Tag Archives: Health Care and Biotech

article 3 months old

Alcidion’s IT Targets Hospital Efficiency

Alcidion is an emerging operator in the field of hospital IT, with technology that can help reduce deaths attributable to medical error. The stock price has doubled since it listed on ASX in February this year.

-Alcidion's Miya uses data feeds from disparate systems to actively monitor and detect emerging risk
-US health care providers obliged to make massive investments in new clinical information infrastructure
-Australian government now pushing hard to digitise hospitals

 

By Eva Brocklehurst

Alcidion ((ALC)) is a life sciences company and an emerging operator in the field of health information, with technology that can help reduce deaths by medical error. The stock has more than doubled its price since listing on the ASX in late February, driven primarily by commercial progress in various Australian hospitals.

Medical error is now the third leading cause of death in the US and Alcidion has technology that can help reduce these debts while making hospitals more efficient. NDF Research initiates coverage with a Speculative Buy rating.

The researchers place the base case at 12.2c per share and 26.3c per share as the optimistic case, using a discounted cash flow approach. The target of 20c sits at the mid point of the valuation range. Alcidion is expected to grow revenue to around $12m in FY18 from $5m in FY15. This is on the back of continued contract wins in Australia and the first installation in the US, which the company expects in FY18.

The company is anticipated to be profitable from FY18 and the researchers believe Alcidion's current cash reserves will be sufficient to fund the company through to profitability. The past eight years have witnessed a massive increase in health care IT spending globally, as healthcare systems seek efficiency gains from electronic health records, remote monitoring and mobile solutions.

Moreover, payors insist on such investments to manage the massive increase in the use of health care which is driven by an ageing population and higher levels of chronic illness. Health care IT spending on NDF estimates is now in the realms of US$110bn and growing at a rate of 3-4% per annum.

So, what is the company's critical system? The "Miya" is a clinical decision support system. Hospitals already have numerous IT systems which track patients in various ways but the relevant information is often in department silos, where staff have to work to pull together the numerous unconnected pieces of information. Miya, by contrast, uses electronic data feeds from the disparate systems to which the platform is connected, actively monitoring to detect emerging risk. Alerts are then sent to the right people at the right time.

The platform does not just integrate data it also analyses using "best practice" knowledge. The system is currently used in 11 hospitals around Australia, three in Victoria's Western Health network, four in hospitals operated by the Northern Territory Department of Health and in the Northern Integrated Care Service run by the Tasmanian health department. There are eight major modules, including patient flow, mobile, access, tracker, clinic, orders, intensive care and emergency department.

The company argues that whenever Miya is implemented it increases hospital efficiency and reduces operating costs. The company's example includes the implementation of the emergency department module in Northern Territory hospitals where the number of patients serviced within four hours more than doubled thanks to the technology.

Emergency departments across the NT witnessed pathology tests cost reduced by 5%, because less were ordered. A critical 7% of all tests that should have been read, and previously were not, now were read. This saves emergency department heads hours per day by not having to seek out that critical 7%. NDF believes the repeat business from NT and Victoria indicates that the product is generating customer loyalty.

In the US, the researchers note, hospitals and health care providers have been obliged to make massive investments in new clinical information infrastructure, simply to comply with the legislation of 2009. A typical approach scraps existing systems and installs a new one supplied by a single vendor. Yet NDF notes there are significant drawbacks with a single vendor solution including cost, potential for delays and the fact that best-of-breed systems are often scrapped.

Alcidion avoids the pitfalls in this regard as it allows hospitals to continue to operate best-of-breed solutions and simply install a supervisory system that unifies the disparate clinical information systems into a common platform. This lowers costs and has less implementation risk. Researchers also note that in Australasia, until recently, there was an under-investment in health information, despite world-class healthcare systems.

They now believe hospitals on both sides of the Tasman are starting to catch up and looking for small, local companies to help. The market opportunity just in Australia, with its 700 public hospitals and 620 private hospitals, is considered significant, as there are around 10m hospitalisations in a year.

The Australian government is now pushing hard to digitise hospitals and its Australian Digital Health Agency is tasked with building infrastructure, set up in January this year. This decision augurs well for companies such as Alcidion, with on the ground experience to help hospitals go digital.

