Tag Archives: Health Care and Biotech

article 3 months old

Treasure Chest: Market Misunderstanding CSL’s Power Of Four

By Greg Peel

Biopharmaceutical company CSL ((CSL)) has long proven an enigmatic investment, not unlike Commonwealth Bank, in that investors have always loved it while stock analysts have long warned of overvaluation. Competition has long been the spectre in CSL’s case.

Yet if we look at a longer term chart for CSL, we see a stock that would always be favoured by the likes of respected Wall Street trader Dennis Gartman, in that the share price continues to “move from the bottom left to the top right”. Aside from a couple of bumps along the way, investors, by weight of numbers, have proven the analysts wrong.

To that end, fewer analysts have now stuck to a persistent “overvalued” mantra. CSL currently polarises broker opinion in that while there remain two Sell or equivalent ratings among those in the FNArena database, the six other covering brokers now rate Buy. There are no Holds.

Complicating the issue is a wide spread of broker valuations, even amongst the cohort of Buy raters. Having updated this month, Morgan Stanley (Underweight) has an $81.00 target while UBS (Buy) was leading the pack with a $105.50 target. Having last updated in the February result season, Citi (Sell) is the lower marker on $75.95 yet JP Morgan (Overweight) can still only manage $85.18.

No doubt those latter targets will be reviewed in August.

While CSL’s primary source of income and focus of most attention is its blood products business, ticking along in the background is a reliable yet unexciting flu vaccine business. Given flu is seasonal and the vaccine business has long been characterised by plodding 3% dose growth rate, any new news from the company with regard flu vaccines is usually met with a yawn from brokers.

Including UBS. Until now.

Back in October last, the UBS analysts joined with peers in failing to be inspired by CSL’s announced purchase of Novartis’ flu vaccine. The company was very excited about the earnings growth prospects this purchase implied, but analysts could not see what the excitement was about. UBS, for one, set its earnings forecasts for the Novartis contribution as much as 35% below those of CSL.

But for UBS, the penny has now dropped. The Novartis vaccine is “quadrivalent” when prior vaccines have been “trivalent”. In other words, the vaccine addresses four strains of flu instead of the previous three strains. While this implies 20-30% more effectiveness, the important point is that quadrivalent vaccines are priced at more than 50% above the price of trivalent vaccines.

It is no wonder, therefore, that CSL has joined its own global peers Sanofi and GSK in investing in quadrivalent vaccine, UBS suggests. The broker has now upgraded its earnings forecasts for CSL to be 6.6% ahead of the company’s FY17 estimates – being the first full year of contribution.

The market, says UBS, is not seeing it. The contribution from flu vaccine may be two years away but the analysts suggest it is worth $6 per share today.

The broker has lifted its target to $106.90 from $105.50, inching further ahead of the pack (consensus $94.45), and retains a Buy rating.
 

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article 3 months old

Weekly Broker Wrap: Supermarkets, Automotive, Pharma And Banking

-Higher yields no threat to equities
-Price war looming in supermarkets?
-Oz departures slow sharply
-Pharma wholesalers need diversity?
-Automotive dealers stretched?
-Donaco's Star Vegas on track
 

By Eva Brocklehurst

Australian Equity Strategy

As long-term interest rates push higher UBS does not envisage a significant sell-off in the bond market. The broker expects equities can cope with a modest rise in yields spaced over the next six to 12 months. The broker considers the Australian dollar retains downside potential which should be good for Australian market earnings. The broker has trimmed its year-end target for the ASX200 to 5,800 from 5,900, given headwinds emanating from banking and mining. UBS is overweight US dollar earners, housing construction plays and energy stocks.

Supermarket Tracker

Wesfarmers' ((WES)) Coles supermarkets have extended their lead over Woolworths ((WOW)) in UBS' survey. The broker's proprietary survey of the Australian food and liquor market revealed Woolworths score is at its lowest level since the survey began in 2007. In contrast, Coles score was its highest ever. Coles now leads Woolworths in 25 out of 26 categories. Coles is observed winning the marketing war and executing better.

Of most concern to the broker are declines for Woolworths across customer-facing areas, such as value for money, in-store execution and the effectiveness of promotional campaigns. It will take time and money to fix the problems too. UBS maintains that when the number one player is under pressure, major changes to its strategy can cause disruptions across the market.

UBS maintains Woolworths needs to lift morale and with a new CEO that is not attached to margins, amid increasing competitive intensity, the risk is for a price war, with Woolworths going harder and earlier than the market expects.

