Coloplast Earnings: Higher Input Costs and Foreign Exchange Put Pressure on 2023

Narrow-moat Coloplast COLO B posted fiscal second-quarter results that keep it on track to meet our full-year expectations, and we’re leaving our fair value estimate unchanged. The firm continues to shake off lingering effects of the pandemic, especially in China, where recently lifted lockdown measures have begun to allow for more patient volume and growth in advanced woundcare. However, the higher inflation environment also means the firm is still juggling higher materials, freight, and energy costs. Further, management said wage inflation in Hungary has been running in the double digits. All of these factors as well as the initial startup costs of new manufacturing in Costa Rica and trends in foreign exchange leave us cautious about the firm’s goal of returning to 30% operating margin by fiscal 2024. We currently assume that those higher manufacturing costs won’t abate until fiscal 2025.

Despite expense pressures, we remain confident of Coloplast’s ability to innovate, improve its intangible assets, and heighten switching costs for patients. For instance, Coloplast has now launched the new Luja male intermittent catheter in four countries, with more to come through the year. This catheter is designed to minimize residual urine left in the bladder, which can create conditions for bacterial growth that can lead to urinary tract infections. For patients using intermittent catheters due to conditions like spinal cord injuries or multiple sclerosis, UTIs will occur on average two to three times per year and can lead to more serious kidney infections. Data from one clinical study that offered direct comparison with Hollister’s VaPro product demonstrated that Coloplast’s Luja was impressively more effective at emptying the bladder with less microtrauma to the urethra. The Luja catheter addresses a major risk that catheter patients must contend with, and we anticipate it will be well received by end users.