Tag Archives: Health Care and Biotech

article 3 months old

NIB Holdings On The Waiting List

- Stock held hostage by uncertain PHI market
- Broker sentiment mixed
- Growth to slow near term on uncertainty
- Longer term prospects strong


By Andrew Nelson

At first look, private health insurer NIB Holdings ((NHF)) is a real head-scratcher. Broker recommendations run the gamut between Buy, Sell and Hold, with analysts wary about the currently uncertain regulatory direction of the Australian Private Health Insurance industry.

A new broker has joined the fray and this one has a pretty clear rationale about the stock and the Reduce call it has initiated coverage with. In a report out yesterday from Japanese investment house Nomura, analysts go so far as to point out that their views are contrary to consensus. The divergence is put down to taking a more cautious stance on earnings, the broker admitting its FY14-15 earnings per share and dividend per share forecasts average 5% and 8% below consensus.

For a company that the broker says is well positioned in an industry that it likes the look of, one wonders why a Reduce call? The answer, in short, is the upside and value that most brokers admit to is seen as being longer term, with a bumpy road to ride before it is fully realised. So really, the divergence amongst brokers and their calls is not one of value, but more of timing.

Nomura expects the Australian private health insurance (PHI) market to deliver long-term growth in the neighbourhood of 8%. This is expected to be delivered on the back of population growth, economic progress and the ongoing shift in the healthcare business away from the public to the private sector.

The broker also sees NIB as being in a unique position, as it is the only listed direct exposure to this market. But that’s the longer-term again.

In the near to mid-term, the broker is not quite so upbeat about the industry. We are in the midst of a PHI public policy wrangle that will likely take years to sort though and for the dust to settle. In the meantime, the PHI industry has a number of obstacles to overcome. The biggest of the obstacles is falling government subsidies.

Adverse policy changes to subsidisation and taxation of PHI have already started to hit the higher earners, which account for around 25% of insured people. Then there are the mooted changes yet to come that the broker thinks could reduce demand amongst lower income earners as well. Together, these issues have the broker expecting to see increased lapse rates and a downgrade to coverage, which will in turn disrupt industry premium growth through FY14-15.

In the past, potential policyholders getting out there and shopping around the PHI market for better cover and lower prices has been a good things for NIB. However, the broker now expects the competition to heat up, with increasingly price-sensitive customers making conditions more difficult.

The broker thinks this environment plays better into the hands of Medibank Private and BUPA given a more seasoned and stickier customer base. iSelect, the largest online broker of PHI in Australia, will also benefit from the increased customer activity and shopping around for better deals.

Nomura believes current consensus estimates are underestimating the near-term growth interruption, with current forecasts for growth in NIB group premiums of 10% over the next two years simply too high. The broker’s own numbers point to under 5% over the next couple of years.

Analysts at Macquarie pointed out mid-May that over the 12-months to March 2013, premium growth in the PHI industry had already come back to 7.5%, although this was offset somewhat by a lift in margins to 5.0%. The broker, at Outperform, was ok with the news, noting core business growth was still steady and will remain supported by regulation and some new business opportunities.

That might be the short to mid-term picture out to FY15, but what does Nomura see after that? The broker sees four main drivers not just for long-term growth, but attractive long-term growth in the Australian PHI industry.

First, you have the prospect of increasing personal wealth levels, thus the macro economic cycle will eventually create a larger, more affluent customer base. Next, Australia has an aging population base, one increasingly reliant on healthcare. Also, as general healthcare costs rise, so will premiums. And the icing on the cake is that Australia is still growing its population base, bringing in new prospective customers every day.

Thus while near-term policy environment is not constructive, Nomura is completely of the view that long-term government strategy seems to favour the continued shift of patients and costs away from the public system and into the private. So even the Federal Government, when it comes down to it, has an interest in supporting the sector.

NIB's continuing expansion outside of its home NSW market should provide an increasing tailwind. Although, Nomura points out that while on paper the group’s new units seem to offer some attractive growth, the broker remains cautious given they are also higher risk strategies when you compare them to core business given a greater reliance on the health of the economic backdrop.

The FNArena Database shows two Buys, one Hold and one Sell aside from the Reduce put out by Nomura. This makes for a positive sentiment read. The consensus price target of $2.27 is close to the current trading price. Nomura is less optimistic, as we have already established, and has a more cautious target of $1.95.

Consensus FY14 EPS growth is pegged at 14%, DPS growth is forecast to run at 7.2%, paying a 4.9% yield and 13.5x FY14 earnings. The multiples are just too much given the tough and somewhat unpredictable couple of years ahead, concludes Nomura, the broker suggesting investors consider waiting for a more attractive entry point.
 

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article 3 months old

Cochlear’s Now More Balanced

-Share price now more realistic
-Some brokers see time to buy
-Overall, caution still prevails
 

By Eva Brocklehurst

As feared by many brokers, Cochlear ((COH)) has announced a revision to FY13 earnings estimates. It's downward. The company is used to being the market leader in speech processors and cochlear implants but competition has crept up steadily. Tie that to a softening of developed markets, particularly in the US, and you have the scenario most broking houses are painting. The stock, in the lead up to the announcement, was deluged with Sell ratings. The share price was too high. Competition is threatening the company's number one standing. There were legacy issues with the Nucleus 5 processor. Now, the radical views are being softened. Bell Potter thinks it's time to buy Cochlear.