Overseas Holidays

It could well be the end of cheap overseas holidays for Australians, given the Australian dollar's recent depreciation to a six-year low. Departures from Australia slowed sharply to just 2.0% year on year recently from average growth of 10% over 2003 to 2013. In contrast, arrivals accelerated to a decade high rate of 5.0% after being almost flat from 2005-2013. UBS notes the change in net arrivals is the most positive since the 2000 Olympics and should support consumption, given weak nominal household income. The broker maintains that in a sub-trend economy which lacks domestic drivers, tourism is a welcome bright spot. This view is supported by forecasts for the Australian dollar to fall further by the end of the year.

Automotive Dealers

The valuation of automotive dealers is starting to look stretched to Credit Suisse, although Neutral ratings are retained. industry conditions have supported both AP Eagers ((APE)) and Automotive Holdings Group ((AHG)). AP Eagers has the benefit of no direct Western Australia exposure, with a greater skew toward Queensland. NSW is a key area of strength for the dealership. Earnings momentum is seen favouring AP Eagers over Automotive Holdings. if AP Eagers is fairly valued then Automotive Holdings is probably too cheap, Credit Suisse reasons. That said, AP Eagers needs continued upgrades to justify its rating, the broker adds, while a positive surprise could drive a re-rating for Automotive Holdings.

Pharmaceutical Wholesalers

The passage of the Pharmaceutical Benefits Scheme package through the Australian Senate means a material reduction to spending and, hence, wholesaler reimbursement over the next five years. Credit Suisse expects listed wholesalers, Australian Pharmaceutical Industries ((API)) and Sigma Pharmaceutical ((SIP)) to fully offset the impact to profits by winding back pharmacy trade discounts. Beyond this, should prices continue to fall they will need to reduce operating costs or diversify away from PBS medicines to sustain earnings at current levels.

Domestic Banking

Household banking fee data released by the Reserve Bank of Australia has shown growth for the second consecutive year, following two preceding years of no growth. The main contributor to the 1.5% growth figure was credit card fees (1.9%) while housing fees continued to drag (-0.6%). Macquarie believes the trend points to more rational behaviour and will sit well with shareholders of the major banks as they look to implement strategies to claw back lost returns from the impending increase to mortgage risk weights. The broker notes re-pricing of mortgages has begun and the retail banks are best placed to benefit.

National Australia Bank ((NAB)) has also been progressively re-pricing deposits. Should these re-price to peer-average levels this may boost earnings by 0.6%, Macquarie contends, with potential to create longer term shareholder value.

Donaco International

Donaco International ((DNA)) has signalled its Star Vegas transaction will be completed by next month. Canaccord Genuity views completion of the transaction as a positive catalyst as the company diversifies its revenue base and risks. The Star Vegas acquisition is the primary driver of the broker's forecast earnings growth in FY16, as the company increases its exposure to Asian consumption. Canaccord Genuity has a Buy rating and price target of $1.25

Bell Potter also has a a Buy rating on the stock, with a $1.36 target. The broker observes completion of the acquisition was a key concern and, with the transaction update, Star Vegas now appears on track. Bell Potter also notes an extra US$20m working capital facility is now being sought because of a persistently low win rate at Aristo Hotel. Visits are strong and occupancy is a record 75% but the actual win rates remains weak. The broker suspects the company has had a run of bad luck but that this should soon change.
 

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article 3 months old

Weekly Broker Wrap: Property Portals, WA Miners, Builders And A-REITs

-Farmers stay focused in Ukraine
-REA Group retains upper hand
-Streamlining continues for WA
-Labour scarcity for builders
-Turnover rent pressures for A-REITs
 

By Eva Brocklehurst

Ukraine Crops

Macquarie has conducted its first ever tour of crops in Ukraine. The broker had expected difficult macro economic conditions would force farmers to withdraw marginal land from corn production and limit investment in inputs. In reality, only corn acreage is reduced. Grains and oilseeds producers have continued operating as usual and sought to improve yield efficiency. The main problem for producers has been the rise in the cost of inputs. Nevertheless, farmers were still planning to keep up applications of crop protection and fertiliser. With the usual weather related caveats Macquarie has higher production expectations for corn and wheat in the country's 2015/16 season.

Property Portal Wars

There has been conjecture about the relative performance of REA Group ((REA)) and the Fairfax Media ((FXJ)) portal, Domain. Citi observes REA Group continues to beat Domain in terms of absolute growth. Agent numbers may have risen for Domain but the online metrics remain skewed in REA Group's favour. The broker observes Domain's rate of revenue growth is set to pass REA Group in the second half of FY15, albeit Domain is still a minnow in terms of its revenue base. 

