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(Sharecast News) - Convatec shares fell sharply on Tuesday after the Centers for Medicare & Medicaid Services in the US suggested to cut spending on skin-substitute products, citing "abusive pricing practices".
In a draft proposal on Monday, the CMS noted that Medicare spending on skin substitutes has risen from $256m in 2019 to more than $10bn in 2024, according to Medicare Part B claims data.
The spending increase was largely attributed to "abusive pricing practices" in the sector, including the use of products with limited evidence of clinical value.
The CMS said it currently treats skin substitutes as biologicals for the purposes of Medicare payment, which can reach as high as $2,000 per square inch.
"CMS is proposing to pay for skin substitutes as incident-to supplies, a change expected to reduce spending on these products by nearly 90%," it said. "These proposed savings would not come at the expense of patient access or quality of care. If finalised, this will save billions for Medicare and taxpayers and incentivise the use of products with the most clinical evidence of success."
Convatec said in a statement that it supports the CMS in seeking to remove excess cost and promote responsible market practices.
However, it also said the proposed reimbursement rate risks limiting patient choice, product quality and availability in the segment.
The company said it will "engage fully" in the public comment process, which closes on 12 September 2025. It does not expect any changes before 2026 at the earliest.
The company said that InnovaMatrix, its porcine placental-derived extra-cellular matrix for treatment of chronic, surgical and trauma wounds, represented around 3% of group revenue in the four months to April 2025. Its guidance is for revenue of at least $75m in FY25.
"While the outcome of this process remains uncertain, if the proposal is implemented in its current form the potential year-on-year headwind to FY26 revenue could be approximately 1-2% of group revenue," it said.
At 1050 BST, the shares were down 4.9% at 246.20p.
Stifel, which rates Convatec at 'buy' with a 315p price target, said in a research note that effectively, the CMS is proposing a flat fee at $150/cm2, versus the $1,000/cm2 that can be charged today. It noted that the average price for InnovaMatrix is not disclosed, but assumes around $500/cm2, indicating a circa 70% potential price cut from 1 January 2026.
Stifel said that if it were to reduce its current InnovaMatrix $54m estimate for FY26 to $30m, this would be a cut of approximately 1% to its current FY26 group revenue estimates.
"This latest twist in a long-running reimbursement/pricing saga for these tissue-based products follows recent CMS draft proposals for a competitive bidding process for urological and ostomy products," Stifel said. "Our instinct at this stage is that the -5% market reaction so far today is overdone."