Upgrading Coloplast to a Wide Economic Moat Rating

Senior Equity Analyst

Debbie Wang

Based in Denmark, Coloplast is a leader in global ostomy and continence care. The firm has made inroads into the concentrated urology and fragmented woundcare markets, but it remains a peripheral player there. In contrast, Coloplast has a long record of consistent and meaningful innovation in ostomy and continence care that has led to a dominant position in Europe. Since 2008, the firm has done an admirable job of trimming its cost structure as it focused on profitable growth. After shifting the majority of its production to Hungary, China, and Costa Rica, Coloplast now enjoys a gross margin that beats that of rival Convatec by more than 1,500 basis points. Currently, Coloplast is altering its emphasis to enhance growth by entering new geographies, with an emphasis on the United States. 

We think Coloplast's urology segment could offer growth potential and cross-selling opportunities. Thus far, the firm has been more successful in the U.S. with its slings, kidney stone management products, and inflatable penile implants than in the underpenetrated European market. Additionally, Coloplast remains a smaller competitor in this area (with an estimated 5%-10% global share) compared with the dominant market leader Boston Scientific. Despite recent legal settlements around Coloplast's transvaginal mesh, we think demand for penile implants and safer mesh products should grow over time.

We are less keen on Coloplast's woundcare segment, where competitive product launches abound. Perhaps more important, we are concerned that Coloplast's limited woundcare portfolio—mainly foam dressings—is on the lower-tech end of the spectrum, leaving the firm more vulnerable as advanced woundcare has moved toward hydrofiber and antibacterial products. Further, as with all competitors in this market, Coloplast faces the march of commodification from manufacturers of lower-tech dressings and relatively low switching costs for customers. Additionally, the majority of woundcare products are sold to providers (versus directly to patients themselves), which means there is greater pricing pressure from group purchasing organizations and government-sponsored tenders.

Business Strategy & Outlook

We’ve long admired Coloplast's competitive advantages and recently upgraded our moat rating to wide on the strength of the company's returns and consistent ability to drive ROIC far above its cost of capital. Having studied Coloplast for over a decade now, we think it can maintain its competitive advantages and generate economic profits over the 20-year period that characterizes a wide economic moat.

Coloplast’s moat primarily stems from its ostomy, continence care, and urology businesses, where it has been able to leverage intangible assets and, at times, switching costs. The firm has a long record of meaningful innovation in the first two areas. We like the moatiness of the ostomy and urology businesses. The $2 billion global ostomy market benefits from intangible assets and switching costs and is the kind of stable oligopoly we like to see. Coloplast is the market leader with an estimated 40% share; Convatec and privately held Hollister roughly split the rest of the market. Although the ostomy market only grows in the midsingle digits, it is relatively insulated from larger economic conditions as patients generally have little choice about whether to use the devices and supplies, and payers have not erected roadblocks to reimbursement. Approximately 1.5 million Americans and Europeans live with a gastrointestinal stoma (after a surgical procedure creates an opening from the intestines through the abdominal wall, bypassing different parts of the colon, small intestine, or rectum). These patients rely on various collection devices to eliminate waste from the body, including Coloplast's SenSura products. Collection bags and pouches make up the majority of the ostomy market and remain the fastest-growing segment. 

Though ostomy products do benefit from some protection of intellectual property, we think the moat is also rooted in sticky end-user relationships. Considering the potential for leakage, odor, and skin irritation, ostomy products are characterized by high social risk and patients are often extremely loyal. There are many configurations of ostomy systems—disposable versus reusable, one-piece versus two-piece, flat, convex, or concave wafer. This means each patient typically goes through some trial and error before finding a highly individualized solution that works for his or her own body. There is little brand switching after the first year with a stoma once patients become familiar with one brand's system. Thus, Coloplast puts its marketing resources into working with ostomy nurses who help teach new patients how to care for their stomas and providing direct post-acute patient support to troubleshoot usage issues. Providing this kind of high-touch patient support helps to keep users in the fold. Coloplast historically has introduced consistent innovation in its ostomy care products, including different types of adhesives, one- and two-piece devices, and irrigation systems. Finally, we note secular trends—greater incidence of inflammatory bowel disease and colorectal cancer—that should translate into steady growth in the ostomy market. 

With its urological products, patents and intangibles such as relationships with practitioners prevail as the primary protection for Coloplast. For all three of these businesses, Coloplast benefits from its strong relationships with nurses and the specialist physicians who steer patients toward certain brands, as well as the direct-to-consumer support that Coloplast excels at. Evidence of Coloplast's moat also shows up in its historical returns on invested capital, which have ranged from 27% to 85% in the past decade.