Domain has now reached parity with REA Group in terms of agent numbers and property listings and has lifted consumer awareness. The broker finds REA Group is extending its lead on audience engagement, implying it is more cost effective for driving sales to vendors. Competitive attention from Domain has centred on Sydney, Melbourne and South Australia but the broker's inspection of online usage suggests there has been little visible impact on REA Group. Citi finds no evidence that REA Group is losing market share although the slowdown in property transaction volumes has curtailed its growth rates.

Western Australian Miners

Morgan Stanley recently visited resources businesses in the west and found four main themes prevail. A search for cost reductions is the most common, given the slump in commodity prices. Lower staff turnover rates have allowed the miners to push through more economic rosters and savings are also coming via attrition, with new workers on lower awards. Another theme is the increase in corporate activity. Independence Group (((IGO)) and Evolution Mining ((EVN)) are cases where strong balance sheets have been used to pursue mergers.

Many bulk miners are adapting their mine plans to suit the commodity price outlook in order to reduce capital outlays and operating costs. Fortescue Metals ((FMG)) described its actions of running lower strip ratios as targeted mine planning rather than "high grading". Hence, the company does not expect its actions will have a long-term impact on reserves. Morgan Stanley is not sure this can be sustained, particularly where strip ratios have progressively declined below the five-year mine plan over the last 12 months.

Lastly, office market data has reflected the tough environment in Perth, with that city showing a vacancy rate of 12% to January 2015, with a rising trend. The broker suspects vacancy rates could be in the vicinity of 15% by mid 2015, a level not seen since the mid 1990s.

Home Builders

Macquarie has met with a number of home builders to develop a view of the current state of the market. The broker notes exceptionally strong pre-sale demand with expectations the market will stay firm for another two years at least. Availability of land remains a recurring issue. Approval processes are banking up, with notable areas being the north west and south west of Sydney. The ability of the trades to deliver on the opportunity remains a concern for builders. Some are importing bricklaying skills to overcome shortages with the hoped-for return of capacity away from mining not developing as expected.

The extent of home price growth has heightened nervousness regarding settlement risks emerging for builders, although there is no evidence of increased risk at this stage in pre-sales of detached homes. The price increases in materials did not appear to bother the builders but the broker did note labour costs growth were a concern, with rates increasing as much as 25% for some trades such as bricklaying. All up, the broker considers the fundamentals are good for building material producers.

Nib Holdings

Nib Holdings ((NHF)) may provide a surprise in its upcoming earnings report. Bell Potter contends the stock is a potential underperformer. Recent presentations confirm earnings are likely to be near the lower end of the guidance range of $75-82m, still slightly ahead of FY14's $72m. Bell Potter suspects earnings growth will more than likely be flat. Data from aggregator iSelect ((ISU)), an important sales channel for Nib Holdings, shows many younger people are looking for better value in health insurance.

The broker is increasingly of the view that relying on this demographic for policy sales is not an avenue to profitability. The company has an 8.0% share of the private health insurance market but earnings from its core business have been declining. Bell Potter expects the international student and workers segment will support some earnings growth in FY16 but retains a Sell rating and $3.30 target.

Yowie Group

Yowie Group ((YOW)) has announced that Walmart will roll out the brand fully to its US stores, all 4,300 of them. This announcement confirms the trial has been successful and Walmart expects the product to sell well. Canaccord Genuity had assumed that Walmart would need to place purchase orders at the end of May or early June for Christmas delivery but Walmart has requested delivery for an August date, well in advance of expectations. Hence, the broker upgrades assumptions for the first half of FY16, noting that when Walmart commits to a product other retailers take notice. This could be a catalyst for Yowie in the US market. The company has a patent in the US for "chocolates with a toy inside" for another three years. Canaccord Genuity has a Speculative Buy rating on the stock and $1.80 target.

A-REITs Outlook

Woolworths ((WOW)) has indicated no improvement in sales at supermarkets in May and June to date and this is signalling a negative for turnover rental growth for supermarket-anchored shopping centres, in Macquarie's opinion. Charter Hall Retail's ((CQR)) largest tenant is Woolworths, at 26.4% of base rent. For Shopping Centres Australasia ((SCP)), Woolworths and Wesfarmers ((WES)) contribute a combined 61% of gross rent.

With general merchandising also struggling, and competitive pressures from new international retailers, Macquarie envisages significant disruption to returns in the Australian real estate investment trust (A-REIT) sector. The broker remains underweight on the sector but expects reasonable overall sales conditions will continue. Still, several major tenant categories are undergoing structural change and A-REITs appear expensive.
 

