Investeringskommentar, Debbie S. Wang, Sr. Eq. Analyst, 04/05/2016
Coloplast reported solid results for its fiscal second quarter that tracked closely with our expectations. After minimal adjustments to our assumptions, we are holding steady on our fair value estimate and Coloplast’s narrow economic moat. In the second quarter, Coloplast saw 7% organic revenue growth—continuing to outpace market growth. We think it is very feasible for the firm to hit our projection for 7.4% full-year top-line growth. However, we recognize that some investors may be disappointed Coloplast did not secure a contract with group purchasing organization Novation, which would have significantly expanded Coloplast’s presence in the U.S. ostomy market.
Overall, the U.S. market was Coloplast’s weak spot in the quarter, in particular due to changes in distributor purchases that hindered continence care sales. While changes in distributor inventory should work its way through the system by fall, we expect building up Coloplast’s presence in the U.S. ostomy and continence care markets will take time and consistent investment in blocking and tackling. Although landing a major GPO contract would have allowed Coloplast to leapfrog into the U.S. ostomy market, we still think the firm can become a major competitor, but it will be a gradual process. Coloplast has already embarked on this process by contracting outside GPOs with individual hospitals chains, but success will ultimately come in the form of product preference among end users. We remain confident that Coloplast’s thoughtful design and user-friendly innovation will win over more patients. For example, the new SenSura Mio Convex has rolled out in 15 countries and demand has already outstripped Coloplast’s supply. Once Coloplast’s domestic market share in ostomy reaches critical mass, it will be considerably more competitive when it comes to GPO contracts. On a more positive note, penile implants and skin care performed well, pushing total U.S. growth in the positive range.
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 healthcare 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 negativepressure 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.