In the US, meanwhile, the benefits of electronic health records are considered legion, such as the potential avoidance of contra-indicated products, ability to do community health surveys and an ability to save time during a doctor's visit. As a “carrot”, in 2009 the US government issued US$36.5bn in incentives for doctors to implement such systems, while the "stick" part involved reimbursement cuts for hospitals which were not making meaningful use of electronic records, starting at 1% in 2015.

This has ensured that, as of this year, 96% of US hospitals had electronic health records compared with only 12% in 2008. As a result, the researchers believe the brakes are really coming off health care IT and Alcidion is well-placed to take advantage of this.

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article 3 months old

Estia Health Beset By Uncertainty

Estia Health is beset by uncertainty surrounding the sustainability of earnings and this is not expected to moderate in the near term.

-Raising $136.8m in equity via non-renounceable entitlement offer to re-pay corporate debt
-UBS envisages growth opportunity from acquisitions provides better shareholder value
-Declining trend in RAD may put pressure on capital to fund growth

 

By Eva Brocklehurst

Estia Health ((EHE)) is beset by uncertainty surrounding the sustainability of earnings. The company has a poor track record in setting guidance, in Morgan Stanley's opinion, and there is a risk of further blow-out in costs associated with integrating acquisitions. There is also no full-time chief financial officer.

The company is raising $136.8m in equity to pay its corporate debt. A fully underwritten 1-for-3 accelerated, non-renounceable entitlement offer will be made at a fixed price of $2.10 a share, a 21.6% discount to the last closing price. Net debt will then reduce to $143m from $274m.

Morgan Stanley welcomes the capital raising, as it believes aged care operators should maintain low corporate debt in order to meet net outflows for refundable accommodation deposits (RAD). The equity raising has reduced balance sheet risk but also diluted earnings per share by 17.4%, in the broker's estimates.

Uncertainty overhangs the stock, given regulatory changes mooted for FY18. Morgan Stanley struggles to offset the revenue impact emanating from the recent changes to the government's aged care funding instrument (ACFI).

The broker also expected more from the strategic review, given a poor performance from assets recently acquired, and wanted a detailed update on why returns will improve and what capital expenditure is also required.

While FY17 guidance is reiterated for earnings of $86-90m, a strong skew to the second half is necessary. The broker wants more evidence of operational improvements in order to become more positive and maintains an Underweight rating and $2.10 target.

The company's presentation outlined more detail on the transition from RAD to daily accommodation payments (DAP) and combinations. Over the three months to October 31, the mix had shifted in favour of DAP. The company stated that the weighted average paying resident mix was 45% RAD and 55% DAP.

Morgan Stanley was surprised at the magnitude of the shift and believes this poses a substantial risk, finding it difficult to envisage how the company can maintain a net RAD inflow. The company has identified an increase in average deposit prices and deposits on new places as countering the cash flow impact.

Dividends have been suspended for the first half and after that the company will target 70% of net profit as the pay-out ratio. The company has replaced its operational matrix structure with a regional structure. A number of significant refurbishment opportunities were identified, as well as an initial nine non-core assets suitable for sale in the short term.

UBS believes the company has taken a conservative stance to ensure its balance sheet adequately provides for its operational objectives. The broker doubts there is any absolute issue to warrant the capital raising, as trading in the year to date remains in line with guidance and there is good net RAD inflow.

The broker's FY18 earnings per share estimates fall 16.6% after the issuance. Average occupancy rates for the year ending November 2016 are at 93.1%, down on FY16's 94.4% because of a slower transition in newly acquired homes. Actual occupancy at the end of November was 92.8% and this is expected to increase because of new initiatives.

UBS retains a Buy rating and believes that residential aged care is unclouded by balance-sheet concerns and the stock price should revert towards peers.

The market should be thinking about the growth opportunity in aged care in terms of acquisitions as in the broker's opinion, based on an internal rate of return measure, these provide better shareholder value. Traditional returns on invested capital (ROIC) measures do not account for the cash flow timing differences between strategies.

Under the government's previous intentions with ACFI and given the top ten operators are disproportionately providing complex care, UBS notes they were over-represented in the proposed reductions, whereas indexation now has the effect of distributing the cuts more broadly across the sector.

CLSA believes second half FY17 occupancy will need to be above 94.6% to achieve underlying earnings guidance, which may be a bit of a stretch as the company has not delivered this percentage in the past.

The broker, not one of the eight stockbrokers monitored daily on the FNArena database, retains a Sell rating and reduces its target to $1.90, while earnings per share estimates are cut by 12% for FY17 and by 17.9% for FY18.