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article 3 months old

Sonic Booms In Europe

-Robust growth in Swiss market
-Pressures remain in Oz, US
-More acquisition potential
 

By Eva Brocklehurst

Sonic Healthcare ((SHL)) has raised its profile in Switzerland, with agreement to acquire Medisupport, a laboratory operation which will triple the size of the company's Swiss enterprise. The acquisition is considered 8.0% earnings accretive and leave the company well placed to be a major player in a market which is showing robust growth.

Macquarie notes Medisupport offers a range of genetic testing, which should allow Sonic Healthcare to bring back in-house a number of tests previously outsourced. Medisupport has developed a proprietary offering in non-invasive pre-natal testing and the company will look to leverage this asset across its European business, with global potential. All up the broker considers the deal a positive one, with material earnings upgrades and a number one position in an attractive market. Further scope for other acquisitions exists in Europe, as the company remains a key player in a very fragmented market.

Medisupport employs more than 700 and has operations in 10 cities. The acquisition is dependent on regulatory approvals but Morgans considers these highly likely. The deal is expected to close next month so FY15 estimates are unaffected. Morgans increases FY16-17 divisional revenue forecasts to $728m from $240m and earnings to $170m from $50m.

The acquisition may propel the company to number one in Switzerland and deliver incremental earnings growth but Deutsche Bank suspects consensus numbers are too high. The broker believes there are few positive catalysts on the horizon, citing reimbursement pressure in many of the company's markets. As debt facilities are largely drawn down, there is also less likelihood of further deals. The acquisition will be funded by a combination of 85% debt and 15% equity. The heavy weighting to debt will allow Sonic Healthcare to take advantage of very low rates on offer. Deutsche Bank downgrades to Hold from Buy, envisaging limited upside to its target of $22.

Shares will be issued to the founders of Medisupport and they are expected to continue in executive roles on a long-term basis. The metrics of the deal impress Credit Suisse, with the purchase price of $453m comprising CHF277m in cash, debt funded, and CHF50.5m in terms of the share issue. A minimum number of 3.6m shares will be issued. Relative to key bank covenants, Credit Suisse estimates substantial head room exists, allowing further potential for acquisitions.

JP Morgan was surprised at the deal, having anticipated acquisitions would come from core geographies. Still, the company is no stranger to Switzerland, having a smaller scale operation in that country. Medisupport generates attractive margins which, with synergies, can make it one of the highest margin operations in the company's portfolio. Incentivising management with equity is considered particularly attractive in this deal.

The broker notes the Swiss market is particularly stable from a reimbursement perspective. Synergies are particularly encouraging and procurement the biggest opportunity. Sonic Healthcare will also be able to merge the two Zurich labels will can generate further synergies in around 12 months time. While there is no sign of the company being vulnerable on funding it should be contemplated at some point, JP Morgan suggests. 

Citi welcomes the deal, having already factored in $200m in acquisitions over the next five years, given the company's plans to grow acquisitively. This particular acquisition bettered the broker's expectations and, if Sonic Healthcare can add more at similar metrics, then there is upside risk to the broker's forecasts. Citi re-models its base case, no longer including acquisitions per annum, and this results in a reduction in overall earnings per share estimates on a standalone basis. 

FY15 remains a challenge, particularly with the challenges in US and Australian pathology businesses, UBS maintains. Potential upside is provided by the Canadian and UK contracts which should accelerate growth in FY16/17. The broker concedes the opportunity for acquisitions still exists, including Germany. Morgan Stanley also considers the transaction will augment solid organic growth, the recent Canadian contract and FX tailwinds.

On FNArena's database there are four Buy ratings and four Hold. The consensus target is $22.51, which compares with $20.77 ahead of the announcement and suggests 7.4% upside to the last share price.Targets range from $21.34 to $24.13. 
 

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article 3 months old

Virtus Health Snagged By Competition

-Question over leverage in NSW
-Opportunities to grow still
-Long-term fundamentals intact
 

By Eva Brocklehurst

Virtus Health ((VRT)) has hit a snag. The IVF company has downgraded earnings guidance to "low to single digit" for FY15 from "low to mid teen" growth, as aggressive peers make inroads in market share amid delays to its Singapore expansion.

The market gave the stock a drubbing but brokers, while cooling their ardour, are not completely negative. Morgan Stanley considers the known risks are reflected in the price and retains an Overweight rating. The company is suffering from lingering low growth in the market and, while downgrading earnings forecasts by 10%, the broker believes a rebound is on the cards, although this may not occur until after the first half of FY16.

Virtus Health gave up market share in three states in recent months. Morgan Stanley did not expect it to lose share in Queensland and Victoria and suspects Monash IVF ((MVF)) may have been the culprit. The NSW issues created by a "bulk-billing competitor" suspected to be Primary Health Care ((PRY)), should now be regarded as an ongoing concern. The broker had anticipated initial enthusiasm in regard to this clinic would have dissipated by now but it appears this is not the case.

