Coloplast is a global leader in Chronic Care, primarily specializing in Ostomy Care and Continence Care. Chronic care involves products that users typically rely on daily over an extended period to manage their conditions. Moreover, users tend to exhibit strong brand loyalty, often sticking with the same brand throughout their treatment journey. This creates a highly valuable customer base for Coloplast. But does this also make Coloplast a compelling investment opportunity? This is what I will explore in this analysis.
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The Business
Coloplast A/S is a Danish multinational company specializing in the development and sale of intimate healthcare products and services. Founded in 1954, the company was inspired by nurse Elise Sørensen’s invention of the first adhesive ostomy bag, designed to help her sister regain confidence after undergoing an ostomy operation. This groundbreaking innovation set the foundation for Coloplast’s mission: to create products that enhance the quality of life for individuals with personal medical conditions. Over the years, Coloplast has grown by closely engaging with users and healthcare providers, developing solutions that address real-world challenges. Coloplast operates through five main segments, each catering to specific healthcare needs. The largest is chronic care, comprising ostomy care and continence care, which together contribute two-thirds of the company’s total revenue. Ostomy care products assist individuals in managing life after stoma surgeries, focusing on comfort, reliability, and discretion, accounting for 35% of revenue. Continence care solutions help those dealing with urinary or bowel conditions, promoting independence and improving daily life, contributing 31% of revenue. Advanced wound care provides products that facilitate the healing of complex wounds while protecting the skin, aiding healthcare professionals and caregivers in managing chronic and acute wounds. This segment accounts for 15% of revenue. Interventional urology focuses on surgical solutions for conditions like urinary incontinence and prostate issues, helping patients regain confidence and improve their quality of life, representing 10% of revenue. Voice and respiratory care includes products such as voice prostheses and tracheostomy solutions, empowering individuals affected by surgeries that impact their voice or breathing. This segment contributes 9% of revenue. Coloplast’s moat lies in its deep understanding of patient needs and its ability to translate these insights into innovative, high-quality products that meaningfully improve lives. Its success is further supported by cutting-edge technologies, a wide array of specialized offerings, and strong relationships with healthcare professionals and end-users. These factors have cemented Coloplast’s position as a global leader in chronic care and a trusted partner in addressing some of the most personal and challenging medical conditions.
Management
Kristian Villumsen is the CEO of Coloplast. He joined the company in 2008 and has held several leadership roles, including Senior Vice President of Global Marketing and Commercial Excellence, Senior Vice President of Region Europe, Senior Vice President of Emerging Markets, and Executive Vice President of Chronic Care. He became CEO in 2018. Kristian Villumsen holds a Master’s degree in Political Science from Aarhus University and a Master’s in Public Policy from Harvard University. He also serves on the board of Demant. Kristian Villumsen’s journey to becoming a CEO is somewhat unconventional, as he initially aspired to be a diplomat, which led him to study Political Science. His academic excellence earned him a scholarship from the Crown Prince Frederik Fund to attend Harvard. During his time at Harvard, his focus shifted to business, and he later became a partner at McKinsey & Company, specializing in the healthcare sector. He is known for his intelligence, problem-solving abilities, and capacity to inspire employees to perform at their best. As a leader, he emphasizes innovation and growth, which is reflected in Coloplast's Strive25 strategy. Kristian Villumsen has expressed the importance of creating a workplace culture where making mistakes is acceptable, provided that employees learn from them. I appreciate Kristian Villumsen’s extensive experience within Coloplast, his focus on innovation and growth, and his motivational leadership style. These qualities make him a strong leader, and I am confident in his ability to guide Coloplast successfully into the future.
The Numbers
The first metric to investigate is the return on invested capital (ROIC). Our criterion requires a 10-year history with all figures exceeding 10% annually. Coloplast has delivered a ROIC above 10% every year over the past 10 years, which is encouraging. ROIC has decreased over the past three years due to the acquisitions of Atos Medical, Kerecis, and Intibia. Once these businesses are fully integrated into Coloplast, ROIC should increase again. The acquisition of Atos Medical occurred in fiscal year 2022, impacting every year since then, while the acquisition of Kerecis happened in fiscal year 2024, resulting in the lowest ROIC of the decade. Therefore, I’m not overly concerned about the recent decline in ROIC and believe that Coloplast will return to its historically high ROIC levels once the acquisitions are fully integrated.
The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the year-over-year percentage growth. I don't have the growth rate from 2013 as Finbox only provides data for the past ten years. It is worth noting that these numbers are influenced by the acquisitions Coloplast has made over the past few years. Therefore, I will not place too much emphasis on them. Nonetheless, it is encouraging that Coloplast has managed to increase its equity every year, with the exception of fiscal year 2022.
Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins provide a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. Coloplast has consistently delivered positive free cash flow every year for the past decade, which is not surprising given its strong business model. Free cash flow peaked in fiscal year 2021 but has since declined due to the significant acquisitions of Atos Medical and Kerecis. These acquisitions have also impacted the levered free cash flow margin. Once fully integrated, free cash flow and the levered free cash flow margin are expected to recover and surpass previous highs. The historical data prior to these acquisitions demonstrates Coloplast's ability to grow free cash flow and maintain a high levered free cash flow margin, underscoring the company's quality. Currently, the free cash flow yield is at its lowest point in the past decade, suggesting that the shares are trading at a premium price. However, this is an aspect that will be revisited later in the analysis.