The broker's rule of thumb is to buy Cochlear on product recalls and major new product launches. The company believes its Nucleus 6 sound processor will be game changing. Bell Potter notes the product has overcome the issues that have beset the company with Nucleus 5. That's one obstacle out of the way. Only Canada and Korea have approval for the N6 so far and approvals in other major markets should come over the next six months, so for other brokers the benefits of the product launch are some time away.

The N6 processor launch will help upgrade sales but this will have little benefit to new sales in BA-Merrill Lynch's opinion. The new processor will add to upgrade revenue from September 2014. The history of patient processor upgrades indicates that 35-50% are likely to upgrade as they become entitled to reimbursement, which Merrills notes is generally every five years. This broker believes pivotal new products are likely to be 2-3 years away.

Merrills also suspects emerging market tenders will benefit in the volume stakes but have little effect on Cochlear's margin because of lower prices. In a way, the slowing of the developed market is exacerbating the price squeeze in emerging markets and in tenders. Slow sales leading up to a product launch are not something unusual, anywhere. Macquarie notes Cochlear's top line has historically been under pressure in the year preceding a product launch. So much of the weakness can be attributed to a cyclical factor. Nevertheless, there are other issues underpinning the pressures on the bottom line. Merrills notes a greater mix of adult patients, who have greater demand elasticity and increasing awareness of what's on offer.

Bell Potter thinks the stock has simply reacted to the downgrade in the earnings outlook and traders have ignored the new product news. This broker has moved to a Buy rating from a Sell rating and has a target price of $78. Bells believes Cochlear is set up for the long haul and has been investing heavily in manufacturing, reaping benefits of lower costs and margin improvement. FY15 is seen as the year the company returns to market dominance. Morgan Stanley is not at all confident that's the case and has a contrary view. The changing demographics and focus on older patients is seen as benefiting Cochlear's competitors, which offer a broad spectrum of hearing solutions. Hence, Morgan Stanley finds the dominant market share is vulnerable and consensus expectations for the stock are too high.

Now the risk of a near-term downgrade to earnings has passed Macquarie is also more positive on the stock. Currency headwinds are also fading as the Australian dollar eases, meaning the catalysts for the stock are more balanced. Macquarie emphasises the model is not broken and while FY14 will be challenging growth should still be happening, around the percentage mid teens. This should support the price of the stock well in excess of current levels. Goldman Sachs also takes the view that the company's scale efficiencies in both manufacturing and marketing will stand it in good stead to make healthy returns and has removed Cochlear from the Sell list.

Unit sales and margin forecasts, as well as earnings estimates have all been adjusted after the company's downgrade. Earnings forecasts out to FY15 are adjusted down by up to 23% across most brokers covering the stock on the FNArena database. The share price was hit in the wake of the announcement and brokers have adjusted price targets accordingly. Now the stock is viewed as trading at a more realistic price. The consensus target price has dropped to $54.30, suggesting 2.0% downside to the last share price. This compares with a consensus target of $62.87 on May 29. The other positive aspect is the dividend yield, not to be lightly regarded in the current environment. Based on FY13 consensus earnings forecast it is 4.5% and for FY14 it is 4.4%.

BA-Merrill Lynch downgraded the rating to Underperform just prior to the company's announcement. The broker sees fit to retain that recommendation. Others, such as Macquarie and JP Morgan, have decided that the price is a better point of entry now and have upgraded the rating to Neutral from Underperform or Underweight. While there is some relief the earnings downgrade is out of the way, most are not sure that the way ahead is that easy and caution prevails. In total there are now six Sell ratings and two Hold on the database, compared with seven Sell and one Hold when we last reviewed the stock.

See also, Cochlear Feeling The Pinch on May 23 2013.
 

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article 3 months old

REVA Medical Opens Opportunity In Stent Market

-REVA opens opportunity in stent market
-Device to start CE Mark trial
-Potential to spark major biotech interest
 

By Eva Brocklehurst

There's a large market opportunity in the global stent market. This area of medical devices is worth US$4-5 billion and is dominated by three main players, Boston Scientific, Medtronic and Abbott. There's an Australian listed player, REVA Medical ((RVA)), that has developed a product which has the potential to expand this category of medical products, given favourable clinical data.

REVA has a bioresorbable scaffold called ReZolve2 which is now in a pivotal European trial. The pilot study conducted last year produced favourable 12-month angiographic data and the second generation product, which is 20% thinner and exhibits 30% more radial strength, was placed into a CE Mark pivotal trial in March. This trial should recruit 135 patients by September 2013 and the company hopes for CE Mark approval late next year. The primary end points are Major Adverse Coronary Events (MACE) at six months and 12 months as well as late loss at nine months, where the goal is non-inferiority compared to a metal drug-coated stent. The trial is being conducted at 30 sites in Brazil, Europe, Australia and New Zealand.

Why is REVA's product so revolutionary? Until recently stents used to treat coronary artery disease have been made of metal. Two years ago Abbott gained CE Mark approval for ABSORB, the first coronary stent that was bioresorbable. This helped reduce the instance of stent-related thrombosis. Stents such as these gradually disappear over time. Bell Potter sees the scaffold - preferred term to stent -reinvigorating the market over time and potentially adding another US$1-2 billion in sales.

