-Fair price tag, modest accretion
-Boosts Ansell's top line growth
-Undermined by patchy conditions
 

By Eva Brocklehurst

Ansell ((ANN)) has rounded out its product portfolio with the acquisition of a chemical protective clothing manufacturer, which brokers envisage will complement the company's other protective clothing segments. The acquisition of UK-based Microgard for GBP59m is expected to be accretive to earnings in FY16. Microgard's manufacturing facilities are in China and it sells its range across 75 countries.

The acquisition fits nicely within Ansell's industrial portfolio, in Morgan Stanley's view. Moreover, the balance sheet remains robust and flexible. The broker estimates the transaction is 3% and 4% accretive in FY16 and FY17 respectively. The acquisition offers a high margin, semi-disposable product with associated revenue synergies. Ansell has leverage to the falling Australian dollar and Morgan Stanley also believes the benefit from falling input costs is yet to fully play out.

This is a sensible acquisition, in Credit Suisse's view, expanding the product offering and following on from the acquisitions of Trelleborg, high-end, higher margin product, and Barriersafe, light-weight, lower-margin product. The broker also envisages cross-selling opportunities in gloves and boots and potential for further consolidation within the space, given the highly fragmented nature of the market. The consideration is reasonable and consistent with recent transactions, while the multiples imply a margin of 25% for Microgard, ahead of the 16% margin Ansell recorded at the group level in 2014, Credit Suisse observes.

The first acquisition in a year signals to JP Morgan that the company is turning back to acquisitions to boost top line growth within the industrial segment, particularly at a time when customers are demanding that savings from declines in raw materials be passed on. The price tag appears reasonable to the broker and marginally dilutive in FY15 while accretive in FY16. JP Morgan does not expect the dilution to FY15 will be outside management's previous guided forecast range of US118-126c per share.

Nevertheless, with weakness in underlying growth evident in the first half, and this acquisition confirming suspicions about the need for top line growth, JP Morgan is reticent about recommending the stock. Synergies should deliver margin benefits but these may be eroded by effects of discounting. The broker believes patchy economic conditions and discounting will provide headwinds for the business for some time. An Underweight rating is maintained.

The forward earnings multiple of eight times is reasonable in Deutsche Bank's view, given an uncontested sale process and the elevated state of asset prices. The sales boost from this low-risk acquisition should help what this broker also considers is weak organic growth. Deutsche Bank's forecasts are slightly diluted in FY15, because of acquisition costs, but accretion of 3.0% is expected in FY16, based on the low cost of debt. Modest cost synergies are expected from lower input costs but the revenue synergies should be more material in the medium term, given Ansell's potential to leverage global distribution.

Morgans takes the view that market conditions are challenging and integration risks should not be overlooked. The deal is considered incrementally positive as it will enhance the sales proposition in protective clothing while the purchase price appears reasonable as well. That said, the broker envisages little room for earnings slippage and, with a Hold rating, advises investors to await a better entry point.

Ansell retains a range of ratings on the FNArena database with two Buy, three Hold and three Sell. The consensus target is $25.42, suggesting 10.9% downside to the last share price. Targets range from $20.98 to $30.00.

 See also, Ansell's Outlook Far From Smooth on February 11 2015.
 

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-Secondary end point met
-Need to evaluate full data set
-More studies/trials to come
 

By Eva Brocklehurst

Sirtex Medical ((SRX)) has dashed expectations that its SIRFLOX study would show a statistical significance for overall survival rates for treatment of metastatic colorectal cancer (mCRC). A run-up in the share price ahead of these findings and the savage sell-off that ensued afterwards signalled the market, and many brokers, were surprised at the outcome. Still, brokers point to several reasons to remain positive.

The primary end point of the study was not met, that being overall progression-free survival in the treatment of mCRC. The secondary end point was achieved, however, in terms of progression-free survival in the liver. This is an important aspect of the result because, as Moelis maintains, it offers a potential opportunity for the SIR-Spheres treatment to form a first-line therapy.

In simple terms, UBS describes the results as revealing a significant treatment for liver cancer, but not when it has progressed to the bowel. The broker was disappointed in the results but concedes there is still an opportunity to treat the liver as part of a broader treatment regime and, given the trial designs are not well understood, expects to obtain further advice on the subject.