Debt
Another important aspect to consider is debt. It is crucial to assess whether a business has a manageable level of debt that can be repaid within a period of three years, calculated by dividing the total long-term debt by earnings. Upon analyzing Coloplast's financials, the company has 3,28 years of earnings in debt, which is slightly above the three-year threshold. However, this is primarily due to recent acquisitions. Given this context, and considering the long-term benefits expected from these acquisitions, I do not view Coloplast's debt level as a significant concern if I were to invest in the company.
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Risks
Dependence on subsidized healthcare markets presents a significant risk for Coloplast due to the economic and political influences that shape these markets. These markets are subject to budgetary constraints, evolving healthcare reforms, and financial pressures faced by governments and regulatory bodies, which may result in cost-cutting measures that reduce reimbursement levels for medical devices. Such changes can lead to price reductions, delayed payments, or restricted market access, directly affecting Coloplast’s revenue and profitability. Additionally, the bargaining power of wholesalers and distributors exerts further price pressure, requiring Coloplast to continually provide robust clinical evidence to justify the cost-effectiveness and efficacy of its products. A failure to meet these requirements can lead to reduced demand or lower pricing. Ensuring that all products, including innovative offerings like those from Kerecis, meet the criteria for reimbursement coverage is another challenge. For instance, if products fail to secure Local Coverage Determination reimbursement, their market adoption could be significantly hindered, limiting growth opportunities. Broader trends in healthcare reform aimed at controlling costs further amplify these risks. Tighter pricing controls and more stringent reimbursement policies could constrain Coloplast’s ability to maintain its market position and grow its revenue. This reliance on subsidized healthcare markets highlights the importance of adapting to changing policies and demonstrating the value of its products to mitigate potential financial and operational impacts.
Product quality and safety risks pose a significant challenge for Coloplast, as the company operates in a highly regulated industry where compliance with stringent medical device directives and legislation is critical. Regulations such as the US Food and Drug Administration (FDA) guidelines and the EU Medical Device Regulation (MDR) govern all stages of a product's lifecycle, from design and manufacturing to distribution and post-market surveillance. Non-compliance with these standards could result in the loss of manufacturing or sales licenses, severely impacting Coloplast’s operations and revenue. Defects, design flaws, or critical product quality issues represent a serious operational risk. Safety concerns could lead to product recalls, legal liabilities for user injuries, and supply chain disruptions, incurring significant financial costs. Moreover, such incidents could damage Coloplast’s reputation and erode customer trust, potentially affecting long-term sales and market position. Maintaining high quality and safety standards is essential for Coloplast to remain competitive and compliant in regulated markets. Any failure in this area could disrupt operations, lead to financial penalties, and harm the company’s reputation, underscoring the importance of continuous oversight and robust quality control measures.
Coloplast’s reliance on maintaining a competitive and innovative product pipeline poses a significant risk, as the company must consistently address the evolving needs of end-users and healthcare professionals. In an industry characterized by rapid medical and technological advancements, any failure to innovate could leave Coloplast vulnerable to disruption. Competitors introducing new medical technologies could quickly erode the company’s market share, especially if Coloplast’s products become commoditized and lose their clinical differentiation. Without continuous innovation, Coloplast faces heightened price pressure and margin erosion as low-cost competitors gain traction. The inability to justify premium pricing or maintain strong relationships with healthcare providers could further impact the company’s financial performance. Additionally, the challenge of anticipating and responding to shifts in medical and surgical trends adds complexity, as Coloplast must adapt its offerings to align with changing healthcare practices and breakthroughs. The company’s success depends heavily on its ability to innovate and protect its intellectual property, ensuring that its products remain relevant and valuable. A failure to address these risks could lead to increased competition, reduced profitability, and the potential loss of its leadership position in the market.
Reasons to invest
Coloplast’s Chronic Care segment, which includes Ostomy Care and Continence Care, is a fundamental pillar of its business and a strong reason to consider investing in the company. This segment benefits from a loyal and long-term user base, solid reimbursement frameworks, and recurring revenue streams, providing a foundation for consistent growth. Users of Chronic Care products typically rely on them daily, with an average duration of 10 years for Ostomy Care and up to 30 years for Continence Care. This extended usage creates stable demand and predictable revenue, even in times of economic uncertainty. Coloplast’s leadership in Chronic Care is underpinned by its innovative product portfolio, close collaboration with healthcare professionals, and ability to outpace market growth. More than 90% of sales in this segment are supported by reimbursement programs, which ensures financial stability and resilience. The company’s Coloplast Care program enhances user loyalty through personalized support, while its strategic focus on expanding in key markets such as the U.S., China, and emerging economies offers additional growth opportunities.