REVA was listed on ASX late in 2010 and Medtronic owns 8% of the stock. Bell Potter believes this latest development may spark global interest in REVA from the established stent market. The broker believes the pilot clinical trail of ReZolve proved the scaffold worked as intended and as a result has significantly de-risked REVA. The scaffold is made from a tyrosine-derived polymer that dissolves at the right rate and is able to expand in a clinically-relevant range through the use of a ratchet system, called slide-and-lock. It is designed with a spiral architecture that delivers the radial strength.

Bell Potter believes there are three possible outcomes after the CE Mark is approved. REVA could sell directly, marketing off the back of the clinical data, one of the established stent companies could acquire the stock to get the jump on competitors or, under a 2007 distribution agreement which is still outstanding, Boston Scientific could negotiate terms for worldwide distribution. The latter is a valuable and potentially profitable feature of the REVA story, in Bell Potter's view. REVA could be in a position to leverage the global footprint of the world's largest cardiology marketing organisation with very profitable margins.

Abbott's ABSORB and a new stent from Elixir Medical called DESolve, which gained CE Mark last month, have paved the way for commercial success of REVA's stent from 2015. What gives REVA a competitive advantage is that its scaffold has X-ray visibility and a more versatile expansion range compared with DESolve and ABSORB.

Bell Potter values REVA Medical on a base case at $2.67 and an optimistic case at $4.35. In valuing the stock the broker assumes the company does not partner ReZolve but brings it to market itself. Also, only European and US sales are assumed. REVA is based in San Diego and raised $85 million through the ASX IPO, issued at $1.10. The IPO was designed to fund an initial 5-subject product validation clinical study as well as a pivotal trial for CE Mark.
 

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article 3 months old

Low AUD A Positive Injection For Aussie Healthcare

- Falling AUD healthy for Aus Healthcare stocks
- Brokers see steady rates as low as 0.96 near-term
- CSL and ResMed to benefit most
- Hedging limits upside for some


By Andrew Nelson

One Australian industry sector that is already enjoying the recent weakness in the AUD, at least in terms of positive forecast revisions, is Healthcare. Over the past week or so, half of the brokers under FNArena coverage have revised their forecasts for the sector, leading to higher earnings and price targets for a number of stocks.

A good number of stocks in the sector generate sales around the world and undertake some significant reporting in US dollar terms. Thus, the downward pressure on the AUD is having some meaningful influence over a number of domestic healthcare stocks.

JP Morgan’s FX Strategy team last week lowered its AUD/USD expectations. The broker now expects the AUD/USD will peak at US$1.01 in March 2014 compared to previous expectation for a peak at 1.07 in December this year. This combined with updated valuation assumptions to reflect a lower risk free rate has generated earnings and valuation changes across the sector.

The broker’s main focus is on four stocks, CSL ((CSL)), Cochlear ((COH)), ResMed ((RMD)) and Sonic Healthcare ((SHL)).

JP Morgan sees CSL as being one of the major beneficiaries of recent currency movements given the company reports earnings in US dollars. There were only minor upward revisions to FY13 forecasts, but FY14 EPS is up 3% and FY15 is up 0.7%.

There is a bigger impact on the price target, which is up to $65.78 from $56.34, given the translational basis of USD reported earnings forecasts that feed into an AUD based price target. The broker’s Overweight rating is maintained.

Analysts at Citi now expect a 0.96 read in the AUD by year end, down from 1.10 prior. Forecasts range from 0.96 down to 0.93 out to the end of 2016.

Citi, at Underweight, only pushed through a 1% increase for CSL’s FY14 numbers, with FY13-15 EPS forecasts unchanged. The price target saw a similar lift, jumping to $52.79 from $49.98. The broker otherwise thinks the stock is overvalued in terms of the earnings prospects on the table and the lack of room for any disappointment.

Citi also notes that stocks such as CSL are being bought for defensive growth, a theme likely to dry up sooner, rather than later.

Macquarie's currency forecasts for FY14 are in line with where spot rates were last month. That has the AUD/USD remaining around 1.03, the AUD/EUR close to 0.79, the AUD/GBP staying close to 0.67 and AUD/CHF at around 0.98. However, while forecast changes at this point are relatively minor, the broker notes that if the Australian dollar remains at current levels through to next year, there will be some very significant upgrades across Healthcare and a number of other sectors.

Much like JP Morgan, Macquarie is starting to see good value emerging from CSL. At current FX levels, the broker notes there is now up to a 5% AUD earnings tailwind that has emerged over the past month. In numeric terms, the PE for CSL is not an “expensive looking” 22x  but a much more reasonable sounding 20.2x FY14 earnings. This is a considerable historical discount, says Macquarie.

The broker has also extrapolated AUD weakness into its long term outlook, advising that were the AUD to find a new long term home at around 90c, it would boost AUD earnings by 12% for CSL.

Goldman Sachs has the AUS/USD at 1.03 for FY13, at 0.93 for FY14 and at 0.90 for FY15. The changes also saw the broker make some revisions to its healthcare coverage. For Ansell ((ANN)), the uplift was limited to a slightly higher price target, with the broker remaining more concerned about structural issues like latex costs and new product uptake.