In re-examining its views around the SIR-Spheres penetration of the first-line treatment market for liver cancer, UBS now considers that perhaps only 30% of this market is available to Sirtex. The stock price is likely to reflect these doubts in the medium term but, assuming the secondary end point does lead to higher utilisation of the treatment, the broker retains a Buy rating and lowers its target to $28.75 from $50.40. Ultimately, UBS believes the trials and studies will prove to have expanded the market to some degree.

Moelis revises its valuation to reflect the outcome, given the likely reduction in the reach of SIR-Spheres in first-line patients, but believes the stock was oversold in the initial reaction to the findings because of confusion around the wording of the announcement as well as the primary end point. The broker anticipates a rebound in the price when the market absorbs the facts of the case.

For SIR-Spheres to become a first-line therapy it requires a peer review to validate the data. With a revision to the potential market size, the current results for the liver (secondary end point) could increase the likelihood of validation, in Moelis' opinion. Sirtex will submit the results of the SIRFLOX study to the American Society of Clinical Oncology in June.Moelis retains a Buy rating, lowering its target to $31.14 from $36.70.

Macquarie considers that, while the direct cause of death for most patients with mCRC is the liver tumour itself, it remains possible that the treatment could improve overall survival rates, even in the absence of proving progression-free survival. Still, there is uncertainty regarding the chances of this conclusion, which will remain the case until the full data set is evaluated in 6-7 weeks time. If positive results or trends are subsequently observed, the chances that overall survival is extended in the longer FOXFIRE study being undertaken will be considerably higher, in the broker's opinion.

The extent of the share price reaction was probably fair, in Macquarie's observation, given the very high levels the stock price achieved in recent months. The broker retains a Neutral rating - target drops to $26 from $32 - because of the uncertainty about the strength of the data. Moreover, in addition to the FOXFIRE study, the company has three other studies examining its treatment in primary liver cancer.

Goldman Sachs believes that if there is limited evidence supporting the use of first line treatments, growth rates for the treatment could slow from current levels, even while there could be still sufficient evidence for use beyond last resort patients. If overall survival rates from the study remain unconvincing with the full data set, Goldman believes the medical community will opt to wait for the release of the FOXFIRE results in the first half of 2017 before considering taking up the product in first line treatment. The broker's bear case valuation at $18 a share implies the market is factoring in limited value for the growth option beyond the last-resort/salvage market.

The failure of the study to meet its primary end point was a bitter pill to swallow, Bell Potter observes, as it follows a series of encouraging results from earlier studies with double digit dose sales growth over a number of years. This broker, too, is awaiting more detailed analysis to make further conclusions regarding the efficacy of the treatment.

As the outcomes of the study become widely known the broker assumes physicians may question the benefit of the therapy. Future revenue from mCRC treatment now depends almost entirely on proving an overall survival benefit and this will not be known for some time, in Bell Potter's view. The broker retains a Hold recommendation and Speculative Risk rating.

Sirtex Medical has one Buy, one Hold and one Sell (Morgans, yet to review the study results) on the FNArena database. The consensus target is $23.46, suggesting 19.9% upside to the last share price.

See also, Important Catalyst Looms For Sirtex Medical on February 9 2015.
 

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-FY15 forecasts upgraded
-Outperforms on most metrics
-Acquisition, growth opportunities

By Eva Brocklehurst

Regis Healthcare ((REG)) posted a solid maiden first half result as a listed company, well ahead of brokers' forecasts. Revenues from the government were higher, reflecting a lift in payments for resident care.

The aged care accommodation provider has upgraded earnings forecasts for FY15, reflecting a much larger than expected inflow from accommodation bonds. Deutsche Bank notes this, in part, reflects a on-off in relation to the introduction of the government's Living Longer Living Better legislation. The broker observes this growth will moderate in the second half but inflows should still be above prospectus forecasts. Allowing for the development pipeline and this stronger-than-expected result Deutsche Bank makes a significant uplift to valuation.

Morgans is upbeat, recommending clients add the stock to their portfolios. The stock outperformed on most metrics, in average revenue per bed, aged care funding and staff costs. The broker compares the stock with another recently listed aged care operator, Estia Health ((EHE)), noting that both companies agree about the big opportunities for acquisition and development that exist across the sector. Regis has added 135 places during the half year, with Regis Tiwi Gardens in Darwin, and has another 194 places under contract in Cairns due to settle in March. This will bring the number of aged care places to 5,049.

