Tag Archives: Health Care and Biotech

article 3 months old

Fisher & Paykel Healthcare Plays Safe After Record Year

-Substantial growth in respiratory care
-Track record of earnings upgrades
-Tussle for market share with ResMed
 

By Eva Brocklehurst

New Zealand-based Fisher & Paykel Healthcare ((FPH)) is riding high. The company produced a record profit in FY14, up 26%, with new applications such as oxygen therapy ramping up and OSA (obstructive sleep apnea) masks gaining market share.

FPH has two divisions. Respiratory and Acute Care (RAC) includes intensive care ventilation, oxygen therapy and humidity therapy. This division generated constant currency growth of 14% and at the end of FY14 new applications comprised 41% of RAC consumables revenue. The other division is OSA, which includes nasal and full face mask and flow generator ranges, with 15% constant currency growth in FY14. On FNArena's database there are two Buy ratings, one Hold and one Sell.

The company is being conservative with guidance as FY15 profit is expected to be similar to FY14, dented by the strength of the New Zealand dollar as currency hedges roll off. A more onerous currency forecast means UBS has lowered earnings forecasts for FY15 and FY16 by 1% and 3% respectively. UBS believes there is still strong potential for growth in OSA masks and new RAC applications. Productivity improvements are also expected to continue for some time. The broker retains a Neutral rating and prefers ResMed ((RMD)) in the sector, on valuation grounds. The FPH price target is NZ$4.20.

OSA revenue growth not only impressed Credit Suisse in absolute constant currency terms but also in relative terms, with growth at least three times that of the estimated sector growth of 5%. The broker thinks the company is being overly conservative and thinks any surprise will come on the upside, given the recent track record of earnings upgrades. The broker notes from the company's commentary that the ageing demographic and increased access to healthcare in developing countries is underwriting significant growth in patients who will benefit from FPH products. Credit Suisse believes the company might be affected in the short term by currency volatility but further afield the growth story is still very much intact and an Outperform rating is retained.

Goldman Sachs adds FPH to its Australasian Conviction Buy list, believing the investment story is in good shape with the new products and benefits from manufacturing in Mexico. The broker thinks FPH is well positioned to benefit from the NZ dollar easing back from near record levels. The broker's 12-month price target of NZ$5.05 is based on a FY16 price/earnings multiple of 22 times and supported by a robust return on equity of 23%. To Goldman this implies a total shareholder return of 22% and a cash dividend yield around 3%.

Macquarie observes FPH's results are usually well signalled as the company provides regular updates. The company will have to deal with the fall in hedging gains in 2015 and valuation is very sensitive to currency assumptions, so the broker's price target is calculated using a combination of three currency forecasts. The broker's target is NZ$4.40 and Macquarie retains an Outperform rating.

Citi reduces its target to NZ$2.98 from NZ$3.02 and retains a Sell rating. The FY14 results were in line with the broker's expectations and Citi estimates FPH has made inroads into ResMed's market share over the past 12 months. The issue is whether ResMed's new mask products gain traction over the next 12 months, and whether this is sufficient to take back market share. Citi assumes ResMed will recover the lost market share and expects FPH's "mid teens" growth guidance in OSA will be difficult to achieve in the second half of FY15.

FPH appears to be holding market share in flow generators with 4-5% growth. ResMed and Respironics have stronger offers and more entrenched customer relationships in this area and the broker questions whether FPH can sustain its market position in flow generators. Citi thinks FPH is somewhat expensive and also prefers ResMed, which is significantly cheaper and offers higher earnings growth potential over FY15 and FY16.

In terms of RAC, Citi likes the high proportion of consumables sales that underpins the division and the annuity style of much of the revenue. In the medium term the broker foresees greater competition, particularly in the US market, where competition was almost non existent. In this region, the broker notes ResMed's purchase of Grundler goes head-to-head with FPH in humidification. On the positive side, any loss of market share for FPH is likely to be slow in Citi's opinion, because of how well entrenched the company is among US respiratory therapists.
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

Primary And Sonic Oversold?

-Current proposal looking less likely
-Sell off in PRY, SHL seems overdone
-Impact complex and difficult to assess
-Potentially negative for earnings from FY16


By Eva Brocklehurst

A co-payment of $7, to be made when visiting a general medical practitioner, was a feature of the latest Australian government budget, creating a good deal of publicity and angst among lower income earners and pensioners. The mooted changes to the medical system put the focus squarely on those companies sourcing earnings from private practice such as Sonic Healthcare ((SHL)) and Primary Health Care ((PRY)). Primary derives around 64% of revenue from GP services while Sonic derives around 70%.

Implementation of the proposal is some way off, if it proceeds at all. Increasingly, it looks like the government will have trouble passing the bill through the parliament, particularly with a newly configured, and likely hostile, Senate taking up residence from July 1.

CIMB finds the impact difficult to assess for healthcare providers, but believes the post-budget sell-off in the two noted stocks at more than 5% was excessive. The broker's analysis suggests, if the reforms were implemented as proposed, that GP visits may decline 3-9%, with a 5-14% decline in pathology volumes and a 4-12% decline in diagnostic imaging. This would equate to modest FY16 earnings declines of 0-5-3.0% for Primary Health Care and 0.2-2.2% for Sonic Healthcare. The reasons the calculation remain rough is there are numerous aspects to the legislation that are difficult to gauge, such as the varying proportion and different pricing of the Medical Benefits Scheme (MBS), the mix of concession card holders and non-concession visits to the GP, and physician discretion to waive or increase the co-payment.

