Morningstar | ConvaTec's First-Quarter Revenue Results Held No Surprises; No Change to Our FVE
Narrow-moat ConvaTec posted first-quarter revenue results that were consistent with our measured expectations, and we’re holding steady on our fair value estimate. Quarterly organic revenue growth was down 2% year over year, reflecting weakness in advanced wound care and ostomy. In the past, we’ve described ConvaTec as a dumpster fire, and we now think it resembles more of a smoldering fire. Interim management has laid out a series of tactical plans to establish more strategic marketing, including the use of specialist sales reps and more clinical data to support its Aquacel wound care franchise. There’s little in the plan that we’d quibble with, at this point. For this company, the question comes down to whether it can execute. We continue to keep our eyes on early signs of favorable changes in each product segment, but it may take several quarters for them to emerge.In the near term, we think there are two key issues that could influence where things go with ConvaTec. First, incoming CEO Karim Bitar is set to join the firm in late September. Bitar arrives with considerable previous experience at Johnson & Johnson, as well as the diabetes business at Eli Lilly. Perhaps most intriguing is his most recent eight-year tenure at Genus, the animal genetics and husbandry firm where Bitar led a turnaround by investing in R&D. We’ve seen that ConvaTec’s businesses are sensitive to innovation--rival Coloplast has reaped substantial rewards from its investment in innovation. Considering ConvaTec was long starved of appropriate investment under its prior owners, we’re optimistic that Bitar will change this course.
Second, ConvaTec’s increasingly wobbly performance in the U.S. could be cause for caution. Organic U.S. sales fell 5% in the first quarter, which is worrisome as this is the market where ConvaTec has historically been significantly stronger than Coloplast. If ConvaTec loses the Premier GPO contract renewal in early 2020, its U.S. business could look bleak.
ConvaTec Group is a holding company. Through its subsidiaries, Co. is a global medical products and technologies group. Co. has four franchises: Advanced Wound Care, which provides wound dressings, devices and skin care products used for the management of acute and chronic wounds; Ostomy Care, which focuses on devices, accessories and services for individuals who have a stoma; Continence and Critical Care, which provides products for people with urinary continence issues; and Infusion Devices, which develops and manufactures disposable infusion sets for the suppliers of insulin pumps for diabetes treatment and similar pumps used in continuous infusion treatments for other conditions.
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