Morgans is aware that with an increase in the level of acquisition activity, the price that operators have to pay for facilities is likely to increase. The company was a little shy in disclosing the metrics for acquisitions but divulged to brokers that $100,000 per bed is a reasonable rule of thumb. Estia's recent purchase in Adelaide was priced at around $137,000 gross per bed, with further development opportunity. In this regard Morgans simply makes the point that attention to pricing metrics will be important to maximise returns. The broker suspects the low level of profitability across government-owned and the not-for-profit sector provides opportunities which will help underpin the company's growth for at least the next five years.

Regis Healthcare had already flagged the decision by the government to drop the payroll tax supplement from 2016 which will cost the group $6.4m and, as a result. second half earnings are expected to be below the first. Still, inflows from residential accommodation bonds were ahead of forecasts and represent around 92% of full year prospectus forecasts. This takes the number of bond paying residents to 46.8% from 43.4%.

Cost control, sales and progress in developments impressed Macquarie. High incremental returns on capital are generated by the company's model and remain a key differentiator in its success. The broker notes Regis will spend $10m on significant refurbishments in FY15 which should mean it qualifies for new government subsidies. So far 115 residents are receiving the higher level of funding of a total of 700 which are eligible, suggesting to Macquarie further tailwinds to come.

The three brokers covering the stock on the FNArena database all have Buy ratings. The consensus target is $5.49, suggesting 3.5% upside to the last share price.

 See also, Growth Opportunities Abound For Regis Healthcare on November 20 2014. 
 

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-Full impact of CHF surge may take time
-Cost base still advantageous
-Management remains confident about increased competition
 

By Eva Brocklehurst

Action by the Swiss National Bank to remove its currency peg to the euro has caused several brokers to re-evaluate their models for CSL ((CSL)). The SNB has removed the cap on CHF/EUR that was introduced in September 2011 to prevent an overvaluing of the Swiss franc. CSL's main manufacturing plant is based in Bern and its accounts are US dollar denominated. The SNB also reduced its interest rates by 50 basis points to alleviate the expected upside pressure on the Swiss franc, which brokers observe did nothing to stem an overnight surge.

CSL reports in US dollars but its largest revenue FX exposure is in euro, while the Swiss franc is its largest FX exposure in terms of costs. Hence, Macquarie notes the peg to the euro was a useful hedge for the company because, up until the SNB's recent move, CSL had little exposure to a falling euro versus the US dollar.

Macquarie suspects the impact will not be felt until FY16, with production of plasma products taking a number of months from when the raw plasma is first collected. CSL obtained its significant manufacturing presence in Switzerland after acquiring ZLB from the Swiss Red Cross in 2000. Acknowledging the importance of the Swiss franc as a cost currency, Macquarie also suspects the impact of the changes may be overstated. The broker's estimates suggest a 6.3% headwind to profit in US dollar terms if the rapid revaluation of the Swiss franc holds up. However, the company's annual report suggests around a 2.5% sensitivity for CHF/USD movements. Macquarie believes CSL will weather the headwinds while the company cost base remains advantageous versus its peers.

CSL trades near fair value in Morgan Stanley's estimation, using a price/earnings relative methodology. The USD/CHF is a key currency paring for transactions and the broker estimates around 20% of the company's costs are incurred in Swiss francs but less than 4% of its revenue. Morgan Stanley estimates a shift to overnight FX spot rates from prior assumptions would reduce CSL Behring earnings by 9.3% on a full year basis with no hedging.

On another front, there may also be downside risk to earnings from heightened competition in the Immunoglobulin (Ig) market. Morgan Stanley notes industry growth is moderating while the coagulation franchise is contracting. The broker expects investors will maintain the premium vested in CSL for the stock's perceived short-term defensive characteristics. The broker retains an Equal-weight rating as the stock is currently trading around 2.0% above its price target of $81.12.