The company also flagged the impact of the Sydney storms on its clinic at Maroubra, as it cannot service new patients until August 15. Furthermore, Singapore has been slower than expected to start up and will contribute a $1m loss to the downgraded forecasts. UBS expects the company will continue with its expansion strategy nonetheless, looking to to the UK for acquisition opportunities. UBS reduces FY15 estimates by 7.5%, downgrading to Neutral from Buy. The broker considers this is the most suitable rating at present, allowing a re-examination of growth options.

Macquarie also downgrades to Neutral from Outperform. The broker is concerned at how quickly the outlook has deteriorated. Moreover, the company is losing market share and not leveraged to a potential rebound in volumes. Industry data was showing signs of recovery, particularly in NSW, but Macquarie now considers its interpretation that it would benefit Virtus Health is incorrect. Instead, growth in NSW is being attributed to Primary Health, a new entrant in the fertility clinic business, which has the benefit of owning a chain of medical centres.

The broker considers growth will return to the industry when broader macro economic conditions stabilise and there are a number of value accretive acquisition opportunities, both domestically and offshore.

Following a downgrade to forecasts and valuation Morgans maintains an Add rating, expecting the yield will underpin the share price and the long-term fundamentals remain intact. The broker was surprised at the competitive impact in NSW, where Primary Health is considered to have picked up most of the cycle growth over the last three months. Yet, longer term, Morgans believes Primary Health will struggle to make a meaningful impact given the complexity of the IVF process and an increasing requirement for transparency around IVF centre success rates.

There are two Buy and two Hold ratings on FNArena's database. The consensus target is $7.37, suggesting 23.4% upside to the last share price. This compares with $8.70 ahead of the update. Targets range from $7.00 (Macquarie) to $7.74 (Morgans). The dividend yield on FY15 and FY16 forecasts is 4.4% and 4.8% respectively.
 

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article 3 months old

Outlook No Clearer For Sirtex Medical

-Product penetration slow
-Potential re sub-group analysis
-Risks from upcoming trials
 

By Eva Brocklehurst

Just when the outlook should become clearer interpretation clouds the issue again. Sirtex Medical ((SRX)) has delivered its SIRFLOX study findings to the American Society of Clinical Oncology for peer review. There were some positive comments from key opinion leaders at the conference, but the reaction from brokers appears dependent on ascertaining the extent of the market to which the SIR-Spheres treatment might be applied in future.

There is no change to the data. To recap, the study has found no statistical improvement in overall progression-free survival in metastatic colorectal cancer (mCRC) but some improvement in terms of extending liver cancer survival, the secondary end point. Some participants at the ASCO conference consider the study advances the potential of hybrid treatment, chemotherapy plus radiotherapy or Sir Spheres.

The study has been selected for a number of official follow-up presentations in coming months, to help drive awareness of the treatment amongst prescribing oncologists. At this stage, oncologists tend to prescribe the treatment only when other forms of therapy have been exhausted and the patient is still seeking intervention, described as the "salvage" market.

The strength of the secondary end point has encouraged the company to expect regulators will expand its label. The data enables Sirtex to update its label to include the treatment as a combination therapy for inoperable mCRC in the liver only. UBS finds this development a key positive with some clinicians prepared to examine the potential for use at a level above the current salvage application. Furthermore, the broker finds the prospect that a sub-group analysis might prove positive even more encouraging.

Penetration of the product to date has been slow, with the broker observing only 7-8% of the salvage market has used SIR-Spheres. UBS believes the company can aspire to a market that is at least four times larger and may be up to 16 times larger depending on expansion to first line treatments.

The negative in the primary end point means the addressable market is smaller than might be expected but Goldman Sachs views the opportunity in the liver-dominant, first line patients as still large enough. The broker estimates that around 30% of first line mCRC patients have liver-dominant disease. Beyond this, the broker also envisage growth from ongoing penetration of the salvage market and growth from other types of liver metastases -.the spreading of cancer from the original site.

In terms of the stock, Goldman Sachs envisages limited competitive threat, given first mover advantages, and expects pricing of SIR-Spheres will remain stable. However, the stock is a higher risk investment than others under coverage given it is a single product company and continues to face event risk from clinical trials that are due over the next three to five years. Goldman Sachs has a Buy rating and $38.00 target.

Bell Potter found the developments from the presentation underwhelming and believes further data from sub-group analysis is required to adequately forecast volume growth with any certainty. If there is a lowering in September quarter dose sales, and the broker suspects there may be, then it may reflect a cautiousness among oncologists in regard to the real benefit of the treatment. Bell Potter retains a Sell rating and $19.36 target.