Citi concurs on ANN, saying the company needs to put together some very successful new product launches in order to come up with 2H13 EPS that is close to 50% higher than 1H13. This is the number required to meet guidance.

The changes proved more considerable for ResMed, Goldman Sachs lifting FY14-15 EPS forecasts by 2.6% and 3.9%, while also revising the price target higher. The broker remains at Conviction Buy on the stock, although there are still concerns about the flow-on effect of competitive bidding and market share losses from competitor product launches.

JP Morgan notes the company will derive some significant benefit at the gross margin line from the lower AUD/USD. The broker explains 50% of the company’s cost of goods and 75% of R&D is denominated in AUD, while earnings are reported in USD.

On the broker’s numbers, current AUD levels imply 2% upside to FY14 USD reported earnings and an extra 1% to FY13. On the other hand, analysts at Macquarie see 6.8% EPS upside from current FY14 forecasts were the Aussie to remain at current levels and 12% upside were it to fall to 0.90.

ResMed is also Citi’s top pick in the sector, the broker of the view that the company’s 20% per year EPS growth prospects are not fully reflected in the share price. On Citi’s numbers, Resmed is trading on a 16x PE multiple. The broker is also not that worried about competitive bidding in the US, noting only about 6% of group revenues are exposed, and besides, ResMed has much more bargaining power than its customers.

JP Morgan advised that for Cochlear, the US and Europe account for around 40% of the group’s revenue base. Incorporating its latest currency revisions adds about 5% upside to FY14-14 EPS forecasts. Citi sees an extra 3% for FY13, 2% for FY14 and 4% upside for FY15. Otherwise, the broker sees sentiment softening a little as the steady growth defensive theme unwinds.

Macquarie sees things differently for ResMed, only ascribing 2.2% upside from current FX changes. The broker admits this is less than the company’s offshore exposure would suggest, but offshore earnings are hedged by offshore debt, so the impact is less pronounced.

Our last healthcare major with significant FX risk is Sonic Healthcare and JP Morgan doesn’t see near as much upside as for the others. The broker points out that the company’s exposure to the lower AUD/USD is limited as US costs are denominated in USD and there is also local debt hedging in place. Thus, positive changes of only 1% or so are made.

Citi sees downside risks to its SHL forecasts, although these are not FX related. The broker points out that if the company is unable to fully offset the funding cuts in Germany, forecasts will be at risk.

Macquarie sums up by saying that while the sector may look a little fully-priced on a historical basis, it is nonetheless highly leveraged to a falling AUD. With AUD weakness likely to continue, the broker sees increasing value beginning to emerge across most stocks.


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article 3 months old

Cochlear Feeling The Pinch

-Competition in cochlear implants heats up
-Cochlear expected to lose market share
-Stock viewed as overvalued
 

By Eva Brocklehurst

Cochlear ((COH)), the leader in implants for the profoundly deaf, has a battle on its hands. Sonova's Advanced Bionics is making inroads into its markets, quickly. Advanced Bionics has recently reported a 47.1% increase in sales for FY13, on a constant currency basis. The quantum of this increase is not reflective of market share gains but, in UBS' estimation, that could be as much as 10%. At any rate, it does put a good deal of pressure on the 70% market share that Cochlear enjoys.

Both Cochlear and Advanced Bionics are to launch new products at the EU conference in Istanbul, Turkey, this week. Full approval of the products is expected by the end of the northern summer, while US FDA approval could take longer, perhaps by the end of the year. MedEL is also expected to launch the new all-in-one processor/headpiece "Rondo" at the conference. Advanced Bionics is expected to close the current performance gap with Cochlear's device, if not better it. The new speech processor will deliver improved performance and has wireless connectivity enhancements. The Cochlear N6 which is to be launched has a new thin profile but is yet to incorporate the wireless technology from partner GN resound, something which surprised UBS. There is no suggestion as to when that may become available.

UBS has checked sources and found the first tranche of the 2013 Chinese contract gave 1400 of 4000 units to competitor MedEL. In 2012 Cochlear won 2800 of the 4000 units so it is still possible that Cochlear will participate in the remaining volume for 2013. The Chinese tender had been held up as an example of where Cochlear could capture volume sales, but that appears to be also under pressure.

Cochlear's market share and franchise may be well entrenched but the innovations by competitors suggest the technological leadership is now questionable. UBS offers three key determinants for brand selection. They are peer reference, reliability and technology. Advanced Bionics has matched many of the features of Cochlear's N5, which was recalled, and has also leveraged parent Sonova's expertise in sounds processing. MedEL's Rondo is worn off the ear and has been well received, particularly by those who wear glasses as traditional behind-the-ear devices can interfere.

Usually, 12 months after a launch Cochlear makes its new processor backward compatible to recipients of earlier models. UBS notes the first year of such sales for N5 captured 20% of the potential patient base. There are around 30,000 patients with N5, which was capped by the recall. So, Cochlear could launch a N6 backward compatible inside of the 12 months that could boost near term earnings, but this would disrupt the longevity of the forward earnings cycle, in UBS' opinion. Industry capacity to accommodate an upgrade cycle is also a cap on total sales in any given 12 month period.

