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Morningstar | Coloplast Sees More Opportunity in the U.S. and Potential Pressure in France

Coloplast’s solid fiscal second-quarter results generally fell in line with our top- and bottom-line expectations, and we’re leaving our fair value estimate unchanged. We think Coloplast’s narrow economic moat remains in fine shape, as the firm has been rolling out a steady stream of new products, supported by excellent commercial execution. We’ve long been fans of the ostomy and continence care businesses, which seem to be the moatiest thanks to deep end-user loyalty. However, the firm has even been succeeding and taking share in the no-moat advanced wound care (AWC) market, especially under difficult conditions in Europe that have dragged down AWC sales among competitors.

Following its typical pattern, Coloplast delivered 8% organic growth year over year and held operating margin around 30%. We don’t expect the announced withdrawal of Coloplast’s transvaginal mesh from the market will damp growth as the product accounted for well less than 1% of total revenue. On the other hand, the current French review of reimbursement for ostomy, continence care, and wound care products could damp growth, especially if cuts are steep. France remains a large market for Coloplast and is currently a key growth driver. We expect to see final decisions arrive soon.

If the French market runs into some turbulence, then it puts more pressure on Coloplast to succeed in the U.S., which remains its most attractive growth opportunity thanks to the size and relatively stable reimbursement environment. Fortunately, the firm has been making steady progress in the U.S., which has seen organic growth in the double-digit range by our estimates. In ostomy, Coloplast’s superior design has increasingly been borne out with clinical evidence. In continence care, Coloplast has leveraged its portfolio to take advantage of the shift to hydrophilic intermittent catheters.

With the Premier and Health Trust GPOs set to award new ostomy contracts in 2020, Coloplast once again has an opportunity to accelerate its ostomy growth in the U.S. Though such a boost would clearly be favorable to Coloplast, we don’t see this as an all-or-nothing situation. Coloplast has demonstrated it is perfectly capable of winning new accounts by approaching integrated delivery networks individually after it was unsuccessful in securing contracts with Novation and Premier the last time around. We recognize the IDN approach is labor intensive, but Coloplast has made it work based on the quality of its products and related clinical data.

Over the last two years, Coloplast has established itself as the sole-source supplier of ostomy products to the Cleveland Clinic and the University of Chicago, both leading research institutions that based their decisions on the strength of the clinical data. Management also announced Coloplast had been chosen as the sole-source ostomy supplier for Kindred Home Health. While home health remains a fairly fragmented field, this avenue can play a substantial role in reaching patients who need chronic care products. This time around with new GPO contracts determined in December, we think Coloplast is in an even stronger position to secure a GPO contract. Nonetheless, if it fails to do so, we still expect the firm to deliver strong growth in the U.S. following its existing strategy.