Adding to the confusion, in CIMB's opinion, is a prior bad experience of providers introducing co-payments in pathology in 2009, as an offset to government price cuts, that were quickly and subsequently withdrawn. The broker hastens to remind the market this experience does not reflect the current situation.

Another layer of complexity comes from differences across these companies in terms of their relative exposure to Medicare-derived revenues and the proportions of both bulk-billed services and concessionary attendances. Credit Suisse is mindful of these differences in attempting to model the possible scenarios. In the broker's bear case - with a $2 net price increase on bulk-billed services based on a $7 co-payment, offset by a $5 reduction in the scheduled fee, a reduction in bulk billing incentive items and a 10% reduction in bulk billed concessionary volumes, as well as no change to the current percentage that are bulk billed - this would deliver revenue reductions of 4% for Primary Health Care and 3% for Sonic Healthcare.

Based on the high proportion of fixed operating costs the broker assumes there is no offset to lost revenue at the earnings line. Moreover, any cost cutting would be negated by increased administrative expenses associated with the collection of co-payments. Therefore, if such measures play out - and there are a lot of assumptions - there could be a group net profit reduction of 22% for Primary Health Care and 9% for Sonic Healthcare.

At the other end of the scale Credit Suisse models a scenario where the co-payment is $15 for ordinary patients and zero for concession holders with no volume loss. In this instance, FY16 profit forecasts for both Primary Health Care and Sonic Healthcare would actually increase by 7% and 3% respectively. As there is such uncertainty over whether the measures will pass the Senate the broker makes no changes to earnings, target prices or ratings on the two stocks.

For UBS there are three likely outcomes. Either the proposals are passed in their current form, in which case the range of impact is a 1.0-2.3% reduction in FY16 earnings for the two companies at a 5% reduction in volumes, or the Senate blocks the reforms and that's the end of the story. The third outcome is that some variation is requested by the Senate in order to ensure passage of the bill, such as a more moderate co-payment or no co-payment on pathology and diagnostic imaging. The worst case scenario is the current proposal, which UBS notes has been captured in the selling down of the stocks, and the broker thinks the outlook can only improve from here.

The uncertainty makes it difficult for both these companies to respond to the measures. The co-payments would not be due until FY16 but confusion abounds and UBS believes this is a risk to near-term patient volumes. The broker applies an immediate 2% hit to GP volumes for both stocks which affects FY15 earnings estimates. These are reduced by 1.1% for Primary Health Care and 2.5% for Sonic Healthcare.

On FNArena's database Primary Health Care has three Buy ratings, four Hold and one Sell. The consensus price target is $4.99, suggesting 10.1% upside to the last share price. Sonic Healthcare has three Buy and five Hold ratings. The consensus target is $17.71, suggesting 1.4% upside to the last share price.
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

Weekly Broker Wrap: 4-Year Outlook, Oz Jobs, Oz M&A Targets And LICs

-Growth spurt seen peaking in 2016
-Is the Oz jobs market that strong?
-Sonic Healthcare a target for US companies?
-What are the advantages of LICs?
 

By Eva Brocklehurst

Westpac's chief economist Bill Evans has peered into the crystal ball, with a four-year view of the world that sees markets becoming more interesting in 2015. A marked lift in global growth is expected, accelerating in 2016. From there a major slowdown is expected to eventuate in 2018. The cause? Developments in the US economy.

Key drivers of the expected surge in US growth in 2016 will be an overvalued equity market that forces firms to adopt growth policies to justify valuations. Pent up demand in the corporate and household sector after eight years of relative austerity will be signalled by a renewing of capital stock, upgrading of consumer durables and housing. This, in turn, is expected to lift wages and employment and thereby boost income. Supporting this growth spurt, according to Bill Evans, will be a dovish Federal Reserve, which is not expected to begin normalising official rates until the final quarter of 2015. The Fed will not be spurred on to act sooner as inflation is expected to stay benign.

The synchronised nature of the demand upturn - China and emerging markets will lift to some degree in response to stronger US growth as will Europe's external sector - will lift commodity prices. Australia's Reserve Bank is expected to begin raising official rates before the US Fed does and this will, along with commodity prices, support a significant rise in the Australian dollar. Australia's relatively stable financial markets will become more volatile from 2015 and Mr Evans expects the currency will once again be flirting with parity to the US dollar.

From late 2016, Mr Evans foresees a significant reversal in equity markets as a tipping point is reached as the lagged effect of the Fed's tightening of monetary policy starts to impact. Business investment, employment, household incomes and overall growth will start to reverse. China's growth in 2018 is forecast at around 6%, while merging markets will become stressed by capital outflows and falling commodity prices.  In 2018 Australia's growth rate is forecast to fall to 1.5%, the currency to be back at US80c and the Reserve Bank to start cutting official rates to 3.0%, having hit a peak of 4.75% in 2017.

***

AllianceBernstein's senior economist, Guy Bruten, is not convinced about growth in the Australian labour market, despite the story that's unfolded so far in the job statistics. Employment grew 14,000 in April on top of a 22,000 rise in March. That's a little shy of the gain require to keep pace with the growth in the working age population. Massaging the statistics, the economist believes there's enough to stem a rise in the unemployment rate if, and that's a big if, employment numbers grow at the current annualised rate and the participation rate does not change. Australia's workforce participation rate has dropped in the last three years. Without this fall the jobless rate would now be above 7%.