Citi also expects the new products will lead to Advanced Bionics gaining market share. Even if Cochlear catches up with enhanced technology, there is sufficient momentum to Advanced Bionics' gains that Cochlear will lose 20% of market share over the next 18 months. Citi views the stock as expensive, as it is trading on a 12-month forward price earnings ratio of 26 times. This is particularly of concern given the risk of market share losses. The broker favours a Sell rating, as does UBS.

UBS believes the premium that the stock commands to the ASX Industrials ex Financials index as well as global peers - 55-85% - is not rational. On the FNArena database the recommendations underpin the same belief the stock is overvalued. There are seven Sell ratings and just one Hold (BA-Merrill Lynch). Cochlear has a dividend yield based on consensus earnings forecasts for FY13 of 3.5%. For FY14 it is 3.7%. The consensus target price is $62.32, suggesting 12.6% downside to the last share price.

See also, Questions Mount Over Cochlear's Top Status on February 6 2013.
 

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article 3 months old

CSL Analysts Shrug Off Alzheimer’s Disappointment

- Baxter AD trials lack efficacy
- Brokers not ascribing AD value
- CSL sell-off ignores underlying value
 

By Greg Peel

Let’s just get this bit out of the way first, because if you’re like me, your head pretty much starts to spin early in any typical biotech company report, not just because of long mouthfuls of scientific names but also because in abbreviating those names and/or branding company products, biotechs have an extraordinary ability to create even more reader-unfriendly names.

CSL Ltd ((CSL)), previously the government-owned Commonwealth Serum Laboratory, collects blood from blood donation centres and separates it into its constituents. The plasma collected is used to produce protein products that act as antibodies against bacteria and viruses, assist in blood clotting, work as vaccines and antivenoms and so on. Prominent among these is albumin, immunoglobulin (Ig), intravenous immunoglobulin (IVIG) and recombinant Factor 8 (rFVIII).

In recent years, CSL, which dominates markets in Australia, the US and Germany (directly or through distribution arrangements), and its global competitors have been studying the potential use of Ig products to treat Alzheimer’s disease (AD), the path to dementia. Little is known about AD and its causes, which puts AD at odds with the likes of haemophilia, for example, as a disease treatable with Ig. In short, successful treatment of AD with plasma products is a bit of a left field concept, albeit plasma products are being used to treat other neurological conditions.

Which is why biotech experts and stock analysts in the biotech sector have never really ascribed any value to the development of successful AD treatments when pricing biotech stocks. Not that success is valueless, rather most are sceptical to start with and know it will take a lot of research and testing before a viable product is released to the market, if ever. Analysts do not dismiss AD product research, but consider its value a free option, within stock price valuation, that may or may not ever be exercised.

Analysts will thus often suggest that the market is not ascribing any value to AD opportunity as well. This is nevertheless more broker-speak than reality. What the analyst is really saying is that based on the current share price, the activities of the plasma company outside of AD product development are enough to justify the share price as it is, and hence no “premium” has been priced in for the AD option. It could also mean the market is pricing core activities below the analyst’s valuation, and adding back a premium for the AD option, but then it becomes a case of pointless hair-splitting.

Clearly the market is pricing in some premium for CSL’s AD product development, because when rival Baxter International announced on Tuesday night that Phase III trials of its own Ig treatment for AD had failed to show sufficient efficacy, and that the company would now go back to the drawing board for a rethink, CSL shares reopened on Wednesday morning down over 5%. The implication here is that if Baxter can’t find a link to Ig and AD treatment, no one, including CSL, is likely to either.

As to whether the AD option premium was thus worth specifically 5% is not a viable conclusion either. CSL is one of those defensive stocks which have been pushed to lofty price levels recently, such that at the first sign of trouble, nervous investors and trigger-happy computers are ready to dump and run.

“We have never believed Ig for Alzheimer’s would work,” said Citi’s US stock analysts this week, “and after a rise in enthusiasm a year ago, most Street commentary has turned cautious over the past six months”. The AD rethink has not evoked forecast changes with regard to Citi’s Baxter numbers, and the broker retains its Neutral rating on the strength of the company’s underlying business.

The same is true for Citi’s European stock analysts, with regard to Spanish plasma company Grifols. Grifols shares went the same way as CSL’s on Baxter’s AD news, falling 7%. Again, the Citi analysts have not changed their view on Grifols underlying business, and retain a Buy on the stock.

Given plasma treatments are already being used to treat other neurological conditions, the fact Baxter’s AD trials have proven disappointing does not detract from the value of products already being sold in the neurological field as far as BA-Merrill Lynch is concerned. An AD product would have incrementally added to this list, but Merrills has ascribed no value to such potential to date in its CSL assessment, considering any possible success to be too far into the future to impact on current pricing.

Merrills has retained its Neutral rating on CSL post the Baxter news, as has UBS. UBS is another broker not ascribing any value for AD potential, although the broker does note a glimmer of hope in the trail results for early onset victims. The analysts nevertheless assume CSL’s 5% share price tank confirms the market was ascribing at least some value for AD, but like other analysts they have made no changes to their fundamental valuation.

Other than the Baxter announcement, this week also featured data from the US plasma industry body suggesting Ig sales have slowed. Brokers are never quite sure how to reconcile these numbers given they often do not correlate with plasma companies’ own figures. There have been no changes to FNArena database ratings this week, with Citi retaining a longstanding overvaluation Sell on CSL and the other brokers split 3 to 4 on Buys and Holds.