Coloplast’s Advanced Wound Care segment is evolving into a key growth driver, bolstered by its strong innovation pipeline and the strategic acquisition of Kerecis. This acquisition has positioned Coloplast in the fast-growing biologics market, where Kerecis’s unique fish-skin technology delivers superior healing outcomes. The recent Odinn study validated the clinical efficacy of Kerecis products, paving the way for deeper market penetration and expanded reimbursement in the U.S., the largest biologics market globally. Kerecis’s biologics platform is highly scalable and cost-effective and is boasting high gross profit margins. This efficiency enables Coloplast to address both inpatient and outpatient care settings while capitalizing on the biologics market’s growth, fueled by aging populations, obesity, and diabetes. Coloplast is leveraging its existing infrastructure to seamlessly integrate Kerecis while strengthening clinical evidence and reimbursement frameworks, ensuring a solid foundation for growth. The biologics segment presents a substantial long-term opportunity, with Kerecis projected to achieve a 30% compound annual growth rate through 2025/26. With innovative technology, proven efficacy, and a growing market presence, the Advanced Wound Care segment is poised to become a significant contributor to Coloplast’s long-term value creation.
Coloplast’s Voice and Respiratory Care segment presents a compelling growth opportunity, reflecting its strong performance and alignment with the company’s proven chronic care business model. With 11% organic growth over the past year, the segment has shown robust results in both laryngectomy and tracheostomy categories, driven by an expanding patient base and increased treatment penetration. The laryngectomy business, contributing two-thirds of the segment’s sales, operates on a chronic use model where patients rely on products for an average of 8–10 years. Growth is fueled by addressing large unserved patient populations in both established and emerging markets, bolstered by reimbursement expansions in countries such as South Korea, Brazil, and Poland. Long-term opportunities lie in markets like China, where Coloplast is working to establish clinical standards and improve access. In the tracheostomy business, additional growth potential lies in developing a chronic patient base. While this segment is currently hospital-focused, Coloplast is expanding into direct-to-consumer solutions and tailored offerings to better serve long-term users. These initiatives support the segment’s strategy to grow beyond its current 10% global market share and meet underserved patient needs. The acquisition of Atos Medical has further strengthened this high-margin segment, integrating it into Coloplast’s portfolio and leveraging the company’s established direct-to-consumer capabilities and clinician partnerships. With a strategic focus on addressing unmet needs and expanding access, the Voice and Respiratory Care segment is poised for sustained growth and market share gains.
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Valuation
Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators.
The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 22,46, which is from 2023. I have selected a projected future EPS growth rate of 13%. Finbox expects EPS to grow by 13,4% a year in the next five years. Additionally, I have selected a projected future P/E ratio of 26, which is twice the growth rate. This decision is based on Coloplast's historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be DKK 489,99. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Coloplast at a price of DKK 245,00 (or lower, obviously) if we use the Margin of Safety price.
The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 2.766, and capital expenditures were 1.166. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 816 in our calculations. The tax provision was 1.343. We have 224,8 outstanding shares. Hence, the calculation will be as follows: (2.766 – 816 + 1.343) / 224,8 x 10 = DKK 146,49 in Ten Cap price.
The final calculation is called the Payback Time price. It is a calculation based on the free cash flow per share. With Coloplast's Free Cash Flow Per Share at DKK 7,12 and a growth rate of 13%, if you want to recoup your investment in 8 years, the Payback Time price is DKK 102,64.
Conclusion
I believe Coloplast is an intriguing company with strong management. The company has a solid moat due to its deep understanding of patient needs. While ROIC and free cash flow have declined in recent years due to acquisitions, these metrics should improve as the acquisitions are fully integrated into the business. Dependence on subsidized healthcare markets poses a significant risk for Coloplast, as these markets are highly sensitive to economic and political developments, budget constraints, and healthcare reforms. Reduced reimbursement levels, stricter pricing controls, or insufficient clinical evidence to justify coverage could directly impact Coloplast’s revenue, profitability, and growth opportunities. Product quality and safety risks are significant, as non-compliance with strict regulatory standards or product defects could lead to recalls, legal liabilities, and loss of licenses to sell or manufacture. Such incidents would disrupt operations, incur financial penalties, and harm Coloplast’s reputation, eroding customer trust and potentially affecting long-term sales. Innovation and competitive pipeline risks also pose a threat, as failure to adapt to medical advancements or shifts in healthcare trends could result in product commoditization, reduced differentiation, and increased competition from low-cost alternatives. Coloplast’s Chronic Care segment is a cornerstone of its business, driven by a loyal user base, long-term product usage, and solid reimbursement frameworks, ensuring stable demand and predictable revenue. The Advanced Wound Care segment is a significant growth driver, bolstered by the acquisition of Kerecis and entry into the high-growth biologics market. The Voice and Respiratory Care segment offers strong long-term growth potential, leveraging its chronic use model, untapped opportunities in emerging markets like China, and the successful integration of Atos Medical’s high-margin business. I believe there are many reasons to like Coloplast. Hence, I would be happy to add it to my portfolio at the intrinsic value of the Margin of Safety price of DKK 490.
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