Macquarie concludes that uncertainty will only truly be lifted regarding whether the treatment increases overall survival and/or quality of life when data from the sister study, FOXFIRE, is available in 2017. Still, given the benefit found in liver progression-free survival, and the ultimate cause of death for most patients is liver metastasis, the broker considers a positive outcome is likely when given as a first line therapy. Therefore, Macquarie maintains an Outperform rating and $33.00 target. Just to complicate matters, the broker cautions that upcoming segment analysis may not be positive, even if overall survival rates are eventually supported.

Morgans is far less positive. The broker believes the data will have limited impact on driving adoption as a first line treatment in mCRC, given liver survival is mainly a radiological end point and not accepted as a surrogate for overall survival. A number of variables in the study suggest to the broker that the market opportunity is likely to shrink as sub-group analysis, similar to what Macquarie suggests, targets which patient population would be most amenable to therapy. As the most amenable patient population is yet unknown, the broker would use the strength in the share price to exit positions, expecting no translation benefit to an increase in near-term sales.
 

FNArena's database has two Buy (Macquarie, UBS) and one Sell (Morgans) rating. The consensus target is $28.29, suggesting 6.9% downside to the last share price. This compares with $26.14 ahead of the update. Targets range from $13.42 (Morgans) to $38.45 (UBS).

See also, Sirtex Raises Hopes For Liver Cancer Therapy on May 15 2015.
 

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article 3 months old

Fisher & Paykel Healthcare Increases Opportunity And Risk

-Competition felt in flow generators
-Some disruption in US likely
-Optiflow a key product opportunity
 

By Eva Brocklehurst

Fisher & Paykel Healthcare ((FPH)) continues to execute its strategy, delivering FY15 results which were above expectations. The numbers beat broker estimates largely because of an impressive performance in gross margins. The revenue mix was tilted towards the respiratory and acute care (RAC) division as opposed to obstructive sleep apnea (OSA), where masks growth stood out but flow generators underwhelmed.

Sales growth in constant currency terms was 13%, with accessories and consumables now comprising 81% of core revenue. High yielding masks growth stood out, up 23% in the second half. Flow generators were the area of weakness, delivering a flat outcome.

To Credit Suisse, the outcome for masks implies meaningful growth in market share. Gross profit margin also impressed, up 443 basis points. The broker was not so impressed with the news the company would undertake a new distribution arrangement in the US for its hospital respiratory (RAC) products. The US market is important and the broker believes a rapid transition to the new channel will be necessary. Fisher & Paykel Healthcare is seeking to distribute its products directly and is working with Carefusion, its current distributor, to ensure a smooth transition. The company has established an expanded centre in the US and is doubling the size of its US hospital sales team.

Credit Suisse gives the company the benefit of the doubt but maintains a cautious stance, keeping forecasts to the low end of guidance for FY16 until it is evident the company can push through the necessary changes. Upside should come late in FY16. Still, the broker is confident in the company's ability to drive its margins higher than originally estimated. The flat outcome in flow generators did not surprise Credit Suisse, given competitor ResMed's ((RMD)) momentum in this particular area. Credit Suisse has an Underperform rating and NZ$6.05 target for Fisher & Paykel Healthcare.

Without a new platform, growth may be elusive for some time, UBS observes. This broker also suggests the company's flow generator sales may be struggling against ResMed's new platform. While management did not offer a time line, UBS believes a new platform is over 12 months away. Still, momentum in RAC and OSA in terms of masks, as well as margins, continues to impress. This is now aided by FX tailwinds.

That all said, the broker believes the market is pricing in growth beyond what is currently visible. The implied RAC multiple suggests there is limited room for execution risk should challenges emerge on the transition front. Hence, UBS retains a Sell rating with a NZ$5.90 target. The company is now targeting a 70% pay-out ratio and increases its final dividend to NZ8c a share.

Citi also has a Sell rating, with a NZ$4.12 target. The broker notes underlying growth was strong, with net profit up 57% in constant currency terms, offset by decline FX hedging gains. The decision to distribute directly in the US follows a recent takeover of Carefusion. Citi believes the transition is likely to result in NZ$10-15m in additional operating costs and NZ$15m in capital expenditure. In the short term, the broker suspects lower sales as the current channel inventory is run down, with some disruption in hospital contracts as new staff are put in place.