Shaw and Partners believes there are still ongoing funding issues which pose concerns, as well as liquidity issues. The main concern regarding the company's development plans is the trend of incoming residents not choosing to pay a RAD.

If this trend continues, the broker suspects it likely that Estia Health will be unable to to sustain the growth capital expenditure required over the next 24 months. Therefore further debt will have to be drawn down from the current debt facility.

The broker suspects ongoing uncertainty regarding the funding structure of the sector will continue to put pressure on share prices and advises investors to be cautious. Shaw and Partners, also not one of the eight monitored daily on the FNArena database, has a Hold rating and a $3.50 target.
 

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article 3 months old

Rebound For Sirtex

By Michael Gable 

The S&P/ASX 200 Index continues to grind higher and it was nice to see some midcap names join the party a little last week. As highlighted last week, stocks that trade at a premium to market are still not seeing much buying yet. The focus continues to be on the cyclical names. This week we have had a look at the Sirtex Medical ((SRX)) chart after last week's fall.
 


 

SRX may move around here, so we will be neutral for now, but if it can hold these levels then we would expect a rally and then we can turn positive. Firstly, it seems to have made a large 3-wave flat correction since hitting that high in early 2015. When SRX managed to retest that high later in the year and slightly surpass it, it then encountered some selling. What we have now seen is SRX go to a marginally new high and then fail, and last week has seen it go to a marginally new low (circled on the chart and indicated by exceeding the horizontal lines). This means that the downside target has possibly been achieved and SRX may well go on to rally again from here.
 

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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article 3 months old

Sirtex Reaction Overdone

Increased competition has wedged dose sales for Sirtex but brokers suspect the market's reaction is overdone.

-Double digit volume growth still expected in FY17
-Small movements in dose sales amplify earnings impact
-Still no absolute substitute for Sirtex treatment in salvage setting

 

By Eva Brocklehurst

Sirtex Medical ((SRX)) issued a disappointing first half update as increased competition has driven a wedge in dose sales. Dose sale growth is now expected to be in the order of 5-11% and earnings are forecast at $65-74m compared with previous expectations of double-digit sales growth and earnings of $90m.

There is increased competition for patients with liver directed therapies, a new drug approved in salvage for metastatic colorectal cancer and restrictions on reimbursement. The company's closest internal radiotherapy competitor, BTG, has clearly taken a share, CLSA observes.

BTG is able to offer a more complete solution to intervention radiology for patients with advanced liver cancer versus the Sirtex Medical offering, and this is putting pressure on the company's various trials to come up with superior results. CLSA believes the company should still be able to achieve double-digit volume growth in FY17 and high single digit growth beyond that.

The stock is now considered oversold as the implications in the current share price are that upcoming clinical trial results will be unsuccessful. CLSA, not one of the eight stockbrokers monitored daily on the FNArena database, retains a Buy rating and $26 target.

Bell Potter, also not one of the eight, does not change its long-term outlook for the company's therapy in the treatment of various liver cancers. The broker considers the relative movements in dose sales and earnings clearly demonstrate the leverage the company has to revenue growth.

Each dose sale in the US generates $22,000 in revenue at an 85% gross profit margin. As a result, small movements in dose sales growth have greatly amplified the earning impact. The broker notes the new chemotherapy drug in the salvage space is Lonsurf, from the Japanese company Taiho Oncology. This drug provides a survival benefit of 1.8 months in salvage level patients versus a placebo.

Bell Potter is of the view that the eight-month extension in liver-only, progression-free survival, as measured by the SIRFLOX trial, stands a reasonable chance of creating a survival benefit, if not in the general population then in the liver only and liver-predominant group.

Bell Potter maintains a Buy rating, which remains absolutely dependent upon a survival benefit for a significant group of patients in the upcoming clinical trials due to be reported in 2017. The broker's FY17 forecasts for earnings per share are downgraded by 34% and the price target is reduced to $30.00 from $42.26.

The downgrade was a significant reduction to Macquarie's expectations. The source of the disappointment lies with the Americas, Europe, Middle East and Africa (EMEA). The company is anticipating first half growth in dose sales of 4-6% in the Americas and 2-3% in EMEA. These levels were well short of Macquarie's forecast.

Asia-Pacific is the strongest performing market, tracking in line with expectations and has clearly benefited from the reinstatement of distribution in South Korea. The main element of concern is the US weakness, as historically this has been the growth engine.

