ConvaTec Delivered More Turnaround Progress in 2022

ConvaTec CTEC wrapped up 2022 in solid fashion, and we’re comfortable that the firm has strengthened its foundation, which sets the stage for improved innovation and operations despite nagging challenges with rising input costs and wages. With few surprises in fourth quarter, the firm nearly matched our estimates, and we’re leaving our fair value estimate unchanged. We’ve also seen little to change our view of ConvaTec’s narrow economic moat and believe the underlying user switching costs, especially in ostomy and continence care, bought the company time to nudge innovation into the product pipeline. The firm has begun to reap the rewards of that innovation through the adoption of three new products in 2022.

Full-year organic revenue growth of 5.6% was very respectable. After the last two years of solid mid-single-digit top-line growth, we expect more of the same in 2023, fueled by strength in infusion sets and the rollout of ConvaFoam wound care in the U.S. We acknowledge that growth of both the ostomy and continence care segments remains mired in the low-single-digit range. However, these units managed to accelerate growth versus 2021. This puts ostomy and continence care a step closer to market growth in the 4% to 5% range. All of this points to progress on the turnaround plan.

We like management’s investment in innovation but remain most intrigued by ConvaTec’s minority investment in BlueWind Medical, which is developing neuromodulation technology to address overactive bladder. Though this is related to continence care, it could signify a major leap into highly engineered, implantable, therapeutic devices from the relatively low-tech intermittent catheters ConvaTec is currently focused on. ConvaTec clearly has a way to go before any direct competition with Medtronic (dominant competitor in neuromodulation for bladder control) might be realized, but BlueWind might offer a hint of management’s ambitions.