Another stockbroker, Morgans, expects significant transaction and translation impacts, estimating 10% of the top line and 20% of the costs are exposed to the Swiss franc. CSL uses forward FX contracts to hedge risk and covers an estimated 75% of profit but the broker observes the contracts are short dated. Moreover, Morgans believes the company's competitiveness may come under pressure as higher costs would need to be passed onto customers to maintain margins and market share. Hence, the broker believes investors may question the company's current "safe haven" status and reputation for earnings certainty, while there is increased downside risk to the extended earnings multiple. That said, Morgans sticks with its Hold rating and $83.25 target pending additional insights.

On a broader market perspective, CSL also presented at the JP Morgan health care conference. The broker expects the company will maintain above-market growth in core Ig products despite the increased competitive threat from Baxter's long-awaited launch of HyQvia. CSL is confident Hizentra's differentiated product features will mean its leadership is maintained. The broker believes the track record in unlocking the value in its R&D portfolio stands CSL in good stead. Further geographical and label expansion as well as momentum in the breakthrough medicines should contribute strong growth in earnings and JP Morgan retains an Overweight rating.

On FNArena's database the consensus target is $84.43, down from $85.02 ahead of the news. The target implies 1.7% upside to the last share price. Ratings include four Buy, three Hold and one Sell (Citi).

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-Difficult co-pay decision for PRY
-Macquarie upgrades SHL
-MBS freeze a headwind for PRY
 

By Eva Brocklehurst

The Commonwealth government has scrapped its budget-time proposal of a $7 co-payment for GP visits in favour of a $5 cut to GP reimbursements for non-concessional adults, giving GPs the option of recovering the payment from the patient. The changed proposal, should it be implemented, means the impact of a co-payment is diluted. This of particular relief to Sonic Healthcare ((SHL)) while Primary Health Care ((PRY)) faces a more difficult decision on whether to absorb the reimbursement cut to preserve its identity as a provider of low-cost health care. The government also proposes freezing the Medicare Benefits Schedule fee through to July 2018. A co-payment for pathology and imaging services has also been scrapped.

In terms of the co-payment, with the majority of Sonic's clinics already paying an additional amount, Macquarie believes there will be little impact to volumes from an increase by $5. With the threat of co-payments largely out of the way and a falling Australian dollar Macquarie has upgraded Sonic to Outperform from Neutral. The stock has tracked sideways in recent months and the broker now believes the risk/reward equation has become favourable.

Goldman Sachs observes the overwhelming proportion of patients (80%) are bulk-billed by their GP. Since 2006, GPs who bulk bill have lost ground to those who charge a co-payment. Medicare reimbursements rates have risen 2% whereas in comparison co-payments have risen 9%. Another statistic Goldman Sachs highlights is that while children's visits to the GP have been broadly flat over the past decade, at the other end of the age scale pensioners rates have increased sharply. Under this proposal the broker does not expect any material change in GP per capita visits from either children or pensioners.

The other main measure, freezing the MBS fee, is a more significant announcement, as it means a headwind for medical centre earnings, particularly for Primary, where this division makes up 41% of earnings compared with only 9% for Sonic. Primary's revenues are derived almost exclusively in Australia and largely from the government via the MBS. The freezing of the schedule along with a recent pathology cut drives downgrades to Macquarie's earnings forecasts for Primary. The broker envisages a longer-term risk to the company's bulk-billing model, given the increased desire of the government to push more health care costs onto patients. Credit Suisse's view of the changes and how they will affect the two companies is similar, but the broker considers the proposal is uncertain and makes no changes to earnings or investment ratings at this stage. Credit Suisse rates both stocks Underperform.

The proposal does not require legislation to make the changes but may be subject to a motion in the Senate and could be voted down, Citi notes. There are positives in the proposal for both Primary and Sonic and the broker considers the announcement a likely catalysts for a re-rating of Primary, for which the broker has a Buy rating. Goldman Sachs takes an opposing view, with a Sell rating, believing the freeze in the rebate is negative in isolation for Primary. While the cut to reimbursements is likely to be negative, it remains to be seen whether the company absorbs this cut, or introduces a co-payment as an offset. Primary's share of the GP market has grown over the past decade and its doctor productivity is around 40% higher than industry levels.