Most recently, the firm has ventured further afield with the strategic acquisition of Atos Medical, which makes supplies and equipment for laryngectomy patients. Though this is a step removed from its historical emphasis on intimate personal care, the technology underlying laryngectomy patients and ostomy patients is fairly similar, and we think there could be synergy there. Similar to ostomy and continence care, use of these neck stoma products is not elective.

From an environmental, social, and governance perspective, Coloplast faces relatively low risk. Most of its business is derived from ostomy and continence care products, which are non-life-sustaining, intended for short-term use, and are generally external to the body, reducing the risks of any complications. The permanent implanted devices housed within the interventional urology segment hold more potential for issues with defects or recalls (such as for transvaginal mesh). However, this segment accounts for less than 10% of consolidated revenue, and a recall would be largely immaterial and is unlikely to permanently impair the firm's competitive advantages, from our perspective.

Wide

Economic Moat

Coloplast A/S

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Coloplast A/S engages in the developing, manufacture, and markets medical products. It operates through the following segments: Chronic Care, Voice and Respiratory Care, Interventional Urology, Advanced Wound Dressings, and Biologics. The Chronic Care segment covers the sale of ostomy care products and continence care products. The Voice and Respiratory Care segment refers to the sale of laryngectomy and tracheostomy products. The Interventional Urology segment includes the sale of urological products, including disposable products. The Advanced Wound Dressings segment focuses on the sale of wound and skin care products. The Biologics segment represents a new segment covering the sale of tissue-based products. The company was founded by Aage Louis-Hansen and Johanne Louise-Hansen in 1954 and is headquartered in Humlebaek, Denmark.

Please see enclosed pdf. Attachment 08032024_trading_in_shares_LRA

Coloplast A/S - Trading in Coloplast shares by board members, executives or associated persons

Coloplast A/S (CLPBF) Q1 2023/2024 Earnings Call Transcript

Report on transactions of executives and related parties in Coloplast shares and related securities According to the Market Abuse Regulation article 19 Coloplast is obliged to report on the transactions of executives and their related parties in Coloplast shares and related securities. The below transactions concern allocation of share options.

Coloplast A/S - Allocation of Share Options

Q1 2023/24 Interim financial results, Q1 2023/24 1 October 2023 - 31 December 2023 Coloplast delivered a solid Q1 with 8% organic growth and an EBIT margin1) of 28%. Reported revenue in DKK grew 8% with 4%-points contribution from Kerecis (underlying growth of around 35%), offset by negative impact from currencies.

Coloplast Finance B.V. - Interim Financial Report, Q1 2023/24

The new transanal irrigation device is designed to help people facing defecation issues or stool leakage. It is estimated that 10-15% of the world's population are affected by chronic constipation1 and that 6% struggle with faecal incontinence2, both of which can cause physical discomfort and mental distress3.

Coloplast launches Peristeen® Light for people with bowel disorders

Q1 2023/24 Interim financial results, Q1 2023/24 1 October 2023 - 31 December 2023 Coloplast delivered a solid Q1 with 8% organic growth and an EBIT margin1) of 28%. Reported revenue in DKK grew 8% with 4%-points contribution from Kerecis (underlying growth of around 35%), offset by negative impact from currencies.

Coloplast A/S - Interim Financial Report, Q1 2023/24

The company aims to expand its position within advanced wound care by introducing a new silicone foam that will benefit both healthcare professionals and patients.

Coloplast launches Biatain® Silicone Fit for pressure injury prevention and wound management in the US

Today, 24 January 2024, Coloplast Finance B.V. held its Annual General Meeting at which Ernst & Young Accountants LLP was elected as Coloplast Finance B.V.'s auditors.

Coloplast Finance B.V. - Change of Auditor

On 24 January 2024, Coloplast Finance B.V. held its Annual General Meeting. At the Annual General Meeting, the sole shareholder, Coloplast A/S, approved the annual report for the financial year 2022/23. In addition, Ernst & Young Accountants LLP was appointed as auditor for Coloplast Finance B.V.

Coloplast Finance B.V. - Decisions at the Annual General Meeting

Friday, 9 February 2024 at 11.00 - 12.00 CET In connection with the publication of Coloplast's interim financial results for Q1 2023/24, to be released same day around 07.30 am CET, Coloplast will host a conference call to present the financial results and answer questions from investors and financial analysts. A presentation will be available on Coloplast's website approximately 1 hour before the conference call.The webcast of the conference call will be available during and after the event.

Coloplast A/S - Q1 2023/24 Earnings Release - Invitation for conference call on 9 February 2024 at 11.00am CET

Today, 7 December 2023, Coloplast A/S held its Annual General Meeting, at which EY Godkendt Revisionspartnerselskab was elected as Coloplast A/S' auditors in line with the proposal from the Board of Directors.