While the company called out increased competition in liver-directed therapies such as Lonsurf, Macquarie believes the majority of the weakness is more attributable to the imminent release of overall survival data, which is driving patient deferrals.

With FOXFIRE, SARAH and SIRveNIB set to report data in the first half of 2017, clinicians may be hesitant to refer a patient for SIR-Spheres, given the short-term potential for a negative read out.

Macquarie anticipates only a modest improvement in the second half. Ahead of the data releases, the broker forecasts a compound growth rate in earnings per share of 14% over the next five years with, which is considered attractive for a company that is trading well below its biotech peers.

UBS re-sets its FY17 estimates on the basis that US sales are expected to slow. EU first half growth is expected to be 2-3%. German funding has been limited, although elsewhere access has been expanded.

While the company cited Lonsurf as having an impact, having been inserted into the therapy cascade, the broker highlights that for some patients in the salvage setting, it is not a substitute for the Sirtex therapy. Some patients may schedule the Sirtex treatment slightly later, or some deaths may occur on Lonsurf before the Sirtex treatment is administered.

Yet, given a survival rate of over nine months on Sirtex therapy UBS considers there to be no absolute substitute. Moreover, guidance implies normalisation of the Lonsurf effect. The broker considers the market correction after the trading update overdone.

The company has a track record of volatility when it comes to alternative, yet inferior, new therapy but a longer survival period tops all. Hence, UBS retains a valuation approach which is indifferent to the outcome of the trials and short-term volatility. Its price target relies on the free cash flow generated on existing indications.

FNArena's database shows a consensus target of $31.10, suggesting 85.5% upside to the last share price. There are three Buy ratings and one Sell (Morgans).
 

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article 3 months old

Resonance Health Sparks Interest

Resonance Health has captured the imagination of NDF Research with its world-leading MRI diagnostics, resulting in an initiation of coverage.

-Key MRI-based test, FerriScan, yet to gain widespread reimbursement from health care systems
-Advantage in FerriScan as a companion diagnostic for Novartis drug, Exjade
-Potential with new products for stock to re-rate over time

 

By Eva Brocklehurst

Resonance Health ((RHT)) has captured the imagination of NDF Research with its world-leading MRI diagnostics. The Perth-based company has developed the world's first non-invasive diagnostic for iron overload, an MRI-based test called FerriScan. The test gained both Europe's CE Mark and US Food & Drug Administration approval in January 2005, and has been the basis of a small but growing business.
The natural question, NDF Research poses, is if the scan is so good why is annual revenue only $2.0-2.5m per annum? Diagnosing iron overload is important, with an estimate of around 4-5m people globally suffering from such disorders, which include sickle-cell disease, haemochromatosis and aplastic anaemia. In these conditions the patient's body absorbs excessive amounts of iron, resulting in a build up in the liver, heart, pancreas and other organs.

Resonance Health is yet to obtain widespread reimbursement for its diagnostic from the health care systems where it is used, so it is most often paid for by patients' out-of-pocket expenses or from internal hospital funds.

Use of the product has grown from a low base and the company expects that in the long run, usage will become routine as management of iron overload becomes more important in catering to a range of diseases. A notable example is cancer, for which frequent blood transfusions after chemotherapy can result in iron overload.

Even without reimbursement FerriScan is increasing its user base. In FY16, 25 new radiology centres started using the product and there are now over 250 in 30 countries that can offer the diagnostic to patients. The other issue is the cost of MRI (medical resonance imaging), as traditionally this is one of the more expensive imaging techniques, causing health professionals to limit its use as much as possible.

The analysts note MRI costs are decreasing as more units are becoming available worldwide and they envisage potential for FerriScan to move beyond being a niche product and become more mainstream.

Another plus for FerriScan is that it is now a companion diagnostic for the Novartis drug, Exjade, an oral iron tablet which gained FDA approval in November 2005, and its successor tablet, Jadenu. There is a problem in over-treating with Exjade/Jadenu and the FerriScan diagnostic is able to best manage this problem, given the accuracy and ease with which it can be performed. The analysts believe Exjade/Jadenu provides a guide to the upside to FerriScan as the product has grown into a best seller for Novartis.

The company's second diagnostic, Cardiac T2 Star, gained FDA approval in August 2011 as a MRI test of cardiac iron overload derived from the algorithms which went into FerriScan. The use of the two tests is considered highly valuable in this setting.