The consensus target price has actually ticked up to $58.52 from $58.19 to suggest 3.6% downside from yesterday’s closing price.
 

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article 3 months old

Price Pressures Mask ResMed’s Strength

-Strong growth in March quarter sales
-Question of how much price pressure can be curbed
-Device growth outweighs softer mask growth
 

By Eva Brocklehurst

The manufacturer of sleep disorder diagnostic products, ResMed ((RMD)), posted strong sales growth in the March quarter. The company markets its products globally, from headquarters in the US and Australia, but the the big market is the US, where the country's health care system and competitive bidding process complicates the outlook. Revenue grew 10% in comparative terms in the quarter, with the US up 13% and the rest of the world up 6%.

The most interesting aspect for BA-Merrill Lynch was the strong gross margin. This was achieved despite weaker mask growth, which was countered by stronger US flow generator device growth. Specifically, the growth of 21% in US flow generator sales indicates the company has captured market share in some high margin areas. This, coupled with new products and cost cutting, provides the levers to counteract the pricing pressure that will come from the Round 2 of the competitive bidding process, in the broker's view. Management acknowledged that the larger-than-expected cuts to US Medicare reimbursement, following Round 2, will lead to increased price pressure in FY14, estimated at 5-6% against the usual 3-5%. The company is banking on efficiency gains to do the work to counteract this.

Merrills observed that the timing of the volume benefit that is to come from ObamaCare, as the new US health care plan is known, will be in place before the plan's Round 3 competitive bidding gets underway. The broker maintains few in the market are factoring this in. Competitive pressure is likely to build in the next six months with price discounting beyond the confines of Round 2 fundamentals. The March quarter result has provided the company with the means to mitigate the impact of this pricing pressure but the degree of both is a matter for conjecture at this stage. Moreover, the benefit could be as late FY15, in Merrills' view. As a consequence, the broker, along with most covering the stock on FNArena's database, opts for a Hold rating.

Don't underestimate the risk that competitive bidding will make to earnings, is the warning that most of the brokers make. Deutsche Bank believes this threat is the reason for maintaining a Hold rating. The Round 2 competitive bidding will start July 1. Citi believes ResMed has more bargaining power than its durable medical equipment (DME) customers and is less concerned about the process, while JP Morgan thinks improving margins and tax rates will allow ResMed to absorb the impact as DME suppliers attempt to pass on the reimbursement impact to manufacturers.

Interestingly the latter two brokers have the only Buy ratings on the FNArena database. Citi and JP Morgan have each focused on the capital management potential. JP Morgan noes that there is $672 million on the balance sheet. ResMed bought back 1.5 million shares in the quarter and has committed to buy at least one million in the September quarter. Should the board redouble efforts on the buy-back or dividend the broker expects it to be well received, despite limited tax effectiveness. Citi views the earnings profile as solid and notes the cash on the balance sheet, believing the company has capacity to increase the buy-back or dividend. The remaining six ratings on the database are Hold. The consensus price target is $4.76, suggesting upside of 3.8% to the last share price.

Home sleep testing has been considered the catalyst for future volumes of flow generators as it provides an alternative and more convenient method of diagnosis. This has always supported growth but the size of the rise in the latest quarter suggests to brokers it's about to get a lot more significant. JP Morgan notes home sleep testing is offered by 38% of US laboratories as an alternative. Why this is attractive is because home sleep testing funnels patients onto higher margin APAP flow generators in order to avoid the inconvenience and expense of titration, which is performed by a sleep lab. This underpins margin improvement and, for JP Morgan, there's some way to go. ResMed is also viewed as much stronger than competitors in this area.

Citi understands that reimbursement among private insurers is sufficiently attractive to make home sleep testing profitable for the sleep labs. The labs have been fighting the reimbursement since 2008 but adoption of pre-authorisation by the majority of private insurers means home sleep testing is now inevitable. US Medicare does not have pre-authorisation and reimbursement is relatively lower. Citi expects the majority of Medicare patients will, therefore, be diagnosed in-laboratory.

Device sales may have grown, and the trend is to higher value devices, but US mask sales growth in the quarter was the lowest in 10 years. Most brokers consider ResMed, in this instance, was a victim of increased competition. Indeed, management attributed the competition to Philips Respironic and F&P Healthcare. JP Morgan suspects that mask sales also suffered as distributors held off buying ResMed masks in anticipation of imminent new releases. The company is launching two new masks in the current quarter which should be smaller, quieter and more comfortable. Deutsche Bank also expects September quarter mask sales will be subdued before a pick up to start the company's new year (FY14) in the December quarter.
 

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article 3 months old

Brokers Stay Positive On Sirtex

-SIR-Spheres growth has been rapid
-Dose sales growth eased recently
-Strong potential remains in place
-Need for more clinical evidence
 

By Eva Brocklehurst

Medical device company, Sirtex Medical ((SRX)), has grown rapidly but as is the case with most biotechs, patience is a virtue. The company's key product is SIR-Spheres, which are radioactive Yttrium 90 microspheres enabling selective radiation therapy to be applied to the liver. The benefit here is that radiation can be directed at liver cancers while the dose to normal tissue is reduced. Sirtex is undertaking further clinical studies to broaden the application of SIR-Spheres technology to earlier stage cancers. Sirtex manufactures in Australia, Singapore and the US and markets the therapy globally.

