Deck
Convatec is a UK-listed chronic-care medical-device maker selling roughly a billion single-use units a year across four franchises — wound care, ostomy, continence, and as the dominant OEM of insulin-pump infusion sets to Tandem, Medtronic and Beta Bionics.
One number, two readings — does FY25's 22.3% margin print compound or unwind?
- Bull read. Adjusted operating margin walked from 17.7% in FY21 to 22.3% in FY25 — 460bps in four years through inflation, FX and M&A integration. Each 100bps on $2.44B revenue is ~$24M of operating profit. Guidance steps to ≥23.0% in FY26 and 24–26% from 2027.
- Bear read. Adjusted operating profit of $551M cleared the $550M bonus maximum by exactly $1M, in the same year trade receivables jumped 25.1% on revenue growth of just 6.6% — an 18.5pp gap, the widest since 2013. Days payable extended from 140 to 150, plugging another $111M.
- Adjusted-vs-reported. The wedge between adjusted and reported net income has doubled, from 1.05× in FY22 to 2.05× in FY25. Reported operating profit fell 2.7% in FY25 even as the adjusted line rose 12.2%.
Recurring chronic-care engine, leverage in the target zone, buybacks above M&A for the first time.
Five consecutive years inside a 5–7% organic band on a base where over 90% of revenue is repeat orders to roughly a million patients a day. Capital allocation flipped in FY25 — $326M of buybacks against just $24M of M&A, the first time deals took the back seat since the FTSE 100 promotion. Holding the margin walk for one more year, while reversing the receivables build, is what the next twelve months turn on.
Strong where it counts, weak where it's largest.
- Infusion Care — #1 OEM. 19% of revenue but the entire moat asset. Sole supplier of infusion sets to Tandem t:slim, Beta Bionics iLet, and Medtronic 780G/Mobi. Second-sourcing requires 18–36 months plus a per-pump FDA filing — a switching cost denominated in regulatory time, not money.
- Advanced Wound Care — structural #4. The largest franchise at 31% of revenue holds only ~6% global share, behind Smith+Nephew and Solventum at 14% each and Mölnlycke at 10%. InnovaMatrix has collapsed from $99M (FY24) to $69M (FY25) to a ~$20M FY26 guide, while rival Kerecis grew 24%.
- The price of being #4. Convatec runs at a 570bps adjusted operating-margin gap to Coloplast (22.3% vs 28.0%) on a near-identical chronic-care model. That gap is the empirical cost of being a follower in the franchise that drives a third of the top line.
FDA letter on the moat franchise lands the same year the receivables flag goes amber.
- FDA Warning Letter, 3 Feb 2026. Cites ~5,000 leakage complaints and CAPA failures at the Unomedical (Mexico) plant — the sole-OEM site for Tandem, Beta Bionics and Medtronic. Tandem has publicly disclosed that TruSteel infusion-set supply delays will persist through 2026, directly contradicting management's framing of no production restrictions.
- Adjusted-EPS hygiene. The headline 100.8% cash conversion excludes $121M of growth capex, dividends, M&A, and buybacks. Adjusted-to-reported net income has doubled to 2.05×, and one-off transformation charges have now recurred for four straight years at $5–13M each. Deloitte rotates out to EY for FY26.
- Governance overhang. 32.96% of shareholders voted against the binding remuneration policy at the 2025 AGM — well below the UK Code's 80% threshold. The re-vote on 21 May 2026 is the first read on whether engagement repaired the breach.
The architect of the turnaround died in October; the building runs without him.
Before: The 2018 profit warning was a near-corporate-failure event. Shares fell 29.5% in a session to 158p, CEO Paul Moraviec was ousted, FY19 organic growth printed −14.3% and a $192M intangible impairment hit. Chair Sir Christopher Gent was later fined £80,000 by the FCA for unlawful disclosure during the episode.
Pivot: Karim Bitar joined as CEO in 2019, launched the FISBE strategy, walked margin from 17.7% to 22.3% over four years, delivered five consecutive years of 5–7% organic growth, and earned the FTSE 100 promotion. He went on medical leave on 4 August 2025 and died on 26 October 2025.
Today: CFO Jonny Mason was confirmed permanent CEO on 6 November 2025 — a career retail-and-distribution CFO with limited prior medtech operating leadership. Novo Holdings exited its remaining 7.8% anchor stake at 227p on 17 November. The 9 April 2026 capital markets day raised medium-term targets to 6–8% organic and 24–26% margin from 2027 — Mason's first strategic statement, on the higher of two possible ladders.
Lean cautious until 4 August — the same number is being read two ways, and one print resolves it.
- For. 460bps of adjusted operating-margin walk over four years through inflation, FX and integration on a >90% recurring base — that is a measured trajectory, not a hope. Each 100bps is worth ~$24M of operating profit.
- For. 16.7× adjusted P/E and 9.1× EV/EBITDA vs Coloplast at 26× and 16.5× on a near-identical model. $95M of $134M FY25 amortisation from the 2008 Bristol-Myers spin-out fully rolls off mid-2026 — a mechanical 4–5¢ lift to reported EPS. Sell-side runs 16 Buy / 1 Hold, average price target 303p vs 226p spot.
- Against. The FY25 margin cleared the $550M bonus hurdle by exactly $1M while accounts receivable built $111M and the adjusted-to-reported gap doubled. If receivables reverse, FY26 reported FCF and adjusted operating profit both compress — the rerate algorithm breaks.
- Against. The FDA Warning Letter sits on the only franchise that differentiates Convatec from Coloplast, and Tandem has publicly disclosed customer-side supply delays running through 2026 — a direct contradiction of management's framing.
Watchlist to re-rate: 1) H1 2026 trade receivables (<$370M bullish, >$400M bearish) and adjusted operating margin (≥23% bullish, ≤22.5% bearish), 4 Aug. 2) FDA Unomedical resolution path — closure without enforcement vs consent-decree escalation. 3) 21 May AGM remuneration re-vote — needs >85% for to clear the governance overhang.