In time, the shift in the distribution of US RAC products will allow for a more focused sales team and slightly better margins, in Macquarie's opinion. The broker welcomes the news that Carefusion, which current represents 24% of RAC total sales, is facilitating a smooth transition, with change-over targeted for July. The broker believes the company's significant product advantages and experience mitigates the risks in the transition. Macquarie expects the transition will have a negative impact on earnings in 2016 but maintains an Outperform rating and NZ$7.25 target. The main risk to the positive outlook stems from the NZ dollar, as valuation and future earnings estimates are very sensitive to the currency. 

Macquarie believes Optiflow is the key product which will drive growth in new applications for the RAC division. The product is important as it builds on the company's position in invasive ventilation as well as its knowledge of flow generators in the OSA market to create a new opportunity. In the broker's view the company's estimate of the addressable market of 30m patients for this product is conservative, given around 10m per annum are given invasive ventilation. Another area of change is the shift to Mexican manufacturing. The company expects half its consumables will be manufactured there by the end of 2017. This will reduce costs in terms of NZ dollars.

Five FNArena database brokers cover Fisher & Paykel Healthcare and a currently split two Buys to three Sells.
 

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article 3 months old

PBS Cuts Create Headwinds For Pharmacy Wholesalers

- PBS cuts hit pharma wholesalers
- Some offset from drug additions
- CSO benefits
- Neutral against reduced discounts and cost cutting


By Greg Peel

The latest round of negotiations between the federal government the Australian Pharmacy Guild have been completed and result in inevitable cuts to the government’s Pharmaceutical Benefit Scheme in the wake of the federal budget, and as such another round of headwinds for pharmacy wholesaler earnings. While the legislation has yet to pass the Senate, and the government has met the odd hurdle in the past, brokers do not believe there is anything here that would prevent passage given an offset of further drugs being added to the PBS.

For pharmacy wholesalers such as Sigma Pharmaceuticals ((SIP)) and Australian Pharmaceutical Industries ((API)), PBS cuts have now become a routine outcome of every Community Pharmacy Agreement. This is the sixth such Agreement, and as such is known as 6CPA.

But that doesn’t make the bitter pill any easier to swallow.

The bottom line is the government is targeting $6.6bn in PBS savings over five years, or as UBS points out, roughly an 8% cut. The bulk of the savings will come from a 5% cut to the price of drugs which have come under the PBS for five years or more. Pharma wholesalers will wear the impact of the cuts as a reduction in margins. However the flipside of aforementioned new drug additions to the PBS takes the net cut back to $3.7bn.

The actual impact on earnings for the likes of Sigma and API is nevertheless not so straightforward. The cuts will be implemented progressively over five years and drug additions will also be spread over five years. Wholesalers also typically rebate a material proportion of the 7.5% PBS fee wholesalers receive from the government back to pharmacists so whereas wholesalers come off worst under 6CPA and pharmacists get off lightly, part of the pain can be eased by reducing those rebates.

There was other good news in the form of the wholesalers’ Community Service Obligations, the government subsidy for which has been retained under 6CPA. The CSO ensures the equally timely supply of all PBS drugs to all parts of Australia, for which the government pays a supporting subsidy. The CSO will no longer be indexed, which is bad, but brokers suspect eligibility will be tightened as an offset.

The CSO measures exclude supermarkets and prevent wholesaler competitors from simply cherry-picking the easy money in metro areas, Goldman Sachs points out.

Clouding the earnings impact issue further are wholesaler discounts to pharmacies and cost cutting initiatives being undertaken by the wholesalers, as Macquarie points out.

Given 6CPA hurts the wholesalers and not the pharmacies, the wholesalers can recoup some of their margins by winding back their discounting to pharmacies. Both Sigma and API have also recently announced cost-cutting strategies for their businesses, as these, too, will help offset the PBS losses.

Macquarie also suggests that PBS cuts have become such a factor of life for the wholesalers, 6CPA will have brought with it no surprises.

Macquarie thus assumes the net result will be mostly a neutral one for the industry, and indeed the broker maintains Neutral ratings and unchanged targets for both Sigma and API. Goldman Sachs agrees the impact will be largely neutral, but notes the trajectory for wholesaler earnings will remain pretty flat.

Deutsche Bank has similarly made no changes to its forecasts, while UBS has made “precautionary” downgrades to Sigma forecasts. UBS has made no changes to its valuation approach but has put the industry on “earnings watch”.
 

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article 3 months old

Nanosonics To Benefit From FDA Review

-FDA to review cleansing protocols
-Trophon proven to kill HPV
-Key use in ultrasound devices
 

By Eva Brocklehurst

Nanosonics ((NAN)) has some compelling fundamentals underpinning its product, Trophon, for the disinfection of ultrasound probes. The US Food and Drug Administration has convened an advisory committee to review the reprocessing of medical equipment and Canaccord Genuity believes the findings and recommendations will have ramifications for the monitoring and adherence to reprocessing protocols for all medical devices.

