Investeringskommentar, Debbie S. Wang, Analyst, 2/2/2016
Coloplast posted solid first-quarter results that largely met our expectations, and we’re leaving our fair value estimate unchanged at DKK 548 per share. The quarter was characterized by above-market growth in the ostomy and wound-care segments. As we expected, the narrow-moat firm’s distribution subsidiary in the United Kingdom has continued its recovery now that the appropriate information technology systems are in place and fulfillment processes have been adjusted. Management indicated that Charter Healthcare has gained market share in the profitable U.K. market by converting new customers as well enticing some former customers to return.
We are eager to see how much progress Coloplast is able to make in the U.S. this year as several major group purchasing organizations are entertaining new contracts. With any luck, Coloplast could see significant gains in its U.S. ostomy business if the firm can land a contract or two. On the strength of Coloplast’s technology and thoughtful design, we think the firm could convert loyal end users from a far larger pool of ostomy patients once it is included in a major contract. We estimate that Coloplast can continue to outpace the ostomy market with 7% average annual growth through 2020.
On the other hand, the continence-care segment could face tougher conditions this year as competitive products have launched and changes in contracts with some U.S. distributors have affected purchase patterns. While the latter factor is a one-time change and ripple effects should fade in the second half of 2016, we’re watching the competitive issue carefully to gauge the impact on Coloplast’s strong position in that market. We project 5% average annual growth in Coloplast’s continence unit over the next five years.
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.