Bell Potter expects growth to escalate as as more clinical data improves the acceptance of SIR-Spheres as a standard of care in primary and secondary liver cancer, allowing higher market penetration than the current 1%. Sirtex is currently involved in five major studies that are evaluating the use of SIR-Spheres with other chemotherapy drugs. Data from these studies should help SIR-Spheres jump to the next level in terms of market acceptance, in Bell Potter's opinion.

In the six months to 31 December 2012, dose units grew around 31% on the previous corresponding half. Third quarter dose sales data, recently released, grew just 6.3%, under what many brokers had come to expect. UBS suspected this could happen, given the strong growth in sales that occurred in the preceding year. Moreover, a tapering off doesn't indicate a lack of potential. UBS notes that in FY12, Sirtex increased the number of treatment centres using SIR-Spheres by 14%, suggesting significant dose growth potential in FY14.

UBS thinks Sirtex can generate around 11% in group dose sales growth indefinitely, and in concordance with Bell Potter, thinks more positive trial outcomes would accelerate this.Quarterly volatility is to be expected with a high value, low volume product. UBS notes that the low volume nature of sales make the quarterly data susceptible to minor changes in doctor behaviour. Just the retirement of one doctor from a treatment centre using SIR-Spheres could lead to 100 basis points movement in volume growth.

Bell Potter flags the fact that acceptance of SIR-Spheres is increasing. In FY12, 50 new centres started using the product in the US with another 32 in Europe and 10 in the rest of the world. SIR-Spheres is now administered at over 600 hospitals worldwide. The broker highlights the fact that available data regarding patient survival has underpinned the uptake of the product.

UBS has taken a Neutral stance and considers that market must balance short term performance against optimism regarding longer term upside. Joining UBS with a Neutral recommendation on the FNArena database is CIMB. This broker is more cautious and thinks upside from sales and marketing may have run its course so is prepared to stay on the sidelines ahead of more information on activity levels. UBS has reduced FY13-14 earnings forecasts by 12-13% on revised timing of sales. CIMB admits that quarterly variance should be expected, but has downgraded FY13-15 dose sales estimates by 2-3%. Again, this broker believes the key to longer term optimism is more visibility from ongoing clinical studies, which aim to move SIR-Spheres to a treatment of first resort.

Macquarie is the third broker covering the stock on the FNArena database and has a Buy rating. Macquarie conducted a survey of radiology oncologists with regard to radioembolisation and SIR-Spheres recently and came away with renewed optimism on the stock. Not just in terms of market conditions but also clinical outcomes. Of interest from the survey was the finding that long-term users of radioembolisation were three times more likely than new users to administer it as a first-line treatment (14% against 5%). This suggests to Macquarie that specialists are observing positive results in patients. In contrast to the other brokers, Macquarie is more confident in raising estimates and revised unit growth assumptions upward, to 17% for FY14-17.

Sirtex is also aiming to extend its product range beyond SIR-Spheres. This includes Carbon Cage Nanoparticles, a technology originally developed at the Australian National University in Canberra. It involves hollow carbon-based nanoparticles engineered to carry radioactive material and Sirtex hopes to target delivery of radiotherapy to cancers such as ovarian cancer. Another is a method of making large polymer chains out of small molecules, CSIRO developed RAFT coated nanotechnology, which Sirtex is using to create polymer-based microspheres. Thirdly there's radioprotector molecules, which involves the evaluation of various molecules that can protect healthy tissue from effects of radiation.

The consensus target price on the FNArena database for Sirtex is $12.09, suggesting 17.1% upside to the last traded share price.
 

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article 3 months old

QRxPharma Poised For Pain Relief

-MoxDuo IR re-submitted for FDA approval
-Potential for strong upside if approved
-FDA response expected in Q313
 

By Eva Brocklehurst

Biotech QRxPharma ((QRX)) has sparked speculative interest this year, given the potential for a positive review of a New Drug Application with the US Food and Drug Administration. Brokers are keenly aware that a go-ahead from the US authority for the MoxDuo IR oxycodone-morphine combination could be a game changer for the stock.

QRX has resubmitted the NDA including the results of Study 022, as requested by the FDA. This extra data shows that the product, for relief of severe pain, could lower the rate of respiratory depression in patients compared with morphine or oxycodone alone. The advantage of MoxDuo IR (immediate release) is that its pain relieving qualities have less side effects than those commonly associated with morphine and oxycodone. These include respiratory depression, constipation, nausea, vomiting and somnolence.

In Citi's view, all the data so far revealed supports the efficacy of the product and there is no reason to suspect MoxDuo IR should not gain approval. Moreover, there are no unexpected toxicity or adverse safety issues reported. Since June 2012, QRX has disclosed more information about the effect of MoxDuo IR against opioid-induced respiratory depression, showing it cuts the incidence of the serious side effect substantially.

Only 55% of drug applications are approved on first application to the FDA, another 20% gain approval after a re-submission and another 8% after a second re-submission, according to Bell Potter. So, the chances remain quite good for success with the re-submission. What pleases Bell Potter is that QRX has a significant licensing deal ready to go for MoxDuo IR with Actavis, a major generic drug company. Actavis would be able to bring substantial marketing power to the drug in the US.

