Shares in FTSE 250 medical products specialist ConvaTec (CTEC) have crashed by 21% to 177.4p after poor fourth quarter sales, weak guidance for 2019 and a plan to spend millions of pounds to try and put the business in a better shape.
ConvaTec has been struggling amid fierce competition from low priced wound care product providers.
Wound care organic revenue fell by 1.8% in the fourth quarter with ConvaTec blaming a tough UK market and its US arm failing to perform as expected. Analysts had expected 0.6% growth in the quarter.
Interestingly, rivals Molnlycke and Smith & Nephew (SN.) are both doing considerably better than ConvaTec in wound care, judging by their recent trading updates.
PROBLEMS ELSEWHERE
ConvaTec’s ostomy care business is also having a tough time as illustrated by a 1.5% decline in organic revenue during the fourth quarter. Supply constraints and winning new business were among the reasons given by the company.
UBS analyst Ian Douglas-Pennant says 2019 guidance suggests ‘limited scope for improvement near term’.
The company itself admits that ‘a number of executive issues across the group’ need to be addressed.
WHAT IS THE SOLUTION?
The plan is to invest approximately $150m over three years. By year three it will incur $50m additional ongoing investment costs relating to commercial spend and research and development.
It hopes these investments should deliver $120m in annual gross cost savings by 2023, as well as improvements in revenue growth and profit margins.
Douglas-Pennant says analysts were expecting additional investment costs but the magnitude of these are ‘significantly greater than expected.’
He adds: ‘We believe 2019 consensus estimates are likely to fall by 15% to 20% as management guides for 18% to 20% earnings before interest and tax (EBIT) margins against consensus expectations of 23%.’
ConvaTec chief executive Rick Anderson, who replaced Paul Moraviec after he quit last October following a profit warning, insists the firm will develop a strong pipeline of new products and focus on product and market segments that offer the best returns.
WAS THERE ANY GOOD NEWS?
The continence and critical care arm of ConvaTec produced better than expected organic revenue growth in the fourth quarter at 3.9% versus estimates of 3.2%.
Douglas-Pennant says there is an opportunity for this part of ConvaTec to take advantage of Danish group Coloplast losing patent protection a few years ago.
‘Coloplast dominates the premium catheter manufacturing market, with c60% market share, due to a superior product offering. However a key patent protecting Coloplast’s estate expired in 2017,’ says the analyst.
‘Given ConvaTec’s 25% market share in catheter distribution in the US they may be able to take material share from Coloplast if they can replicate Coloplast's product offering. ConvaTec plans to launch a premium catheter though meaningful sales won't be visible until 2020 in our view.’