Guy Bruten observes the debate around the globe as to whether falls in participation are demographically based or caused by discouraged workers. The latter is clearly the case in Australia, from his analysis. A sharp drop in 15-34 year-old male participation explains the greater proportion of the drop in the participation rate. Consensus expectations generally favour a smooth transition to employment growth in other areas as the mining surge winds down but Mr Bruten thinks the opposite will occur. The bigger fall in mining and related services employment is still to come, as the fall in mining capex is only starting. There is also a range of manufacturing job losses that will impact in the second half of the year.

Moreover, fiscal policy is set to be tightened and, while the extent of this is uncertain, Guy Bruten notes a substantial effect on confidence. Other aspects which signal a bumpy ride for employment are the shape of the housing recovery and subdued wages growth. This adds up to the Reserve Bank of Australia keeping official rates on hold for some time and the economist believes speculation regarding hikes before year end is misplaced.

***

UBS observes the re-domiciling of US companies to another country through acquisitions and for tax reasons has recently accelerated. The test of whether this can be done requires 25% of sales or 20% ownership to be domiciled offshore. Six large transactions are in train or completed so far in 2014. The acceleration in the trend has largely come from corporates rushing to beat changes in the US 2015 budget, that propose increasing the threshold for re-domicile to 50% from 20%.

UBS thinks Australia's healthcare sector is a target for such undertakings and Sonic Healthcare ((SHL)) is a logical candidate. It makes strategic sense for the likes of US Quest and Labcorp. These two would gain geographical diversification and synergies from asset consolidation. CSL's ((CSL)) vaccine division could provide scale for an acquirer, but UBS observes separating the division may provide difficult. Ramsay Health Care ((RHC)) would provide diversification and synergies to certain acquirers but UBS notes the shareholder structure and valuation could prove problematic. One precedent which the broker highlights is the transaction involving Endo Health and Paladin Labs of the US which resulted in a re-domicile in Ireland, despite neither party being incorporated there initially. The combined entity is expected to enjoy an effective tax rate of 20%.

What are LICs? Listed Investment Companies provide access to a diversified range of investments in a single ASX-listed exposure. Morgans considers LICs have a place in every portfolio. So what should you look for? First objectives such as yield, growth or diversifying returns need to be taken into account, if choosing investments that are not correlated to existing holdings. LICs offer four main areas of exposure - Australian equities, international equities, specialist and absolute return funds. These entities do not regularly issue new shares or cancel shares as investors join and leave. Their structure allows the fund manager to concentrate on selecting investments without having to factor in the money flows. Therefore these instruments are generally long-term portfolio holdings.

LICs have emerged as a competing investment to managed funds but have some significant advantages over unlisted managed funds, in Morgans' view. Largely, as they are closed-end funds, managers need not be concerned about uncertain fund inflows and outflows, and the structure enables the smoothing and deferral of dividends which can be particularly useful for those in high tax brackets.
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

The Budget And The Stock Market

- Minimal GDP/RBA impact
- Healthcare not a winner
- Infra not a loser
- Retail ups and downs


By Greg Peel

It could have been worse – that’s the general summation from stock market analysts. This is a typical response, of course, given Treasurers like to talk tough and then deliver something a little less painful to appear benevolent. Investors also need to take into consideration, as is the case in stock trading in general, that stock prices had already moved on anticipated pain before last night’s budget speech.

“If the reported drop in consumer sentiment associated with Budget speculation is reversed,” offers Citi, “then we don’t see any major implications from the Budget for the RBA and the equity market”. Macquarie suggests the overall view is one of short term negative but medium term positive for both the Australian economy and the equity market.

JP Morgan suggests “this is a reasonable outcome for stocks,” noting the cut in the corporate tax rate is a positive even if high income earners have to wear a debt levy for a while. GDP expectations should not take a meaningful hit, suggests JPM, given the balance of well-flagged tightening measures and the offset of high-multiplier infrastructure spending.

We must also be aware at this stage that the bill still has to pass through the Senate and may yet be watered down, assuming Labor, the Greens and the Pups all land on the same page.

Drilling down into sectors, it is clear the biggest loser is healthcare, and indeed perhaps more so than was feared. Having said that, uncertainty remains as to just how the consumer will respond to the new regime, and how healthcare providers will respond to the response. To that end, there is disparity among broker views. Infrastructure is a winner, although perhaps not as much as was hoped, making winners out of engineers & contractors to varying degrees. Retailers should find the carbon tax repeal offsetting the extent of middle class welfare cuts. Biotechs and education providers might see a boost.

Let’s start with healthcare. This is not the forum to list all the changes – no doubt readers will assess their individual impact from an avalanche of available media commentary.

The problem for healthcare analysts is that no real data exist on consumer price-sensitivity. Will the new (reasonably modest) medical co-payment measures and PBS changes force the sick to resign to dying at home rather than seeing a doctor? Will it simply make the snifflers and hypochondriacs think twice? Whatever the case, analysts agree the new budget measures are probably a bit worse than feared and will have their greatest impact from FY16. The impact on Primary Health Care ((PRY)), Sonic Healthcare ((SHL)) and Sigma Pharmaceutical ((SIP)) will by no means be positive, but analysts disagree on just how negative the outcome might be.

Macquarie believes the impact to Pathology and GP volumes could be “material” given the non-urgent nature of a fair portion of these services, and especially to those providers who currently bulk-bill.