Coloplast A/S - Change of auditor

Articles of association for Coloplast A/S as adopted at the Annual General Meeting of Coloplast A/S held today, 7 December 2023 are enclosed. For further information, please contact Investors and analysts Anders Lonning-SkovgaardExecutive Vice President, CFOTel.

Coloplast A/S - Articles of Association

Today, 7 December 2023, Cololast A/S held its Annual General Meeting, at which the following resolutions were adopted: The annual report for the financial year 2022/23 was approved. Distribution of year-end dividend of DKK 16 per share of nominally DKK 1 was approved.

Coloplast A/S - Decisions at the Annual General Meeting 2023

The Annual General Meeting of Coloplast A/S will be held on Thursday, 7 December 2023 at 3:30 pm CET at the premises of Coloplast A/S, Holtedam 3 in Humlebæk (the Aage Louis-Hansen Auditorium), Humlebæk, Denmark. The notice of the Annual General Meeting is enclosed.

Coloplast A/S - Notice of Annual General Meeting 2023

Coloplast A/S (OTCPK:CLPBF) Q4 2023 Earnings Conference Call November 9, 2023 5:00 AM ET Company Participants Kristian Villumsen - President and Chief Executive Officer Anders Lonning-Skovgaard - Chief Financial Officer Conference Call Participants Anchal Verma - J.P. Morgan Hassan Al-Wakeel - Barclays Maya Pataki - Kepler Cheuvreux Christian Ryom - Danske Bank Veronika Dubajova - Citi Oliver Metzger - ODDO BHF Graham Doyle - UBS Martin Parkhøi - SEB Kristian Villumsen Thank you, operator.

Coloplast A/S (CLPBF) Q4 2023 Earnings Call Transcript

Coloplast, a leading company within intimate healthcare, will invest around 100 million euros in a new manufacturing site in Portugal to support the company's continued growth.

Coloplast announces new manufacturing site in Portugal

Hereby please find the Annual Report 2022/23 for the group of Coloplast A/S. Attachment Annual Report 2022-23

Coloplast Finance B.V. - Announcement no.

Announcement of Full-year Financial Results 2022/23 (1 October 2022 - 30 September 2023) Coloplast delivered Q4 organic growth of 8% and 28% EBIT margin1). Reported revenue in DKK grew 3% to 6,226 million, impacted by unfavourable development in currencies Organic growth rates by business area: Ostomy Care 9%, Continence Care 6%, Voice and Respiratory Care 13%, Advanced Wound Care 8% (Advanced Wound Dressings 12%), and Interventional Urology 5%.

Coloplast A/S - Full-Year Financial Results 2022/23

FY 2022/23 organic growth of 8% and 28% EBIT margin1). Reported revenue in DKK grew 9% to DKK 24,500 million Organic growth rates by business area: Ostomy Care 8%, Continence Care 7%, Voice and Respiratory Care 10% (8 months), Advanced Wound Care 7% (Advanced Wound Dressings 6%), and Interventional Urology 10%.

Coloplast A/S - Annual Report 2022/23 & Remuneration Report 2022/23

Coloplast announces financial guidance for the 2023/24 financial year. Organic revenue growth is expected around 8% and the EBIT margin is expected at 27-28%. The assumptions on the financial guidance are laid out below.

Coloplast A/S - FY 2023/24 Financial Guidance

Please see enclosed pdf. For more information and calendar invitations for upcoming events, please visit: https://investor.coloplast.com/investor-relations/financial-calendar-and-events/ Kind regards,Investor RelationsColoplast A/STel.

Coloplast A/S - Financial Calendar 2023-24

Monday, 4 September 2023 at 14.00 – 15.00 CEST In connection with the completion of the acquisition of Kerecis, Coloplast will host a conference call with Fertram Sigurjonsson, Founder and CEO of Kerecis.A presentation will be available on Coloplast's website before the conference call. The webcast of the conference call will be available during and after the event.

Coloplast A/S - Coloplast completes the acquisition of Kerecis - Invitation for conference call on Monday, 4 September 2023 at 14.00-15.00 CEST

NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION IN WHOLE OR IN PART, DIRECTLY OR INDIRECTLY, IN OR INTO THE UNITED STATES OF AMERICA, CANADA, JAPAN, SOUTH AFRICA, HONG KONG OR AUSTRALIA, EXCEPT AS PERMITTED BY APPLICABLE LAW, OR IN ANY OTHER JURISDICTION IN WHICH SUCH RELEASE, PUBLICATION OR DISTRIBUTION IS UNLAWFUL.

Coloplast A/S - Announcement no. 08/2023 - Coloplast announces registration of share capital increase of 12.2 new B shares completed

Coloplast has completed the acquisition of Kerecis, announced on July 7, 2023, after receiving approval from all relevant authorities and reaching a shareholder acceptance level of 100%

News for Coloplast A/S Stock (CLPBY)