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ConvaTec has turned a corner and offers growth and re-rating potential
The transformation of medical technology company ConvaTec (CTEC) has reached an inflection point which should drive market-beating sales growth and improve profitability.
The shares look attractive against good earnings potential while scope for the stock to trade on a higher multiple of earnings (known as a ‘re-rating’) provides extra attractions. This could be driven by a modest improvement in operations.
ConvaTec trades on 18 times 2022 expected earnings per share which is less than half the rating of Danish competitor, Coloplast.
WHY IS IT ATTACTIVE?
ConvaTec operates in attractive markets which exhibit structural growth drivers.
Having previously struggled to fully capitalise on the opportunity, the company has now sharpened its commercial focus after many years of lagging rivals.
The pandemic slowed down expected operational benefits from the group’s transformational programme. This now appears to be bearing fruit as the business pivots towards sustainable organic
For example, ConvaTec registered 7.9% growth from its top 12 priority markets in 2021.
At group level it expects to deliver 2022 organic sales growth of between 4% and 5.5% while increasing operating margins to at least 18%.
Over the medium-term management is targeting a mid-twenties operating margin.
ACQUISITIONS ACCELERATE CHANGE
ConvaTec has targeted acquisitions to accelerate its turnaround plans with a focus on broadening its product offering in faster growing areas, expanding into other geographies, and increasing depth in existing areas of strength.
A good example of increasing exposure to faster growth is the proposed acquisition of Triad Life Sciences which enables the company to enter the attractive wound biologics segment.
The biologics market is worth around $1.8 billion a year and involves wound healing treatments which can restore natural repair mechanisms using active agents.
Researchers are looking at integrating anti-microbial compounds into the wound dressing itself.
In recent years ConvaTec struggled to capture growth in its markets and in 2019 new chief executive Karim Bitar came on board and set about simplifying the business.
Bitar was previously the chief executive of animal genetics company Genus (GNS).
Non-core businesses were sold, and cost efficiencies were made while the company has increased spending on sales, marketing, and research and development.
ConvaTec was founded in 1978 as a division of what is now US healthcare company Bristol Myers Squibb. It was sold to private equity in 2008 and listed on the London Stock Exchange in 2016.
The company operates four divisions: Advanced Wound Care, Ostomy Care, Continence and Critical Care, and Infusion Devices.
ConvaTec generates over
80% of its sales from the first three categories. These underlying markets are growing around 4% a year while the Infusion Devices market is growing around 7% a year.
Growth drivers include ageing populations, rising obesity and increasing access to healthcare in emerging markets.
The competitive landscape is characterised by highly concentrated markets with a small number of large players dominating. This creates high barriers to entry.
Its main competitors are global medical technology companies such as Smith & Nephew (SN.).
ConvaTec is the clear market leader in the disposable infusion market where its infusion sets have around an 80% share. The devices are used by patients with diabetes.
The sets are connected to an insulin pump for continuous infusion to deliver a controlled dose to users. They are delivered to the manufacturers of infusion pumps such as Medtronic.
WHAT ELSE DOES IT DO?
Advanced Wound Care is about providing dressings and skincare products for the management of chronic wounds which are hard to heal.
These conditions are caused by diabetes, immobility and venous disease (a vascular disorder). Traumatic injury, burns and invasive surgery are also a contributory factor.
ConvaTec has a strong position within the antimicrobial segment where it commands a 30% market share. The launch of new foam products in 2022 is aimed at growing share in the faster growing segment of the market.
Ostomy Care involves the provision of devices and accessories which service patients with a stoma. This is a surgically created opening where bodily waste is discharged.
The main reasons to get ostomy surgery are related to colorectal cancer, inflammatory bowel disease and Crohn’s disease. Patients over the age of 60 make up around 60% of the market.
The business has annuity-like features reflecting patients’ long-term use of ostomy products for permanent stomas which have a life of between 13 and 20 years.
Within Continence and Critical Care ConvaTec makes products for patients suffering with continence issues related to spinal cord injuries, multiple sclerosis and spina bifida.
Most of the firm’s sales come from its distribution businesses where it has built up home delivery distribution platforms. This division has been one of the stronger performers over the last few years with revenues growing around 9% a year since 2017.