Stocks in Focus: Convatec

stethoscope_medical technology

This week James Ross-Russell of NW Brown Wealth Management looks at Convatec, the global medical products and technologies company, which released third quarter results recently.

The main focus of the company is developing, producing and distributing products which aid the care of people with chronic conditions. These products range from wound dressings to insulin pumps. Having been founded as a division of E.R. Squibb & Sons (latterly Bristol Myers Squibb) the division was purchased by private equity firm Nordic Capital in 2008 and then listed on the London Stock Exchange in 2016.

The company announced results which were encouraging with organic growth beating analyst estimates and management maintaining their expectations for the year. The company operates with a largely recurring revenue model, with the majority of sales being single-use medical products crucial to patient care. The markets they operate in have high barriers to entry, supplying healthcare institutions with critical products; however there is still competition over market share between the existing players.

The previous owners of Convatec, Nordic Capital, have been criticised for underinvesting in the business. In turn, this underinvestment caused a drag on growth and margins and ultimately led to profit warnings in both 2017 and 2018. New management are keen to reverse this trend by investing in research and development whilst paying down debt. The new CEO, Karim Bitar, has joined from Genus PLC, the listed agricultural biotechnology company, where he was CEO for 8 years. Bitar only took up his role on 30 September; however investors will be hopeful he can reproduce the shareholder returns that he helped orchestrate at Genus.

The company is positioned in a favourable sector with demographic factors, such as ageing populations, expected to grow their addressable market over the coming years. However the company needs to keep innovating to grow market share against a backdrop of steep competition.

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