The company's third key product, HepaFat-Scan, is an MRI-based method of measuring the volume of fat in the liver tissue. Fatty liver disease has the potential to become a significant problem worldwide. It is estimated that around 30% of US adults have non-alcoholic fatty liver disease, with the potential to develop fibrosis and cirrhosis of the liver. By providing the first accurate alternative to a liver biopsy, the company's scan has potentially made a strong contribution towards managing the disease, NDF Research believes.

Resonance has developed technologies for use in additional organs including bone marrow, pancreas and spleen and the analysts envisage multiple growth horizons beyond its main diagnostics and potential with the introduction of new products for the market to re-rate the company over time.

Resonance has conducted a single capital raising in the past decade, in 2014. Cash has remained more or less steady over the past few years as the company carefully invests in new development. Resonance has made a deliberate decision to invest more in marketing and R&D to develop and grow its business and the investment is expected to pay off over time.

NDF Research initiates coverage of Resonance Health with a Speculative Buy rating at 7.5c per share as the base case and 14.3c per share as an optimistic case. The target price of 11c sits at the mid-point of these two numbers. The researcher also assumes true gross margins for the company's tests are around 65% at present and will expand to between 70% and 80% by FY26. Cost growth is expected to converge on revenue growth by FY26. The company is forecast to become profitable in FY18.
 

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article 3 months old

Patent Dispute Hinders Fisher & Paykel Healthcare

Fisher & Paykel Healthcare has signalled robust growth in its hospital applications but remains hindered by a patent dispute with ResMed.

-Litigation moves to ITC, suggesting higher risk in the outcome
-Nasal high-flow oxygen therapy driving growth in hospital applications
-Trump ascendancy flags potential issue for Mexican manufacturing

 

By Eva Brocklehurst

Fisher & Paykel Healthcare ((FPH)) delivered a strong first half result, upgrading guidance and signalling robust growth in its hospital applications. Yet the company is hindered by a patent dispute with ResMed ((RMD)), which could put a dampener on the stock until it is resolved.

First half net profit was up 26%, and 3% ahead of guidance. Hospital growth was 23%, although this included a pricing and inventory benefit. FY17 guidance has been upgraded to NZ$165-170m in net profit at a USD exchange rate of NZ70c.

Deutsche Bank downgrades to Hold from Buy following a detailed review of the risks around the action in the International Trade Commission regarding the company's litigation with ResMed. The ITC action appears to have both higher risks of a worst-case outcome and an outcome that is likely to come much sooner than previously expected. The broker's review of the process and case history suggests that, via this avenue, the risks are significantly greater than through the US courts.

While the stock remains an attractive long-term growth story, the significant uncertainty means the broker does not believe the risk/reward balance is attractive. Deutsche Bank applies a 20% discount to its discounted cash flow valuation pending resolution of the process in the ITC.

The company has suggested costs associated with the patent infringement dispute would put upward pressure on expenses, but this would be offset by efficiency gains. The company now expects general and administrative expenses to grow in line with sales, as opposed to its previous expectation that growth in these expenses would be restricted to 1% below sales.

Macquarie adopts the new guidance and, for the sake of conservatism, does not incorporate a subsequent step-down in expenses after the conclusion of the dispute. The broker notes the stock has been caught up in the sell off of high-multiple stocks and is now trading on 25 times next year's forecast earnings. This significant premium is warranted in the broker's view, given double-digit growth rates and strong market position in hospital humidification, and an Outperform rating is retained.

The headline numbers impressed UBS, being slightly ahead of its estimates, although this was largely because of the greater than expected benefit from the internalisation of US distribution. The 24% constant currency revenue growth in home care was below UBS estimates, reflecting a maturing of the market share gain in obstructive sleep apnea (OSA) masks.

Despite downgrading earnings estimates by 3% for FY18 and FY19, the broker observes net profit growth remains strong at 16% and 20% for FY17 and FY18 respectively, driven by constant currency revenue strength and earnings margin expansion. UBS retains a Neutral rating because of the heightened risk associated with increasing competition in OSA and the patent infringement cases.

In the medium term, the broker envisages solid market growth prospects for OSA and increased manufacturing offshore, underpinned by growth in earnings per share. The broker also notes comments from US President-elect Donald Trump raise the prospect of tariffs on Mexican imports if the North American Free Trade Agreement cannot be successfully re-negotiated.

