem to the U.S. here either later this year or early next year. So we have a gem in the portfolio that we picked up through one of the acquisitions through Mathys. It's in the process of being brought into the United States at this point.

Okay. We look forward to that. So this might peel into -- I'll probably ask the same question when we get to extremities but that's robotics. Knees, it clearly seems to be a very strong trend line for adoption. What is your guys' position on robotics, especially within hips and knees? First in terms of how you compete and obviously at some point whether you need to get into the game?

Yes. Yes. So I want to broaden your vantage point on this. So we always got to -- we jump to robotics. Robotics are an execution tool that help take a plan and help the surgeon, they facilitate the execution of the plan. The tech and the enabling technology really starts at the beginning, where we can understand the patient better. And tech in that sense is going to become bigger and bigger and frankly, it's going to become commonplace with everything we do in the arthroplasty and other joints for that matter. It's just going to be part of health care and how we do health care moving forward. So we've really been focused on the fundamentals required to deliver on any outcome that we want. So we've been really focused on getting the images from the patients, figuring out how to turn them into virtual surgical plans and use that information to drive what you're trying to accomplish intraoperatively. And then the navigation and guidance that tells the surgeon where they are in space at any point in the procedure, which is also the technology that drives the execution tools, in other words, the robotics. So the key to running any robot program is having the navigation and the software that is essentially the computer that tells a mechanical arm where to go. We've been really focused on those things right now. The current robotics environment in the knee is pretty big. And the hip, if you -- I'm sure you know, is a fraction of what the knee is, right? And so there's a lot of reasons for that. But -- it's a different joint. It's a ball and a socket, you don't have great exposure. It's difficult for a robot to get into that space. So we've had the approach that each anatomy has a unique execution tool that would be optimized for that framework. It'd be great to say that 1 robot can do it all. Unfortunately, what the market has found is that 1 robot doesn't really do a great job and at least in the hip and the knee. And then once you get into the shoulder, the shoulder looks a lot more like a hip. Okay. We've been primarily focused on what are we going to do in shoulder first and the knee second. But we're on the precipice of being able to go in any direction we want. We have a couple of plays that we've been working on. We're not talking about them publicly. That look a little different than what exists in the market today but can accomplish...

These are navigational approaches or robotic approaches or both?

These are robotic approaches. Yes. So the foundation for all the navigation that drives it is where we are right now. In fact, last week, we launched both our next-generation augmented reality navigation, our wearable navigation technology and our optical tower. Optical tower being the traditional, which is -- what is -- all robots are driven from that right now. So we're launching those things to be used independent of a robot this year. And then I think in the future, you'll be able to see those technologies extended into execution tools.

Okay. I was going to ask about shoulders as well because we now have an influx of shoulders but it sounds like you're sort of answered that question a little bit.

Yes, shoulder, there's no reason that tech and enabling technology won't be huge in shoulders. The technology and the data AI is going to -- computational statistics to drive prediction is going to be a huge trend in orthopedics, just like it is in all medicine. So the more data we get, the smarter we're going to get, the better we're going to be able to inform decisions about if you make this decision, you do this, this is what it's going to look like. And so we -- that's a huge part of what we're building right now. In fact, we have a sort of a 3-pronged offense in the shoulder, some of which is public, some of which is not. But I think the key message here is that the foundational elements to go where we want to go are in place. And we are going to be launching in Q2 our first rendition of the augmented reality into the shoulder, which is a very cost effective, in fact the most cost-effective and deployable solution in terms of navigation. And so in a joint, that's hard to see and it's hard to get access and you -- the scapula moves quite a bit as your arm moves unlike the hip and unlike the knee, something like augmented reality is very nice because it moves with you in real time. It's not all that complicated. It's very cost effective. And as the market goes to the ASC, I think that cost effectiveness and the efficiency, the amount of time it takes is going to be very attractive.

There's a lot of innovation in augmented reality right now, including what you guys are doing? The physician community, the surgeon community, is embracing this? Or is it are we still really early in that adoption curve?

I think in the hip and knee, we're relatively early. The younger people coming out, they love it. the younger generation who is used to video games, they're used to this sort of imagery being in their world, it's very intuitive for them. I think the older generations -- I mean if you look at the robotics market in the U.S., which we talk about robots a lot, it's about 20% of knees. So 80% of the market still doesn't use any sort of robotic piece and that's because it's a generational thing quite a bit. And that -- over time, as you see people come out and coming into their practice, they're much more inclined to want and need technology in the front end versus someone who's been doing this for a long, long time and sees it as advantageous for complex procedures but not something they need the chip shot procedures. I think augmented reality is sort of -- it's very new. It's on the front end of that and we have a leadership position there. We have a really differentiated solution. I don't need to get into the details. But because of that differentiation, I think as that space expands, we're going to be in the driver's seat to take advantage of it.

Okay. We're just about out of time. I think I just want to ask one last macro question. Just volume and pricing, what's the trend there? Pricing has been surprisingly healthy for the industry lately.

Yes, it has. I would say, volume has been very healthy as well. I think internationally, that's on the back of a lot of governments trying to work down their patient wait list. I mean the international market growth has been, for a while now, has been fantastic. And I think there's been as much political disruption has been in the United States, there's just as much, if not more, internationally with leadership turnover. People want to bring down those lists. It's a key part of their agendas. And so volumes are going through the roof. I think even here in the U.S., volumes are very strong. It's hard to see it intra-quarter until you really go back and do an autopsy but Q4 was healthy volumes and really picked up towards the end of the quarter. I think that momentum is riding into Q1. So I think -- I'd be surprised if anybody says volumes are not healthy at this point. Pricing continues to be one of those things where we will be disciplined with pricing. We always have been. We've always performed about 50 basis points better than the market, wherever the market is on pricing. We expect to continue to be able to do so. It's been flat to positive now for -- post-COVID and...

Is there a dynamic that's changed there because it was usually on 3% or 4% over...

Yes, it's tough to -- yes, well, I would say maybe the market has been. We've never been anywhere close to that territory. But it's tough to say why but all the inflation that came through from COVID really changed the dynamic. I think companies got a lot smarter with how to deal with pricing and how to deal with issues like that. And so the room for negotiation has been changed a little bit since the COVID experience. So yes, we've given conservative guidance on pricing and we're preparing our business for tougher conditions than what we're seeing right now.

Okay. Well, I think we're just about out of time. We'll wrap it up but thanks so much for all that info and thanks very much.

Thank you.

Thank you.