BA-Merrill Lynch suggests net-negative impacts for all of PRY, SHL and SIP, mostly PRY and SHL, but while PRY is a majority bulk-biller, SHL already charges co-payments and thus will be less affected.

Goldman Sachs agrees PRY is the most exposed and also sees SHL impacted given its leading position in Australia, but believes SIP and fellow pharma wholesaler Australian Pharmaceutical Industries ((API)) will suffer little impact.

CLSA calculates volumes would have to decline by around 4% for medical centre and pathology services for PRY and SHL revenues to be revenue negative but notes that when PRY introduced GP co-payments at selected medical centres in FY10, a 5.3% decline resulted.

Citi, on the other hand, suggests the new co-payments are “probably neutral” for PRY and SHL, but will depend on any moves by the two to waive part of the co-payment in order to gain market share. The other new healthcare measures will “likely have only a modest impact,” says Citi, on PRY, SHL and SIP.

So the jury’s out on the healthcare sector. Watch this space. But there are also winners, with Macquarie noting private hospitals and insurers will win. This puts Ramsay Healthcare ((RHC)) in the frame, for one. The new Medical Research Future Fund may also be positive, Merrills suggests tenuously, for the likes of CSL ((CSL)), Cochlear ((COH)), ResMed ((RMD)), and Mesoblast ((MSB)).

CLSA believes new charges won’t impact on IVF providers such as Virtus ((VRT)) given the highly discretionary nature of the spend, while Macquarie suggests IVF providers “appear to have a small win”.

The market may be a little disappointed by the lack of new initiatives on infrastructure in the budget, says Morgan Stanley, although Citi notes that of all the budget initiatives, the $11.6bn infra increase seems to represent a substantial rise on previous projections. Whatever the case, all brokers agree it’s a shot in the arm for (parts of) the engineering & construction sector.

CIMB suggests Transurban ((TCL)) comes out with the most to gain. Just about everyone else believes Leighton Holdings ((LEI)) is the biggest winner followed by Lend Lease ((LLC)), with benefits also flowing to Downer EDI ((DOW)), Transfield ((TSE)), UGL ((UGL)), Monadelphous ((MND)) and RCR Tomlinson ((RCR)).

With regard to retail, CIMB does not believe the budget places a significant burden on the consumer. The reversal of the carbon tax in FY15 should more than offset the negatives, the broker suggests, although the cuts do look more significant from FY16. CIMB retains its Overweight rating on the consumer discretionary sector and its Add ratings on JB Hi-Fi ((JBH)), Harvey Norman ((HVN)), Dick Smith ((DSH)) and Myer ((MYR)).

If the potential $6.7bn decline in consumption expenditure is spread proportionately across discretionary subsectors, posits Macquarie, the biggest impact will be felt in clothing & footwear, furnishings and household appliances. On the other hand, the supermarkets might benefit if consumers respond by eating at home more.

The broker thus believes the budget is a negative for JBH and HVN but a positive for Metcash ((MTS)). The negative for clothing & footwear, and thus discount department stores, and the positive for supermarkets, splits Woolworths ((WOW)) and Wesfarmers ((WES)) down the middle.

Macquarie goes to the next step and assesses the impact on shopping centre landlords. Sales at more discretionary-weighted sectors are likely to be impacted while food-based centres might actually benefit. Thus on the negative list are Westfield Group ((WDC)), Westfield Retail Trust ((WRT)), CFS retail property ((CFX)) and GPT Group ((GPT)), on the positive list are Charter Hall Retail ((CQR)) and Shopping Centres Australasia ((SCP), while Federation Centres ((FDC)), Stockland ((SGP)) and Mirvac ((MGR)) sit somewhere in the middle.

So that’s the rub. We must consider that analysts have only had since yesterday afternoon’s lock-up to recalibrate their views, and much appears to depend on just how the consumer will ultimately respond. Certainly there were no McMillan Shakespeare-type clangers.

Over to the Senate…
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

Yeah Baby: Virtus Health On A Growth Path

-Robust IVF growth
-Genetic testing growth
 

By Eva Brocklehurst

Reproduction services provider Virtus Health ((VRT)) is a leader in its field and brokers believe the company's target market has attractive growth potential.

Macquarie expects assisted reproduction services (ARS) in this country will continue to rise as IVF - in vitro fertilisation - becomes more affordable and success rates rise. The broker expects industry revenue growth of 7% per annum over the next five years. Virtus earnings are also being boosted by day hospitals and diagnostics, courtesy of the emergence of new genetic testing technologies. Key to the company's growth in ARS, according to Macquarie, is the superior pricing, because of the patient demographic - age and income - and the fact that IVF tends to be a one-off service that figures highly in relative importance to the patients concerned.

Demographics are important in IVF. The age at which women have their first child is increasing and as ageing reduces fertility there is growing need for medical help. Moreover, Macquarie observes awareness of IVF is now relatively high in the broader community and, while this as a driver has largely played out among heterosexual couples, the social acceptability of single mothers, same sex couples and surrogate pregnancies is growing and this increases the prospect for a greater proportion of IVF volumes coming from these segments in the future.