If this scenario were to occur without exclusion for medical devices, UBS believes it would then take out the cost benefits for the company from its Mexican manufacturing facility. The imposition of import tariffs could incite changes to the company's supply chain, with manufacturing of US-related product shifted back to New Zealand and manufacturing of products for the rest of the world remaining in Mexico.

Use of nasal high-flow oxygen therapy has been the driving force behind the growth in new applications in hospitals and now accounts for around 30% of the company's total revenue. Citi believes this therapy has significant room to grow for a number of reasons. It is currently used in intensive care settings but expansion to other emergency, surgical, medical and respiratory wards will significantly widen the addressable market.

Fisher & Paykel has been a high-flow pioneer and enjoys significant first-mover advantage. High-flow is better tolerated by patients, largely because the mouth is not covered and the patient can talk, see clearly and eat easily.

Citi also believes the unwinding of the yield trade poses a risk for high-multiple stocks. This is somewhat offset by a corresponding currency benefit for Fisher & Paykel Healthcare. Despite its rich price/earnings multiple the broker believes the stock is attractive, given the growth outlook for earnings per share.

Nevertheless, the broker expects the share price will be more volatile as it responds to news flow. The broker has no basis for preferring one company's position over another in the patent dispute and continues to expect a negotiated outcome.

While the results highlight the strengths of the company's business model, Credit Suisse believes these are well understood and should be balanced against the tailwinds that are now fading on some fronts. The stock is now trading at a level which the broker believes is fair value and more commensurate with the risks. Credit Suisse retains a Neutral rating. There are two Buy and three Hold ratings on FNArena's database.
 

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article 3 months old

Treasure Chest: CSL’s Heart Data Under Microscope

Ahead of the release of important data on CSL's heart disease product, brokers acknowledge potentially substantial upside.


By Eva Brocklehurst

CSL Ltd ((CSL)) is under the microscope as it prepares to present its CSL112 phase IIb data at the American Heart Association conference. Several brokers assert there is substantial upside risk for the stock, should the primary and/or secondary end points be validated.

The product could provide immediate benefit in reducing plaque volume and inflammation, disrupting the processes that lead to further heart attacks, stroke, and death. Heart attack patients have a 5% mortality risk within 30 days and a 15% incident risk of major adverse cardiac events within six months.

There are two aspects to the data, the primary (safety) and secondary (efficacy) end points. Morgan Stanley observes a successful primary appears to be a foregone conclusion by the market, as this will assess if the product induces liver/kidney toxicity. Among secondary measures, the time to first occurrence of a heart attack will provide some signal as to how effective this drug may be in preventing secondary heart attacks.

The move forward to clinical development and commercialisation is dependent on the outcome of these end points. Tolerance of the product is largely expected and Morgan Stanley envisages a positive reaction in the stock of around 7% on a positive primary end point. The secondary end point, in terms of the recurrence of heart attacks, is more challenging and the broker is less certain, given only four months of follow-up and a relatively small study population.

A significant secondary signal would be a major positive surprise and the broker expects a reaction in the stock of around 17% is possible, although it would require validation in a phase III trial. The treatments addressing the unmet clinical need in heart disease are competitive and, the broker notes, competitor Amgen will present its full data from its Repatha study at the conference.

There are three probable outcomes from the conference, Morgan Stanley deduces. The first is if the data misses both end points, which would hit the shares by around 3% to the downside, in the broker's calculations. If the data meets the primary end point, but there is no secondary signal, this means it may proceed to a phase III, and Morgan Stanley envisages upside to its $101 target, to $111.

The best scenario is where the data hits both the primary end point and provides a good secondary signal, confirming the move to phase III. This is where the broker envisages 17% upside to its target, to $122, although the premium recedes slowly because of the long trial duration and likely new competitive developments. Morgan Stanley retains an Underweight rating.

Citi suspects that any positive news may push the shares higher and the product could be a game changer. The broker retains a Neutral rating and $110.73 target. The product could add over $1bn per annum to profit in five years after the launch, the broker estimates. Citi derives an un-risked valuation of $18/share for CSL112. This reflects both the size of the market opportunity and the high margin/low incremental production cost.

The broker expects the trial to demonstrate acceptable liver and kidney toxicity, in line with Morgan Stanley's view, and possibly a trend of reduced cardiovascular events. This could be positive for sentiment and the stock by around 3-4%, Citi calculates. Given there is little priced into the stock, the broker expects a failure of the trial would be negative but the reaction would be constrained, perhaps to a 3-5% fall.

