ConvaTec is one of the world's largest players in ostomy care – surgery performed to create an opening in the body for the discharge of waste – where it operates in a structurally-attractive oligopoly.
It is also the third largest global player in advanced wound care – dressings to treat acute and chronic wounds.
ConvaTec's share price has been weak since June 2017, due to concerns surrounding the execution of a widely anticipated 'Margin Improvement Plan', manufacturing issues in transferring a plant from the US to the Dominican Republic, which disrupted the supply chain, and a profit warning in October that put further pressure on the stock.
However, this is a business with strong competitive advantages. In wound care, it benefits from the market's high barriers to entry and low risk of disruption from new players due to the strength of its brand and the relationships it has built with healthcare professionals.
In ostomy, ConvaTec benefits from a very sticky customer base as you tend to find low switching rates due to the sensitive nature of such products.
Growth in wound care is driven by lifestyle changes (as many chronic wounds are directly or indirectly caused by obesity) and an ageing population, given increased surgery among this segment of the population.
In the ostomy, the prevalence of bowel diseases increase with age, which is driving growth in this part of the market.
Despite the temporary setback, the long-term outlook for ConvaTec is very strong, which is supported by attractive financials; high returns and profit margins and significant free cashflow.