The FDA is worried about duodenoscopes, in particular, following an outbreak in both California and North Carolina of a drug-resistant superbug. The outbreak appears to have stemmed from a lack of thorough cleansing. Duodenoscopes are intricate and very hard to clean. The FDA does not regulate the practice of medicine but its guidance is considered important in the drafting of any specific regulations.

Nanosonic's hydrogen peroxide, non-nebulant technology, Trophon, does not provide a solution to the challenges of cleaning duodenoscopes. What the incident and subsequent FDA review has highlighted is the need to fully review procedures for all medical equipment. There appears to be shortcomings in procedures in reprocessing medical devices with high contamination rates because of inadequacies of the current procedures and poor adherence to the protocols.

Of most significance for Nanosonics are results from a study presented to the Society for Healthcare Epidemiology of America which showed Trophon was the only high-level disinfection system that has been proven to kill human papilloma virus. HPV is one of the most common sexually transmitted infections and ultrasound is a key imaging tool used by obstetricians and gynaecologists. High risk strains of HPV are responsible for nearly all cases of cervical cancer and are the leading cause of several other cancers. Standard chemical disinfectants are unable to destroy the virus.

Why is Nanosonics set to benefit? Trophon provides a simple, automated and effective solutions for the reprocessing of ultrasound transducers. The broker believes the data may help drive adoption of Trophon by clinics. Trophon is fully automated, self-contained system and there is little operator involvement in the disinfection process. The product provides a clear audit trail with each disinfection electronically recorded. Alternative methods of cleaning ultrasound probes are via soaking in liquid disinfectants, which is labour intensive and, if done properly, can take up to 25 minutes.

The broker points to several recent publications, which have highlighted sub-optimal practices in relation to the use of intra-cavity ultrasound transducers (ICUTs). Most sterilisation procedures for critical devices involve high temperatures and are not suitable for equipment such as ICUTs. Hence they are classified as semi-critical devices that, if not able to be sterilised, must be disinfected at a high level.

Canaccord Genuity maintains a Buy rating for Nanosonics and a $2.20 price target.
 

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article 3 months old

Medibank Private Stalled

By Michael Gable 

It will be very interesting to see if the rise in our market yesterday - led by a recovery in the major banks, increasing merger and acquisition activity and an improvement in the iron ore price – can be sustained in light of comments late last week from US Federal Reserve chair Janet Yellen indicating that the central bank was poised to raise interest rates this year. This is not a shift in the Fed’s view, but rather an effort by the Fed to alter the market’s expectations regarding the timing of the next move.

In contrast to the performance of the local market, US markets fell on Friday (and were closed yesterday for the Memorial Day holiday) and European stocks fell on Monday, albeit on thin trading volumes.
In this week’s report, we take a look at Medibank Private ((MPL)).

 


We only have about 6 months’ worth of charting to go off but what we can see is that MPL came back to where it listed and then bounced strongly off those levels. However, it appears to be finding some resistance at the most recent downtrend line. A strong break above that line would indicate higher levels. At the moment though price action appears fairly neutral.
 

Content included in this article is not by association the view of FNArena (see our disclaimer).
 
Michael Gable is managing Director of  Fairmont Equities (www.fairmontequities.com)

Michael assists investors to achieve their goals by providing advice ranging from short term trading to longer term portfolio management, deals in all ASX listed securities and specialises in covered call writing to help long term investors protect their share portfolios and generate additional income.

Michael is RG146 Accredited and holds the following formal qualifications:

• Bachelor of Engineering, Hons. (University of Sydney) 
• Bachelor of Commerce (University of Sydney) 
• Diploma of Mortgage Lending (Finsia) 
• Diploma of Financial Services [Financial Planning] (Finsia) 
• Completion of ASX Accredited Derivatives Adviser Levels 1 & 2

Disclaimer

Michael Gable is an Authorised Representative (No. 376892) and Fairmont Equities Pty Ltd is a Corporate Authorised Representative (No. 444397) of Novus Capital Limited (AFS Licence No. 238168). The information contained in this report is general information only and is copy write to Fairmont Equities. Fairmont Equities reserves all intellectual property rights. This report should not be interpreted as one that provides personal financial or investment advice. Any examples presented are for illustration purposes only. Past performance is not a reliable indicator of future performance. No person, persons or organisation should invest monies or take action on the reliance of the material contained in this report, but instead should satisfy themselves independently (whether by expert advice or others) of the appropriateness of any such action. Fairmont Equities, it directors and/or officers accept no responsibility for the accuracy, completeness or timeliness of the information contained in the report.

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