Fair value estimate: 535 DKK
Analyst Note, Debbite Wang, 16/06/2015
Despite Coloplast's lower outlook for full-year performance, we're standing behind our DKK 535 fair value estimate after our slight adjustments failed to materially move the needle on our valuation. We view the two key factors dampening growth as near-term turbulence that does not affect the underlying demand for Coloplast's products. First, the shift from paper to digital prescriptions in the U.K. has caused delays in Coloplast's fulfillment of ostomy supplies to retail customers. The longer delivery times have caused end patients to buy their supplies from other outlets, depriving Coloplast of the product sales as well as the dispensing fee. Nonetheless, we expect this volume and revenue to recover once the processing glitches are worked out and delivery times return to normal levels.
Second, the Department of Justice investigation has kept a lid on Coloplast's direct-to-consumer marketing activities. Even though the investigation of Coloplast is drawing to a close (and will likely end in a settlement), investigations of ostomy supply distributors continue and that will further delay Coloplast's implementation of its marketing programs. It has taken roughly 16 months for the DOJ to reach a conclusion on Coloplast, which leads us to believe a resolution with the distributors should not be far off.
Finally, Coloplast's revised projection for 11% top-line growth in DKK for the 2014-15 fiscal year now matches our revenue growth estimate. We added in an estimate for inventory writeoff from the DOJ settlement, and a slight decrease in operating margin, but the changes did not significantly shift our valuation.
Bulls say
- Thanks to aging populations in developed countries, the incidence of colorectal disease is growing. Independent of age, the incidence of inflammatory bowel disease is also on the rise.
- Growing household income coupled with health-care reform is making emerging markets an attractive target for Coloplast.
- The U.S. remains one of the largest ostomy-care and continence markets, and Coloplast has beefed up its footprint and made inroads in that geography.
Bears say
- Complications from transvaginal mesh have cast a pall on the entire category, which includes Coloplast's vaginal slings for incontinence.
- Coloplast's wound-care portfolio is relatively limited, especially when compared with the breadth of products from Smith & Nephew and ConvaTec, which includes high-tech solutions such as negative-pressure wound therapy, gels, and hydrofiber dressings.
- Adoption of new ostomy and continence products (and usage volume) is highly sensitive to reimbursement policies. If reimbursement becomes less generous, this could hit Coloplast's squarely on the chin.
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