Margins in excess of 30% and high incremental returns on capital may appeal to new entrants, and there has been reports of potential low-cost entrants into the ARS arena. Bell Potter understands that Monash IVF is now conducting pre-deal marketing for an IPO later this year and expects pricing to be at a small premium to that at which Virtus was offered. Monash is significantly smaller in scale than Virtus. Overall, Macquarie sees little risk to existing players because the scale of any new entrant is limited by the difficulty in recruiting specialists and embryologists. Macquarie remains confident that market penetration has some way to go. Moreover, the company's valuation is not demanding and the broker has initiated with an Outperform rating and $9.30 target. Bell Potter retains a Hold rating and $8.42 target, expecting capital growth of 11.1% and a dividend yield of 3.2%.

Bell Potter notes Medicare statistics were encouraging for growth in the March quarter and expects 6% growth in second half IVF volumes for Virtus. May and June are traditionally the busiest times in the year and will be critical to guidance. The broker notes there has been no discussion of IVF funding in the lead up to the federal budget and, given the budget will confirm details of the paid maternity leave scheme, believes it is unlikely to contain an adjustment to ARS. Furthermore, the establishment of paid maternity leave is expected to be a significant catalyst for the industry. The company's first half met UBS' revenue expectations, although fell short on net profit estimates. Site expansions and refurbishments were blamed and UBS expects stronger growth in the second half. The broker has an $8.65 target and a Buy rating.

It's not just about IVF. Virtus provides assisted reproductive services, responsible for around 4,000 births per year, but also specialised diagnostics. Other revenue is generated from opthalmology, endoscopy, plastic surgery, gynaecology, urology and dental from its six, day hospitals. Genetic testing is an additional area of growth, in Macquarie's view. This includes screening of embryos as well as pre-natal testing of blood.

Australian operations are predominantly in the three main eastern states. Services are provided through 34 integrated fertility clinics, 17 embryology laboratories, 19 andrology laboratories and the day hospitals. Macquarie considers peer comparisons should be made with other heath service providers such as Ramsay Health Care ((RHC)) Sonic Healthcare ((SHL)) and Primary Health Care ((PRY)) on the basis that the majority of revenue comes from, or is regulated by, government, and all have exposure to Australia's growing demand for health services. The economics of this sector consist of 3-5% volume growth, 0-3% pricing growth with potential for modest margin expansion, in Macquarie's assessment.
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

Weekly Broker Wrap: The Aussie, Wesfarmers, Pharma Stocks And The Genworth IPO

-$A demand unlikely to wane
-CLSA prefers Wesfarmers
-Constrained growth in pharma
-Genworth IPO not so cool for CLSA


By Eva Brocklehurst

What will it take to push the Australian dollar lower? The currency has defied many analysts over recent years, surprising with its stubborn strength. Macquarie considers this resilience reflects an ongoing structural shift in the sources of demand for the currency and sustainability for commodity prices, as opposed to the 1990s and early 2000s. It also reflects the higher-than-usual differential between Australian official interest rates and the rest of the developed world.

Over the past decade the Australian dollar has appreciated by 50% in trade weighted terms, reflecting the boom in demand for resources. This is not all. Macquarie considers the currency is also underpinned by a fundamental shift in investor demand, reflecting the decoupling of Australian interest rates from other developed markets. The inflation-fighting success of Australia's central bank has driven inflation expectations lower and led investors to re-assess the relative risk in the Australian economy. This demand Macquarie expects to be sustained in coming years as a result of a less volatile and more robust commodity price cycle, relative strength of Australia's financial economy and attractiveness of Australian assets to a growing Asian middle class - to name a few factors. The Australian dollar may not be a major reserve currency but Macquarie notes it is gaining prominence as a well supported, relatively stable store of wealth.

Macquarie considers Australia has been among those economies affected by the US Federal Reserve's escalation of quantitative easing, driving demand for higher yielding Australian assets. This is particularly in the case of government bonds, which the analysts note reached an historical high at 78% foreign-owned in 2012, before edging back to 68% in late 2013, still well above the long-term average of 47%. Will a scaling back of QE have the opposite effect? Macquarie's not so sure. Recalibrating models to account for the impact of QE suggests other fundamental drivers of the currency remain very evident. The analysts calculate that to arrive at a US82c forecast for the Australian dollar by year end would require an iron ore price around US$85/t, coking coal at US$100/t and thermal coal at US$70/t!

***

CLSA prefers Wesfarmers ((WES)) to Woolworths ((WOW)). Woolworths may have matched Coles for the first time in 4.5 years in terms of quarterly like-for-like sales growth but CLSA thinks Coles can deliver at more than twice the rate of Woolworths, as it penetrates further into fresh categories and improves supply chain efficiencies. Wesfarmers is further advantaged by its Bunnings chain. The broker notes that hardware store's format has proven best in class and remains underpinned by a significant store roll-out that looks likely to provide 9% compound earnings growth rates.

In contrast, Woolworths' Master business is stalling. Masters' March quarter figures imply average sales per store declined by 9%, and CLSA does not think guidance for breaking even in FY16 will be met. Last but not least, Woolworths is trading at a premium to Wesfarmers despite offering less than half the rate of of earnings growth, on CLSA's calculations, so the Buy signal is entrenched for Wesfarmers.

***

Goldman Sachs expects revenue in the pharmaceutical wholesaling industry to remain flat over the next two years because of Pharmaceutical Benefits Scheme price cuts for a number of high volume products which have lost patent protection. Wholesalers will need to maintain a strong focus on growing over-the-counter and private label offerings to offset this. In terms of Australian Pharmaceutical Industries ((API)) Goldman has increased FY15 and FY16 earnings estimates on better sales from Priceline and better gross margins from a reduction in discounting. The broker retains a Sell rating as, while Priceline is improving and cost control is encouraging, the aforesaid pressures from the PBS and a competitive retailing environment should limit underlying earnings growth.