In the best case scenario, where a dose-dependent statistically significant reduction in major cardiovascular events is demonstrated, the stock could add around $10, Citi asserts. Going into the conference, the broker envisagea the stock fairly priced, given its flu business, while poorly performing, is gradually improving and there is increasing volatility in the haemophilia market. Citi does not include CSL112 explicitly in valuation until there is greater clarity about a phase III clinical trial and a corporate strategy on the product.

The latest novel therapies to treat haemophilia will be delivered at the American Society of Hematology next month. The impact of these therapies is difficult to quantify, but Ord Minnett considers it likely that traditional factor replacement therapies for both haemophilia A and B will face significant new competition over the next decade. The broker is aware of at least 12 novel non-factor based therapies under development and the sheer number suggests re-invigorated competition is almost inevitable.

Ord Minnett maintains a Hold rating but reduces it price target to $100 from $105, to make allowance for the medium term risk to earnings estimates from the new product pipeline for haemophilia. The broker's worst-case scenario assumes the company's haemophilia therapies are largely displaced by new treatments. Such a scenario is unlikely until at least the mid 2020's but the broker envisages it prudent to adjust for the probability.

FNArena's database shows two Buy ratings, four Hold and one Sell (Morgan Stanley). The consensus target is $109.49, suggesting 7.4% upside to the last share price. S targets range from $100 (Ord Minnett) to $120.20 (Morgans).
 

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article 3 months old

Healthscope To Be Avoided

By Michael Gable 

AGM season is in full swing, and just like reporting season, it brings with it some winners and losers. Healthscope ((HSO)) was a clear loser last week and we show you on the chart why it needs to still be avoided for the time being.



Despite the recent sell-off in HSO, it is likely to fall further. In 2015, it managed to hit a high of $3.15 before falling all the way down to $2.12 earlier this year. It then staged a nice recovery, rushing all the way back to the 2015 high and surpassing it slightly after hitting $3.17. Unfortunately it was then sold off quickly at that point. Ideally we should have seen a consolidation under the previous high. After yesterday's fall, it has become obvious that by going to a new high and failing, it is likely to dip under the recent low of $2.12. We may even see the stock with a "1" in front of it. So for the moment traders would be advised to steer clear of HSO for the next few months or so until it establishes some support again.
 

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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article 3 months old

CORR: Healthscope Rattles Market But Brokers Less Anxious

This story has been re-published to correct broker info at the bottom of the story.

Healthscope has rattled the market, announcing a very weak September quarter and flagging the prospect of a flat revenue outcome in FY17 if the trend continues.

-Main culprit cited is negative publicity regarding private health care affordability and prostheses pricing
-Industry drivers are intact, such as demographics and under-invested public hospital sector
-Ambitious expansion program raises debt levels but considered manageable

 

By Eva Brocklehurst

Healthscope ((HSO)) rattled the market with the announcement its September quarter hospital cases were very weak. If the trend continues through the rest of FY17 the company has flagged the prospect of a flat revenue outcome for its private hospitals. Management contends that the main cause was negative publicity about private health care affordability and speculation regarding pricing and government rebates on items such as prostheses. This led to a fall in high-end surgical procedures such as orthopaedics and ophthalmology. October is reportedly tracking better.

Morgans asserts that as September is historically a weak month, flagging the potential for an extended period of weakness seems premature. The broker accepts there may be need for further case/mix optimisation, and this makes the near-term outlook uncertain, but continues to view core industry drivers as intact. Hospital re-developments are on track, the company's capital structure is secure and contract pricing is stable. Nevertheless, the broker expects the shares will take some time to recover from the jolt.

Credit Suisse reduces hospital division EBITDA (earnings before interest, tax, depreciation and amortisation) forecasts by 8% and suspects a volume recovery may take time. Long-term growth in private hospital volumes, an ageing population, increase in chronic disease and an under-invested public hospital sector are considered to be supportive features of the industry.

The broker also cites the need for a positive re-balance of the mix of cases in the company's portfolio and suspects this adverse shift in cases may be amplified in the second half with the scheduled opening of Holmesglen in Melbourne amid potential for a higher medical patient case mix.

The wider issues are not easily discernible from the the announcement and, while downgrading the rating to Neutral from Buy, Citi defers its full assessment of the implications affecting the hospital sector until industry data for the September quarter is published in November. Nevertheless, earnings estimates are re-based for Healthscope.

