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ConvaTec announces resignation of chief executive as it issues profit warning

Former Johnson & Johnson chairman Rick Anderson has been appointed interim chief executive of ConvaTec
Revenue growth in 2018 is going to be weaker than expected

ConvaTec Group PLC (LON:CTEC) shares plunged 30% on Monday as it announced the resignation of chief executive Paul Moraviec and issued a profit warning after disappointing revenue in the third quarter.

The medical products firm said Moraviec will step down as a director with immediate effect and Rick Anderson, a non-executive director of ConvaTec and former chairman of Johnson & Johnson, will be interim chief executive until a permanent replacement is found.

"We have made significant progress during my time as chief executive officer and I am confident that ConvaTec now has the strong platform, infrastructure and leadership to enable the business to flourish,” Moraviec said.

ConvaTec lowers revenue and margin guidance

In a trading update for the three months to September 30, the company said revenue took a hit of US$18mln to US$23mln due to its biggest customer in the infusion devices business changing its inventory policy.

The group said revenue was also weighed down by “challenging market dynamics” in the UK advanced wound care division, including NHS supply chain tendering activity.

ConvaTec cut its revenue guidance for the 2018 fiscal year to growth of flat to 1% from a previous forecast of 2.5% to 3.0%. It also lowered its estimates for adjusted earnings (EBIT) margin to 23% to 24% from 24% to 25%.  

In the third quarter, the company generated total revenue of US$452.2mln, up 1.5% compared to a year ago on a reported basis or up 0.4% on a like-for-like basis.

The infusion devices arm saw revenue drop 4.0% and like-for-like revenue decline 3.7%.

The advanced wound care unit posted a 0.7% decrease in reported revenue and a 0.8% rise in like-for-like revenue with the skin care business continuing to drag on growth and recovery in US surgical cover dressing taking longer than expected after supply constraints last year.

Reported revenue in the ostomy care division edged down 0.5% but like-for-like revenue increased 1.5%, supported by new products and the benefit of weaker comparatives due to the supply issues experienced in the second half of 2017. 

ConvaTec warned that it expects the impact of supply constraints and the loss of patients last year in ostomy care to be towards the upper end of its previous guidance of 50 to 100 basis points of group organic revenue growth in the 2018 financial year.

The continence and critical care unit delivered reported revenue growth of 11.7% and like-for-like revenue growth of 1.4%, as robust sales of GentleCath hydrophilic coated catheters offset a packaging recall in the group’s Slovakia plant and ongoing product rationalisation in critical care.

ConvaTec still confident on future potential 

The company said it “continues to have confidence in the fundamentals of the business and its future potential”.

“Our cost out plans are under development and the group will provide an update on these with the FY 2018 results in February 2019.”

In late morning trading, shares were trading hands at 156.75p. 

"While three of the company’s four divisions saw revenue growth in the third quarter, the fact that the company is now looking for a new CEO and faces other challenges means that investors should expect the shares to remain volatile for some time to come," said Ian Forrest, investment research analyst at The Share Centre.

"As such we have moved our recommendation to a ‘hold’ for investors willing to accept a higher level of risk."

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