There's no change to Sigma Pharmaceuticals' ((SIP)) Sell rating either. Sigma is in a position to grow ahead of the market, in Goldman's view, given its faster growing customer base and the strength of key customer, Chemist Warehouse. The company's conservative balance sheet also means it can support capital management and potential acquisitions. Again, the combination of PBS price deflation and challenging trading for customers is expected to constrain the rate of earnings growth over the next 2-3 years.

***

Leading lenders mortgage insurer (LMI) Genworth's US parent is putting its Australian business up for initial public offering (IPO). CLSA is cool on the idea. The IPO is being presented as an earnings recovery story. The company expects recent premium increases and a subsequent improvement in loss ratios will generate improving returns. CLSA thinks the recent increase in high loan-to-volume ratio business and a booming housing market do more than offset any premium increases and three to five years from now loss ratios will deteriorate.

The broker also questions the returns, given the elevated levels of capital required to run a mono-line insurer. At 11% return on equity - the only way the broker believes one can value the stock - FY15 fair value sits at $2.44 in the broker's calculations, which equates to an IPO price of $2.20 today. At an issue price of $2.20 the stock is considered a Buy but this is the low end of the indicated offer price. At the mid point of $2.55 the broker would assign an Underperform rating.

What compounds the problem for CLSA is that, while there is a future in the lenders mortgage insurance market and the incumbents have it easy, Genworth is at the mercy of a client list which has the financial strength and capital base to carry mortgage insurance risk on their own balance sheets - the big banks. Hence, until Genworth breaks this nexus, and CLSA questions whether it will, it's likely investors will not achieve returns commensurate with the earnings volatility and risk they will run.

So what is lenders mortgage insurance? It's a necessary insurance enabling Australians to own their own homes and can generate excellent risk-adjusted returns. The downside is that it can be volatile and when losses occur they can be huge. CLSA notes this class of insurance can deliver nine years of excellent ratios only to have them wiped out in one disastrous event. Two players control this market in Australia, Genworth and QBE Insurance ((QBE)), and expansion equates to system loan growth. Sector players can only increase value by keeping a rein on pricing and costs. Forward pricing the risk of an asset bubble can have pitfalls, although CLSA thinks insurers have done a good job recently and been conservative in approach. There is the temptation to release profit after a few good years but insurers, and investors, need to stay focused on underlying risk. So, the sector demands lots of investor patience. Capital too, reflecting the volatility of the risk.
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

Brokers Warm To ResMed As Price Disruptions Abate

-Lull in US price reforms
-New products on launch pad
-Earnings growth upside
 

By Eva Brocklehurst

Brokers have renewed confidence in sleep disorder specialist ResMed ((RMD)) after the company's March quarter results, with two taking the opportunity to upgrade recommendations. Most of the disruption from the US competitive bidding process seems to have passed and brokers, generally, have a more upbeat outlook on future prospects.

BA-Merrill Lynch believes, while growth in the quarter was achieved through discounting, the effect was immediate and this highlights the fact there are still plenty of opportunities for the taking, although large volume discounts could make further growth more difficult. Credit Suisse thinks a series of new mask launches offers the opportunity for ResMed to stem market share losses, but concedes a decision to price at the level of existing models may hinder distributor take-up. JP Morgan is encouraged by the fact ResMed is using its ample gross margin to capture lost market share but remains mindful that distributors could pull forward inventory to capitalise on discounted product. If such be the case, this is not a sign of sustained improvement in underlying demand. Still, the broker is prepared to give the company the benefit of the doubt and assumes similar volume growth in the fourth quarter.

Merrills thinks investors lacked confidence in the stock in the recent past because of the challenges in the industry but with new products, easier comparables and a lull in pricing reforms in the US, confidence should improve. The broker notes the Astral Ventilator, and "10" masks are to be launched soon and the market is expected to look ahead from these launches for what's in store in FY15. The biggest surprise for Merrills in the March quarter was the weak Flow Generator growth in the rest of the world, largely affected by the largest Japanese customer delaying the renewal of orders. The broker is comforted by the evidence that there remains strong underlying growth for masks in Japan. All up, Merrills sees the company at an inflection point and the risk/reward as attractive.

On the FNArena database the consensus target is $6.05, suggesting 16% upside to the last share price. This compares with $5.98 ahead of the quarterly update. Targets range from $5.49 to $7.07. Both CIMB and Deutsche Bank upgraded ratings. There are now five Buy ratings and three Hold.

CIMB thinks the operating environment may be challenging but price erosion is subsiding and there are new products to be launched so sales growth and momentum should be restored. The broker has upgraded to Add from Hold. The broker acknowledges gross margin guidance of 61-63% compared with the previous 63-65% suggests there may be more price erosion to come, but takes comfort from the likelihood that the bulk of price adjustments have already occurred and market stability is starting to emerge.

The US market retains some pricing issues and remains highly competitive so Credit Suisse suspects the most effective tool for manufacturers to shift market share is via pricing. A further concern centres on the shift to bundled payments as the distributor payment methodology, in lieu of nationalising the current competitive bidding. If so, Credit Suisse maintains it would radically change the way the product is sold in the US. The broker does not envisage reimbursement would be allowed to grow excessively. On this basis, JP Morgan finds it difficult to recommend the stock (Neutral rating) whilst the US Medicare decision on implementing a bundling system remains a possibility.