QRX expects to file MoxDuo IR for regulatory review in Canada, Europe and Australia by mid year. Citi notes the possibility the company could announce a European strategic/commercial partnership prior to filing. The broker believes skewing any deal terms to upfront cash payments versus long-term royalties would be preferable. Bell Potter assumes that QRX's average royalties on net sales of MoxDuo IR in the US would start at 10% and gradually converge on 20% by year 10, as more of the Actavis sales reach higher thresholds.

Bell Potter assumes, with the successful re-submission, that all of QRX's three MoxDuo products, IR, IV and CR can be launched in the US by the end of 2016. CR is the controlled release proprietary 3:2 morphine/oxycodone formulation, encompassing both sustained delivery technology as well as abuse deterrent and tamper resistant features. IV is the intravenous variant, being developed as first line therapy for acute moderate to severe hospital-based administration. This formulation has completed a proof-of-concept Phase 2 trial.

After the first half results in which the company posted a $5.2 million loss, Citi noted the company had enough cash to fund the rest of its plans for 2013. The broker believes there is significant upside for the stock once MoxDuo is approved and retains a Buy rating. This is one of the three rating the stock on FNArena's database. The other two, JP Morgan and CIMB, also have Buy recommendations. The price targets diverge quite strongly, reflecting the large risks associated with biotech companies which have products up for scrutiny by health officials. Citi has set the top at $2.33 while JP Morgan has the lowest at $1.03. The consensus target of $1.72 suggests 40.1% upside to the last share price.

Bell Potter has a target of $2.30, recently raised from $1.10. The broker believes the current share price is undervaluing the stock's potential and maintains there's a strong possibility of a re-rating after the meeting scheduled with the FDA advisory committee in mid 2013. A response from the FDA is expected in the September quarter.
 

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article 3 months old

GI Dynamics: Opportunity In Diabetes Control

-Large potential in diabetes treatment
-EndoBarrier 2013 sales to grow strongly
-Israel to now contribute to revenue
-US trial starts, key to big market
 

By Eva Brocklehurst

GI Dynamics ((GID)) is off to a firm start in 2013. The health services company has a device to almost guarantee success - EndoBarrier. The device treats diabetics, and diabetes is in plague proportions. Almost 8% of the world's adult population is diabetic. The device has been launched in Australia and will soon be on sale in Israel, where there is a high prevalence of diabetes. It is already available in parts of Europe and South America.

For CIMB, the spade work was well executed over 2012. EndoBarrier sales grew nearly 200%, underpinned by 28 therapy centres and sales in seven countries. The device gained Europe's CE Mark in 2010. Clinical work has demonstrated that EndoBarrier can return Type II diabetics to glucose control, as well as bring about a 40-50% reduction in excess body weight for obese patients. Given EndoBarrier is not a permanent fixture, this outcome is superior to bariatric surgery. The device's record on glucose control also exceeds that obtainable with diabetes drugs.

In 2013, 20 new centres will offer EndoBarrier therapy. GID plans to expand the number to 48 by year end. Australia and Germany will see a majority of the new centres, with the balance to be divided between new markets such as Israel and expansion in the rest of Europe and South America. Bell Potter notes management was very upbeat about the positive response EndoBarrier received in Australia and will aggressively focus on this self-pay market in 2013, with plans to open at least four new centres.

Revenue is expected to increase substantially as unit volumes grow. Bell Potter also expects Israel, a new self-pay market, to contribute to revenue in 2013. Additional local reimbursements are coming in and there is, potentially, the first of the national level reimbursements from Germany to consider. The broker will watch the company's quarterly sales trajectory for EndoBarrier closely. CIMB estimates sales of US$8 million in 2013, growing to US$142m over the next four years. The broker expects a net loss of around US$32m in FY13 and expects profitability by FY16. Bells expects break even in FY15.

What is also very positive is that a key trial has started in the US. Bell Potter believes that the trial can enrol fairly quickly, given the high prevalence of diabetes in the US. GI Dynamics can complete trial enrolment by mid 2014 and be in a position to release the results by the second half of 2015. So, given the usual timespan to product launch, EndoBarrier should be in the US at the beginning of 2017.

What pleases Bell Potter is that the company has collaboration agreements with GlaxoSmithKline (GSK) and Medtronic. These two represent the leaders in the drugs and devices industry respectively. The collaboration with Medtronic will focus on identifying the effects of the EndoBarrier device on continuous glucose levels. The arrangement with GSK will be in evaluating the hormonal changes in patients on EndoBarrier therapy.

Removing a potential negative, GID has also resolved its litigation with Gore3. This was without the need for a trial and without any financial obligations by either party. Bell Potter welcomes this resolution because the threat of a potential competitor for EndoBarrier has been dealt with. GID retained exclusive ownership of intellectual property, while granting a royalty-free, non-exclusive licence to Gore for using patents only for applications in blood vessels. Gore cannot use the patents for any applications in the gastrointestinal tract, the area of the body for which the EndoBarrier device is designed.

CIMB is the one broker covering the stock on the FNArena database and has a $1.90 price target and Outperform rating. Bell Potter's target is $1.70 and the broker expects GI Dynamics to be re-rated by the market as device availability increases and the money starts rolling in, as well as when further data emerges on the effectiveness of EndoBarrier.
 

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