Convatec has a poor third quarter for the second year running

A year ago Convatec issued a sales warning, causing its shares to tank more than 25%. Today history repeated, with the additional flourish of the chief executive’s resignation. The woundcare company had not managed to recover from last October’s fall, and now has even more ground to regain.

Meanwhile its closest rival, Coloplast, is starting to see results from a strategic change it made a year or so ago, and its shares are riding high after a long period of moribund trading. Convatec needs to increase its share of a highly commoditised market, not easy at the best of times, and with tricky market trends on both sides of the Atlantic it is going to have a rough time for the foreseeable future.

This morning Convatec cut its 2018 organic growth forecast from 2.5-3% to 0-1%. It blamed “a change in inventory policy by the biggest customer in our infusion devices franchise”, named by analysts as Medtronic, for an expected hit to its fourth-quarter revenues of $18-23m. Convatec also guided its operating profit margin down slightly. 

In addition, its advanced woundcare unit significantly underperformed, growing organically only 0.8% compared with consensus expectations of 2.6%. UK market dynamics were also challenging, the company said, “including NHS supply chain tendering activity”.

Turn around 

Paul Moraviec took this opportunity to resign as both chief executive and a director of Convatec with immediate effect; Bernstein analysts called this development unsurprising “given Convatec’s numerous missteps” since its 2016 flotation. 

The IPO, the second-largest of a healthcare company ever, saw the group list 34% of its shares on the London exchange at £2.25 ($2.96), the lower border of its range (Mega float could push Convatec towards profit, October 26, 2016). The group raised £1.5bn, but closed down 3% on its first day, and since then its share price has fluctuated.

A year ago the stock lost more than a quarter of its value when Convatec cut forecasts for full-year organic sales growth to 1-2% from a previous target of 4%. It continued to sink to £1.82 at the end of October; this nadir was surpassed with today’s 36% fall to £1.43.

If it wants to turn the ship around Convatec could do worse than following the example of its Danish competitor Coloplast. Until recently this group’s performance had been lacklustre to say the least – it led the big-cap fallers in 2016 as its value dropped 18% across the year (Political ructions, poor deal-making and scandal – a bad year for big-cap medtechs, January 4, 2017). 

Roughly a year ago Coloplast announced a new strategy, prioritising investment into internal projects and M&A. Its shares promptly fell as investors were confronted with the lower profitability necessitated in the short term. 

Now, though, Coloplast is starting to see its new strategy pay off. Its shares are up 24% so far this year, despite a slight downturn this week. Announcing its third-quarter results in August, Coloplast was able to raise full-year guidance.

Convatec is trying to improve its situation, particularly in woundcare. It has a Wound Acceleration Plan it is banking on to address US performance issues, focusing on account conversion, sales force effectiveness and expanding its reach into the post-acute segment. It cautioned in its third-quarter statement that the financial benefits would take time to ramp up, and so far these are at the low end of expectations.

Convatec will have to make more radical changes if it wishes to see the kind of returns Coloplast is enjoying. But it might have to. At the moment Coloplast is getting the better of it.