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The Cooper Companies envisions a bright future

Hermes US SMID

Home / Perspectives / The Cooper Companies envisions a bright future

Mark Sherlock, CFA, Lead Portfolio Manager
26 October 2016
Small and Mid Cap

US medical business The Cooper Companies is benefiting from rising global demand for daily contact lenses and fertility treatments. Its position as the sole provider of a full range of daily and frequent-use lenses underpins its ability to generate strong revenues and increase market share.

The Cooper Companies manufactures specialist medical products that are sold in 100 countries. It has two businesses: contact-lens maker CooperVision, which generates the majority of the company’s revenues, and the women’s healthcare-focused CooperSurgical.

CooperVision: focused on growth

Providing 80% of the firm’s total revenues, CooperVision is best known for its soft contact lenses. With a 22% market share, it is one of the four providers dominating the $7bn global contact-lens industry.

CooperVision is adapting well to changing consumer preferences. Many people who previously used weekly and monthly lenses now favour daily lenses because they are convenient, less likely to cause eye infections and are more comfortable as they are made from a thin layer of moisture-rich silicone hydrogel.

Before the financial crisis, CooperVision lagged its competitors because it lacked a silicone-hydrogel lens. It subsequently introduced the technology, developed new products and bought existing brands, achieving a growth rate double that of the industry in the five years to 2015. CooperVision’s acquisition of Sauflon in 2014 ensured that its range of silicone-hydrogel lenses, including two daily products, become the most expansive in the market.

In addition to common spherical lenses, specialty products such as toric and multifocal lenses – used to treat astigmatism and correct near and far sightedness respectively – are also driving CooperVision’s growth. Due to their special shape, toric lenses must be fitted professionally, resulting in greater brand loyalty among users. Since CooperVision is the only provider of silicone hydrogel toric and multifocal lenses, and these segments are expected to grow faster than spherical lenses due to aging populations, the company is well placed to significantly grow its market share further.

The one-day use cycle for daily lenses naturally lends itself to higher revenues for providers. This, combined with a general increase in product quality, should generate market growth of 4-6% by 2019 and increase worldwide revenues from $7.5bn to more than $9bn. In addition, profit margins should grow as operating margins for daily lenses are higher than those for the frequent-use lenses they replace.

Keeping risks in sight

The barriers to entry to the contact lens market are high: the infrastructure to develop and market lenses is costly and difficult to build, and physicians and patients often trust existing brands and tend to be unwilling to try a newcomer’s product. These obstacles should help protect CooperVision’s competitive position and allow it to focus on claiming more market share from its rivals.

However, the challenge that CooperVision faces in integrating new products amid what can be strong competition should not be underestimated. In the recent past, the company has missed quarterly profit guidance, but these troubles appear to have passed. Encouragingly, its latest projections are more conservative, and in Q3 CooperVision returned to its historical growth multiple of 1.5x the market for contact lens makers, driven by increased market share in the Asia-Pacific region.

Risks to the business include the possibility of a product recall – Johnson & Johnson was forced to reclaim 492,000 boxes of daily lenses in 2010 after users complained of stinging eyes while using the products – an increase in corrective laser eye surgery or optometrists selling cheap glasses. Importantly, since lenses are private purchases, they will not be affected by any changes to Medicare or Medicaid reimbursement models.

CooperSurgical: specialist operator

CooperSurgical’s products are used by obstetricians, gynecologists and other healthcare professionals for a range of procedures including fertility treatments, such as in vitro fertilisation, complex surgical operations and genetic testing. It counts some of the largest medical-technology companies as competitors, but Cooper’s specialisms have seen it invest more significantly in these areas, driving its steady increase in market share. Its fertility business generated 10% growth in the most recent quarter.

A clear view of long-term growth

The Cooper Companies operates in two markets – contact lenses and fertility treatments – with strong long-term outlooks and high barriers to entry. CooperVision’s revenue growth exceeds that of its sector and the company is the leading provider of spherical, toric and multifocal silicon-hydrogel lenses to consumers worldwide. Given that Cooper produces staple necessities, it is more resilient to downturns in the US economic cycle than producers of discretionary goods.

With a price-to-earnings ratio of 16x earnings for the 2017 fiscal year and a share price of $184, Cooper is trading at a similar multiple to large-cap medical-technology stocks. Given the company’s exciting growth prospects, we perceive this valuation offers an attractive entry point for long-term investors.

Past performance is not a reliable indicator of future results and targets are not guaranteed.  This article does not constitute a solicitation or offer to any person to buy or sell any related securities or financial instruments.

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Mark Sherlock, CFA Lead Portfolio Manager Mark joined the Hermes US SMID team in February 2009 as co-manager of the Hermes US SMID Cap strategy and became lead manager in October 2013. He became co-manager of the US All Cap strategy in May 2015. Mark initially joined Hermes in 2005 as an analyst and fund manager on the UK Focus Fund. Prior to this, he was an investment analyst at Rio Tinto Pension Fund, where he had responsibility for the small and mid cap portion of the portfolio. Mark qualified as a Chartered Accountant with PricewaterhouseCoopers in 2002. He has a degree in Politics from Durham University, is a CFA charterholder and a Fellow of ICAEW.
Read all articles by Mark Sherlock, CFA

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