To Citi the US may still be challenging because of competitive bidding issues but these headwinds are abating. Moreover, the growth in the rest of the world should stay strong, aided by the controlled launch of the Astral respiratory care platform in Europe and the AirFit P10 pillows masks at the beginning of the March quarter. The broker likes the stock, particularly with core earnings growth forecast at 11% in FY14 and 19% in FY15.

Deutsche Bank expects a return to more normal pricing and demand will present in FY15, boosted by the new product range and the move into the non-invasive ventilation market in the US. While the broker acknowledges the risk of further funding reforms, such as bundling, this would take a number of years to introduce and the market should continue to grow in the interim. Deutsche Bank hails the company's success in winning back share in the US and the broker no longer expects a contraction in FY14. Rest-of-world sales forecasts are reduced following the weakness in Japan and, combined with lower average pricing, the broker has reduced earnings forecasts in FY15 by 3.5%, but this impact eases in the outer years as the benefit of non-invasive ventilation sales increases. Deutsche Bank upgrades to Buy from Hold.

A fourth quarter launch for the new FG platform at the major "sleep" conference is likely, in UBS' opinion, and there has been a strong precedent for strong growth after prior launches. The broker expects FY15 growth of 15% could prove conservative and will review sales estimates if new devices offer relevant innovation. UBS believes the key metrics are robust, there's a net cash balance of $543m and buy-backs in place for 14% of shares. Moreover, the stock is trading at 16.4 times FY15 estimates, a historical low against the five-year average. It's worth a Buy rating in this broker's book.
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

Your Editor On Switzer: Healthcare Stocks Defensive?

The label of "defensive" or "safe haven" is too often and too easily applied when it comes to healthcare stocks in Australia, explained FNArena Editor Rudi Filapek-Vandyck to host Peter Switzer. His research into All-Weather Stocks has revealed only three healthcare stocks are genuinely a member of the select few, and all three are facing some specific issues right now.

Confusion starts by applying the same label of "healthcare" for a sector that essentially consists of exporters of services and technology, above market PEs, government regulations, currency impacts, manufacturers of high-tech devices and changing dynamics in the competitive landscape.

To view the broadcast, click HERE

Past broadcasts can be viewed via the Investor Education section on the FNArena website: https://www.fnarena.com/index2.cfm?type=dsp_front_videos

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

QRxPharma Knocked Back And Knocked Down

-Severe setback to development
-Now highly speculative investment
 

By Eva Brocklehurst

QRxPharma ((QRX)) has been scalded. The advisory committee of the US Federal Drug Administration - the world's most influential health product regulator - has rejected an application for approval of the company's MoxDuo-IR drug. The grounds were lack of evidence of a safety advantage. As this is considered unproven, QRxPharma has to return to the clinic and repeat its phase 3 trial, using a design that specifically entails demonstrating a meaningful safety advantage.

The study will require a further two years and $50-75m, according to Citi. As the company has only $15m in cash, it will have to resort to a further capital raising, which will be diluting to existing shareholders. Moreover, the broker believes the company's credibility is now at stake, particularly as its own briefing documents for the FDA suggest there was a much less compelling case than had been purported. This could make further fund raising problematic, in the broker's view.

Citi acknowledges the FDA may have changed some of its requirements while the trials were in progress but thinks the company's ongoing protestations regarding the process are unhelpful. The broker cuts the price target to 27c from $2.58 but hangs onto the Buy rating, although noting there is significant risk and the stock is highly speculative. The lack of clarity on the path to regulatory approval is expected to weigh heavily for some time. Citi also assumes a further $80m in equity will be needed.

QRxPharma is a specialty pharmaceutical company developing new drugs to treat moderate to severe pain. The company has patented a combination of morphine and oxycodone and this forms the basis of its developmental drug products. Essentially, the company has not convinced the FDA that its product is safer than taking morphine or oxycodone on their own. MoxDuo-Immediate Release is the most advanced product while the company is also developing MoxDuo-Controlled Release and MoxDuo-Intravenous.

JP Morgan is equally perturbed and has downgraded the stock to Underweight from Neutral, cutting the target to 6c from 92c. The broker notes the US was to be a highlight in the company's geographical approvals and this is now a non event. The US has always represented one of the largest market opportunities and this rejection is the latest in a line of setbacks for the company since 2012, when it received the first complete response letter from the FDA, with a subsequent letter relating to data integrity issues in August last year.

Also, the rejection calls into question whether approvals in Australia, Europe and Canada and the launches in these jurisdictions targeted for 2015 will be achieved. JP Morgan is not ruling out the potential for the product to be approved elsewhere, given the obstacles tend to be fewer. Nonetheless, with the second half 2014 launch of the product in the US now delayed indefinitely the broker assumes no revenue will be forthcoming in FY15. JP Morgan includes contributions from Canada, Australia and the EU in FY16 estimates, in line with the targeted launch of the product in these regions, but risk weights these earnings to reflect a lower probability of approval.

The broker does point out that the FDA advisory committee considered the incorporation of anti-abuse technology would be a supportive factor in approving the pain drug and the company's Stealth Beadlet technology may hold that opportunity. QRxPharma intends to incorporate this into MoxDuo-IR, but this requires new trials and is some way off. Hence, the cash position is in focus and the broker observes the US partnership agreement with Actavis Watson, which was based on approval of MoxDuo-IR, is also now uncertain. 