 Citi does not believe the announcement is as significant for Sonic and envisages good valuation support for the stock in a generally expensive sector. Goldman Sachs also considers the impact on Sonic is likely to be modest. FNArena's database contains five Buy ratings, two Hold and one Sell for Sonic Healthcare with a consensus target of $18.63, suggesting 7.1% upside to the last share price. Primary Health Care has four Buy, two Hold and two Sell ratings with a consensus target of $4.97 and signalling 10.1% upside to the last share price.


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-Significant therapeutic data
-US$250m in sales pa touted
-Other brokers more measured
 

By Eva Brocklehurst

Mesoblast ((MSB)) will launch a stem cell therapy for acute graft-versus-host disease (GvHD) in 2016. Baillieu Holst believes clinical success in the upcoming trials, and subsequent US Food & Drug Administration approval, have potential to usher in a boom in regenerative medicine as US investors realise the early scientific promise of stem cells is translating into clinical and commercial reality. This development has now transcended the ethical issues associated with embryonic stem cells.

The GvHD therapy is significant as acute cases kill. The condition involves immune cells generated by a bone marrow transplant attacking the recipient's own tissues and organs. It is commonly associated with bone marrow transplants, as a patient's marrow is destroyed by chemotherapy or radiation therapy in an effort to treat leukaemia and lymphoma. The marrow is then replaced by previously harvested stem cells from a donor and the genetic mismatch causes GvHD.

Mesoblast acquired the business for mesenchymal stem cells from US biotech, Osiris Therapeutics, in late 2013 and this therapy - MSC-100-IV - is a development from that acquisition. The therapy has been promising in phase II data for adults with GvHD that are at high risk of death because of liver or gut complications. The company is now preparing for a 60-patient open-label phase III paediatric trial. A product launch is expected in 2017.

Baillieu Holst believes the positive data so far have opened up a large market opportunity and the path to market is straight forward. The FDA only requires one phase II and one pivotal trial before approving a stem cell therapy, so Mesoblast may only need to wait a relatively short time before its technology yields commercial revenue. Mesoblast's partner, JCR Pharmaceuticals, filed for Japanese approval for MSC-100-IV in October and the broker expects approval to be granted next year in Japan. The US FDA has requested two phase III studies, one is covered by the paediatric trial and the other is a confirmatory adult study in patients with liver and gut complications. Mesoblast expects to have the paediatric data in 2016 and will launch product in Canada and New Zealand on the back of this, as conditional marketing approval has already been granted.

Mesoblast expects the therapy could enjoy peak year sales of US$250m per annum and Baillieu Holst regards this figure as easily reached. It will put the key project in the orphan drug area, as so far no product has come close to generating the kind of survival benefit shown by MSC-100-IV. Baillieu Holst values the stock with a target of $9.50.

The question often asked of the broker is why the stock has been in a downtrend for three years, with its all-time closing high of $9.99 recorded back in 2011. Baillieu Holst believes this is a reflection of market scepticism in the US regarding the commercial prospects of regenerative medicine ahead of any meaningful phase III data. The broker compares the scepticism to that in the mid 1990s with development of a drug that became Rituxan. Monoclonal antibody developers were similarly treated with contempt by the market until this drug was approved in 199. Given this assumption, and that Mesoblast is yet to falter clinically, the broker believes the stock is undervalued.

The company is the world's number one stem cell business. Late in 2010 a partnering deal with Cephalon, a US pharma company, transformed Mesoblast. Cephalon was subsequently acquired by Teva, and that company's continued involvement is a positive, in the broker's opinion. Mesoblast has now moved to a phase III trial in heart failure on the back of strong phase II data. The trial, which will be conducted by Teva, is eagerly awaited. Substantial news flow is expected from Mesoblast next year, featuring progress in various phase III trials, phase II results and potential for further partnering deals.

Baillieu Holst's Buy rating contrasts with Macquarie's Underperform. Macquarie recently commented on the data subsets which were re-released from the trial examining the use of Mesoblast's stem cells in intervertebral disc repair. On one measure of pain relief the trial reached statistical significance but was negative on the anatomical improvement measure. Macquarie's target is $3.50. FNArena's database also has two Hold ratings for the stock - Credit Suisse and Deutsche Bank. The former already incorporates earnings from the Japanese launch in its estimates while Deutsche Bank suspects, given key trial results are not due until FY16, that Mesoblast may need to raise funds before then. The consensus target on the database is $4.55, suggesting 7.3% upside to the last share price.
 

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