Morgan Stanley has been questioning the affordability issues affecting over-earning by private hospitals for some time and believes this latest development could be a sign that private hospital earnings are not as durable as suggested by their expensive price/earnings multiples. The broker cannot discount the prospect of further negative revisions to earnings per share.

While Healthscope has a large brownfield development program, which should drive higher earnings growth, the broker considers it largely offset by the ongoing requisite capital expenditure. Morgan Stanley prefers to sit on the sidelines at present and retains an Equal-weight rating.

Ord Minnett suspects the weaker results were also exacerbated by aggressive operational management undertaken over recent years, which have left little room for error and make for a difficult comparable number. Solid private health insurance membership and a supportive regulatory environment are expected to underpin the business, as is the investment in brownfield capacity expansion which should ensure a return to strong growth from FY18.

The ambitious expansion program will mean Healthscope's net debt reaches nearly $2bn at its peak, by the broker's estimates, or over four times EBITDA. Still, Ord Minnett believes this is manageable, noting it includes project finance associated with the Northern Beaches hospital, much of which will be refunded by the government upon completion.

UBS, too, does not envisage any fundamental risk to longer term drivers for hospitals and believes the execution of a strategy that expands non-organic growth opportunities is a precursor to higher valuation multiples. Furthermore, given FY16 also started off quite softly and there was a rebound, there is opportunity for a recovery in FY17.

Macquarie is disappointed in the downgrade and lists a number of processes under way which have potential to curb the robust growth of private hospitals. These include the review into the Medicare Benefits Schedule, associated scrutiny of doctor activity, better reporting of intervention rates from government health agencies, an ongoing focus on private health affordability, as well as insurer auditing. The broker moderates its earnings forecasts, reducing expectations for hospital revenue growth and margin expansion in FY17.

Most brokers do not believe the other major listed private hospital operator, Ramsay Health Care ((RHC)), will experience the same level of revenue pressures, given its more varied geographic exposures. Macquarie also notes Ramsay is less leveraged to a potentially over-supplied Victorian market.

There are four Buy and four Hold ratings for Healthscope on FNArena's database. The consensus target is $2.69, suggesting 18.6% upside to the last share price. This compares with $3.15 ahead of the announcement. Targets range from $2.40 (Macquarie) to $3.00 (UBS and Deutsche Bank).
 

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article 3 months old

Treasure Chest: Pro Medicus Opportunity Immense

Moelis upgrades medical imaging software company Pro Medicus to Buy, citing an extensive growth opportunity in the US.

- Unrivalled streaming speed
- Software difficult to replicate
- Margins surprise
- Requests for proposal mount

 

By Greg Peel

Pro Medicus ((PME)) provides medical imaging software and practice management workflow software to hospitals and radiology clinics in Australia, North America and Europe.

Medical imaging represents 80% of sales. The company’s software enables 2D, 3D and even 4D, apparently, images of x-ray, CT and MRI scans and the like to be rapidly streamed to clinicians’ computers, tablets and phones for diagnosis. The imaging software extends beyond radiology and into cardiology, oncology, neurology and pathology.

Back in April, Pro Medicus won a large, long term contract to roll-out its software for Mercy Health, one of the largest Catholic healthcare groups in the US (Pro Medicus Raises Its Stake In US Market).

Despite winning nine out of ten recent requests for proposal, the Pro Medicus’ US market share is only around 4%, prompting stockbroker Moelis to suggest the company’s opportunity in the US is “immense”. Feedback from users of competing software have confirmed the Pro Medicus technology offers unrivalled speed for on-demand medical image streaming. One customer reported a 10% jump in volumes thanks to the speed of the service.

This has prompted rivals into attempting to replicate the Pro Medicus software, but without success. None have made it into production, suggesting a significant barrier to entry for the competition.

Moelis estimates Pro Medicus has another 10-12 requests for proposal in the pipeline at present and forecasts more contract wins over the next twelve months. The company’s recently released FY16 profit report showed sales in line with Moelis’ forecast but the earnings margin came in 350 basis points better than the broker expected, underscoring the operational leverage of the software.

As a biotech-meets-SaaS operation, Pro Medicus stands out as high cash generation, high return business. Moelis forecasts a return on equity of around 30% in FY17 and a return on invested capital of around 90%. The broker has upgraded its recommendation to Buy, with a $6.10 target (last trade circa $5.00).

Next month’s Radiological Society of North America conference will prove a key marketing event for the company, Moelis notes.
 

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