Morgans has moved the probability of success for MoxDuo-IR to 20% from 80% and removed a $20m milestone payment and related costs from valuation. The broker has maintained forecasts for the MoxDuo-CR and MoxDuo-IV programs at this stage but reduced market share assumptions. The share price target has been cut to 21c from $1.79 and the rating double downgraded to Reduce from Add. The FDA will make its final recommendation on May 25 but brokers consider it unlikely to go against the advisory panel's decision. To Morgans, the upshot is a key milestone has been missed and for many investors the stock is no longer appropriate for their portfolios.
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

What’s Likely In The Federal Budget For Health Care?

-GP co-payment likely positive for Primary
-Pharma co-payment likely negative for Sigma
-Changes unlikely on medical insurance
-Lifting retirement age?
 

By Eva Brocklehurst

There's speculation the Australian government will go ahead with a $6 co-payment for visits to the GP, to be announced in the May budget. According to media reports this co-payment would be capped at 12 visits per year, making a total out-of-pocket cost of $72 per person.

UBS believes the devil will be in the detail. Savings for the government are envisaged to be around $750m over four years and the broker assumes the preferred implementation measure is allowing GPs to retain the co-payment while the government freezes indexation of the medical benefits schedule payments. The impact of the mooted changes would be most significant for stocks such as Primary Health Care ((PRY)) and Sonic Healthcare ((SHL)). Primary bulk bills 100% and the co-payment would provide a material pulling forward of revenue that would have otherwise taken over three years, in UBS view. Sonic already has a significant level of co-payments, which would continue, but is expected to implement the co-payment where it was bulk billing.

BA-Merrill Lynch expects, given the mix of earnings, that Primary has more exposure than Sonic to any GP reform and pathology claw-back that may be instigated in the budget. The broker expects the government will introduce new measures to either shift part of the cost burden to patients via the co-payment, or revise the way service providers are reimbursed. If the latter is enacted the broker cautions that, given the high fixed cost leverage in health care, the impact on earnings often ends up being worse than estimated.

Implementing such budget measures is not expected to require legislation. UBS observes the Audit Commission seems to favour a price signal to access Medicare, with exceptions for the chronically ill and elderly. The broker suspects the recommendations, due in several weeks, will be more controversial than the final budget outcome. Moreover, the government will need to consider reforms that don't require legislation, given it will not control the Senate. UBS suspects a tiered payment structure would combine with the co-payments, such that the government would pay GPs less for consultations with non concession card holders. Changing the GP reimbursement structure is a powerful option because, not only does it reduce visits, it also could reduce utilisation of those health services such as pharmaceutical, radiology and pathology.

UBS estimates a modest GP utilisation decline of around 3%, if the co-payment goes ahead, with a flow-on effect on the above three services. The broker believes the current pathology agreement, which has some two years to run, does offer the industry some level of protection, given it provides for a fixed sum, with 5% growth of a base rate. Should the industry maintain its current run rate, UBS estimates it will overspend the FY14 budget and a top-up would need to be negotiated This may be reviewed or considered in the context of any GP co-payment arrangements.

Pharmaceutical co-payments may be raised, which Merrills notes has traditionally been the area for budget savings given the large representation in the health budget and the rate of growth. Despite the fact previous reforms have not yet run the full course, Merrills believes, if a raising of the co-payment occurs, it could have a material impact on consumption and hence a direct impact on Sigma Pharmaceuticals' ((SIP)) wholesale revenue. UBS quotes the health minister saying that current legislation around pharmacy ownership will not be changed with this government. This means Coles ((WES)) and Woolworths ((WOW)) will remain excluded form the community pharmacy sector.

The government is unlikely to reverse its stance on denying radiology indexation of medical benefits rates, but UBS considers that reduced GP visits could have some negative implications for the utilisation of radiology. On average there are 10 radiology tests for every 100 GP visits. Still, the broker suspects patients who defer/cancel GP visits following reimbursement changes would be unlikely to be carrying ailments requiring radiology services. Applying the same methodology to pathology, the broker assesses 13 patients require pathology for every 100 GP visits, but they would also be less likely to cancel a visit to the GP following reimbursement changes. At a worst case scenario the broker estimates a 1.4% negative impact on the pathology benefits pool.

Two potential positive catalysts for the private hospital sector and private health insurance are unlikely in this budget, in UBS' opinion. This includes means testing of premium rebates, which were introduced by the prior government and the current government promised to reverse. This reform is likely to be preserved for when fiscal conditions permit. The other catalyst would be expanding the base for the private health insurance sector to allow insurers to cover out-of-hospital costs and out-of-pocket expenses. The intention to sell Medibank Private via IPO in FY15 is positive for the industry, in UBS' view, and this offers some protection for the health insurance industry - read nib Holdings ((NHF)) - as it is less likely to government would make policy changes that may adversely affect the sales process.

In terms of the recent discussion regarding lifting the retirement age to 70 from 65, Merrills thinks this has implications for participation in health insurance. Cover reaches a peak at 59% in the 60-64 year-old bracket and then starts to fall away. If the retirement age was lifted, the broker see benefits to extending health insurance participation and with it the potential market for Ramsay Health Care's ((RHC)) private hospitals from an extra 28,000 insured.
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.