Convatec: Steady Improvements in Innovation and Execution Should Add Up to Improved Returns

Convatec CTEC continues moving forward with efforts to reshape its product portfolio, leaning toward more chronic care and innovative technologies and away from the acute-care setting. Considering that these shifts will take time to show up in financial results, our modeling assumptions are unchanged and we’re holding steady on our fair value estimate, which remains moderately above recent share prices. We remain confident that strategic decisions under CEO Karim Bitar should reinforce the company’s narrow economic moat and potentially nibble away at the growth and profitability gap with rival Coloplast, as Convatec gets closer to commercializing some of its differentiated pipeline products. We’re watching the recent U.S. launch of ConvaFoam carefully, as this provides Convatec with entrée to the largest subsegment in advanced woundcare and fills a key gap in its portfolio. Importantly, increased medical utilization should provide a healthy tailwind through 2023, especially for woundcare and ostomy.

Considering that growth on ostomy is largely constrained by the rate of new patient discharges, we’ve projected this segment to grow in the low single digits through 2027. We’ve baked in slightly more optimistic mid-single-digit growth for advanced woundcare, which reflects the firm’s competence in commercializing new technologies in this market and the recent acquisition of several emerging technology platforms. For instance, Convatec’s purchase of InnovaBurn will bring a novel placental extracellular matrix to help heal severe wounds including second-degree burns.

Though the previous management team gave lip service to improving innovation, execution, and cost structure, Bitar deserves credit for actually making progress on these measures. Convatec has made steady, incremental improvement, which gives us confidence that returns should also see improvement.