CONMED Corporation, headquartered in Utica, New York, is a major medical products manufacturer specializing in surgical instruments and devices. Approximately 60% of the company's revenues are derived from products designed for the orthopedic surgery markets of arthroscopy and powered surgical instruments. The company also sells products for general and other surgical specialties such as electrosurgery systems for all types of surgery, and endosurgery instruments for minimally invasive laparoscopic surgery. Patient Care products, including ECG electrodes for heart monitoring and pulse oximetry for blood oxygenation monitoring, are provided for various clinical settings. The company has six major product line categories: Arthroscopy (35% of 2006 sales), Powered Surgical Instruments (21%), Electrosurgery (15%), Patient Care (12%), Endoscopic Technologies (9%), and Endosurgery (8%). Approximately 75% of the company's revenue is recurring, derived from the sale of disposable single-use products. Capital equipment such as powered drills and saws for surgery, electrosurgical generators, video-imaging cameras, fluid control systems, and surgical hand-pieces are marketed to facilitate the sale of the disposable products. CONMED, with 3,200 employees, has six manufacturing facilities and distributes its products globally through its own U.S. sales network, international direct marketing in nine countries, and specialty distributors in other countries.
CONMED has significant market growth opportunities due to favorable demographics. The aging of the population, combined with a more active and subject-to-injury population, results in the growth of surgical procedures. The growth in surgical procedures also reflects technological improvements that offer safer and less invasive surgical procedures. We estimate surgical procedures are growing in the low-to-mid single digits.
The company is also responding to the need to reduce health care costs. A larger and older population is placing pressure on the health care system. To reduce costs, managed care companies and other third-party payors like Medicare have placed pressure on health care providers and manufacturers to reduce the cost burden. In particular, health care providers have focused on the high cost of surgery. To reduce costs, physicians are making greater use of minimally invasive techniques, which reduce patient trauma, recovery time and the length of hospitalization. About half of CONMED's products are designed for minimally invasive surgery.
The company benefits from offering a broad line of surgical products. Providers, in order to reduce inefficiencies and to contain costs from using multiple suppliers, are reducing the number of vendors. In contracting with fewer vendors, providers need manufacturers who can provide a broader array of products at lower prices. Many hospitals and clinics belong to group purchasing networks to obtain volume discounts from manufacturers and suppliers. Smaller, less diverse manufacturers and suppliers run the risk of losing contractual relationships with the health care provider.
CONMED has a significant recurring revenue stream that generally provides stable quarterly performance. Three-quarters of company sales come from single-use disposable products. Hospitals and clinics are expanding the use of single-use, disposable products, which reduce overhead from sterilizing surgical instruments and products following surgery. Utilizing one-time disposable products also lowers the risk of patient infection and reduces the cost of post-operative care.
To supplement organic growth and their product offerings, the company has acquired 11 companies in the past five years. Most notably, the company acquired certain endoscopic products from C.R. Bard, with the deal closing in September 2004. The product line, known as Endoscopic Technologies, consists of disposables used by gastroenterologists to diagnose and treat diseases of the digestive tract. For the full year 2005, Endoscopic Technologies added $58.9 million in sales. In first quarter 2006, Endoscopic Technologies contributed $14.7 million to sales, $14.7 million in second quarter 2006, $12.7 million in third quarter 2006, $12.8 million in the fourth quarter 2006, and $54.9 million for the full year 2006. In first quarter 2007, the company recorded $14.7 million in sales and recorded $13.4 million for second quarter 2007. For the third quarter 2007, the company recorded $12.5 million in sales. Revenues from this segment have been weak due to certain manufacturing and quality problems at a contract assembly operation in Juarez, Mexico. Given the problems, some production has been moved to the Utica facility in New York. Additionally, the company notes that it has experienced price erosion due to increased competition. The company plans to launch several new products in 2007 and 2008 to help stimulate growth. The company launched new products during second quarter of 2007 including a coated biliary stent, an endoscopic ultrasonic needle and two new forceps.
The company's use of acquisitions has led to problems. This growth strategy increases integration, supply or pricing risk that is disruptive to the business and CONMED's customers. Due largely to poor acquisition-related performance that has hampered operating margin improvement, the company has undertaken several cost reduction initiatives in 2006 that will continue in 2007. In September 2006, the company announced the closure of its Integrated Systems assembly operation in Montreal, Canada. In 2006, the company incurred closing costs of $1.9 million with additional amounts to be charged in 2007. The company anticipates cost synergies of approximately $1.1 million from this consolidation. In second quarter 2007, the company closed an office for Endoscopic Technologies' products, in France, incurring pretax closure costs of $1.3 million.
Also impacting results, CONMED competes in a highly competitive market environment. Despite the company's broad product lineup, some of the competition offers products beyond CONMED s offerings, which may make the company less competitive to customers. Several competitors, including Stryker, Johnson & Johnson, Medtronic, Smith & Nephew, Tyco International, Boston Scientific and 3M Company, are larger than CNMD and have greater resources and larger research and development efforts. Stryker's powered surgical instruments growth results suggest it is taking some market share from CONMED's Linvatec unit. While CONMED management suggests fewer elective surgeries and lower hospital capital equipment spending as reasons for the revenue shortfall, we believe competitive conditions are the main issue. The larger orthopedic companies may be taking advantage of product bundling arrangements, an area in which CNMD is unable to compete effectively. In addition, Zimmer, long out of the powered surgical instruments market since it sold its Linvatec/Hall line to CONMED in 1998, has reentered the market through its distribution arrangement with Brasseler. While CONMED's powered surgical instruments business is slowly showing signs of recovery with new products launched in 2006 beginning to gain traction, we expect continued competition-related difficulties. To help compete more effectively, the company is planning an orthopedic sales force expansion in 2007 of about 30 reps from the current 200 rep level. Selling and marketing expenses will likely go up as CONMED launches several new products in 2007, including a high-definition camera system that was launched in February 2007.
The company settled its ongoing endoscopic product anti-trust litigation against Johnson & Johnson in the first quarter through an agreement that resulted in a payment of $11 million to CNMD. Johnson & Johnson ceased the marketing practices which CONMED had challenged. Given the settlement just before the expected April trial date, future litigation expenses have been averted. We expect margins to improve given the elimination of forward legal costs.
The company is highly leveraged but is improving its structure. At the end of September 2007, the long term debt-to-equity ratio stood at 49.0% down from 60% in Q406 due to debt repayment of $29.0 million in the first nine months of 2007. The company repaid $39 million in debt during 2006. We note that $150 million of the $238 million in long-term debt is 2.5% convertible debt due 2024 issued in November 2004, with the remaining debt LIBOR floating-rate or at an alternative base rate (the greater of the Prime rate or Fed Funds rate). However, if the company is unable to meet its earnings goals, debt service may be affected. The high debt level may also reduce the ability of the company to pursue its acquisition growth strategy.