Investeringskommentar, Debbie S. Wang, Sr. Eq. Analyst, 22 August 2016
Coloplast’s fiscal third-quarter performance reliably met our expectations, and the incremental adjustments we’ve made to our assumptions did not materially shift our fair value estimate. Thanks to a steady stream of new products, Coloplast has consistently outpaced market growth, racking up 8% organic revenue growth in the third quarter. As we had seen in the second quarter, the U.S. market continues to look like a soft spot for Coloplast, as McKesson has been consolidating 15 of its warehouses and combining inventory. Nonetheless, we are confident that end users in the U.S. are very receptive to Coloplast’s innovative products--double-digit sales growth of Coloplast ostomy and continence products from distributors to end users underscores robust demand, which we expect to manifest in Coloplast’s revenue once the distribution shifts are completed. We see little to change our view of Coloplast’s narrow economic moat.
We were pleased to see solid growth across most product segments. In particular, ostomy organic growth of 11% in the third quarter emphatically outperformed the 1% growth that rival Convatec posted in the same period. This fits with the same competitive pattern we’ve seen since 2013, with Coloplast’s strength in ostomy care increasing at the expense of Convatec (and, we suspect, of privately held competitor Hollister). We expect this to continue through the medium term, thanks to the controlled rollout of SenSura Mio Convex, which has been well received in 16 markets thus far. However, strong demand means Coloplast has hit capacity constraints, and introduction in new markets will depend on how quickly the firm can expand capacity, especially in its lower-cost locations. Unfortunately, the impact of growth from higher-margin products has not yet filtered down to the bottom line, but we expect another 170 basis points of operating margin improvement by 2019 as manufacturing is further consolidated in lower-cost locales.
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.
