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Morningstar | ConvaTec Under Review as We Re-Evaluate Its Operational Challenges

With ConvaTec plagued by operational difficulties and missteps over the last 18 months, we think it’s fair to say it currently looks more like a dumpster fire than anything else. We’re putting the company under review as we examine its challenges with the geographical relocation of key manufacturing facilities, aftermath of supply constraints, integration of recent acquisitions of distributors, and its ability to weather the tougher competitive conditions we’ve seen develop in the advanced wound-care market. With former CEO Paul Moraviec moving on and an interim CEO in place, we think turning around this narrow-moat company could take a good two or three years.

We think it is important to note that ConvaTec’s current situation is largely due to less-than-optimal execution, some of which were self-inflicted errors and some of which seems to be more reflective of bad luck. The underlying markets in which the firm competes--especially ostomy, continence, and critical care--continue to exhibit solid, steady growth in demand and opportunities for innovation. We also contend that the structure of these markets remain conducive to moats in that they are relatively consolidated and enjoy high end-user switching costs. Although ConvaTec clearly fell behind rival Coloplast during the years it was under the ownership of private equity, we still think there is plenty of opportunity for ConvaTec to regain its previous competitive position, especially as no new entrants entered the ostomy and continence care markets during that entire decade. Nonetheless, it’s clear that ConvaTec faces significant internal challenges, and the plan for addressing those issues probably won’t be put into place until a permanent CEO is hired.