Expert view: why it’s a critical time for investment in ASX small cap health stocks
Health stocks don’t get quite the attention that tech or battery metals do. Progress can be slow, risk is high and the announcements are often dense thanks to medical jargon.
But Scott Power, a senior analyst at Morgans, says there is plenty of value in the sector. He has 21 years’ worth of experience working across healthcare, life sciences and technology.
And he says the next few months are “make or break” for a number of companies with big results due out.
What is your view on smaller cap health stocks on the ASX as we head towards the end of the calendar year?
You’ve landed in the space at the right time. There are a lot of things that are about to happen, over the coming weeks and months, some major events in life science stocks.
ResApp (ASX:RAP) is due to report its United States respiratory trial results, which is a major inflection point for them. They’ve already posted positive Australia results but if the American results are positive that is a huge milestone for them.
Bionomics (ASX:BNO) are due to report Phase IIb post traumatic stress disorder results, a major inflection point for them. ELLEX Medical Lasers (ASX:ELX) have major clinical results on their macular degeneration trial out before the end of September.
Volpara (ASX:VHT) have quarterly results due out, that is a medical software-as-a-service business that’s managed to successfully implement their technology across their customer base, and they’re reporting very good customer acquisitions and good revenue coming through.
Rhinomed (ASX:RNO) are due to finish a deal with Columbia Care, we expect there to be some sort of finalisation before the end of September. Paradigm (ASX:PAR) have major osteoarthritis results due before Christmas.
So there’s probably a dozen or so things due to hit over the next couple of months. It should bring a lot of investment back into the sector. Life sciences has been a bit patchy, there’s been a fair bit of interest in other sectors like resources, but if one, two, three or four of these companies turn positive results it could completely change things.
How significant are these results that these companies are reporting?
The sector tends to move on catalysts or milestones. There hasn’t been a dearth of announcements, it’s just that some of the key results, including ones I’ve mentioned, are yet to hit. They are almost make or break for some of these companies, which is why it’s very timely that we are having this conversation at the moment.
I don’t think there will be a middle ground; it’s either going to be really good or really bad. It all depends on whether they meet their clinical endpoints.
Australia has traditionally been known to punch above its weight when it comes to healthcare, for example Cochlear, CSL. Will this play out again?
Those companies have been outstanding and it makes interesting dinner conversation in terms of who’s going to be the next big success but I’m not in the game of making predictions.
I have been in this game for 21 years and the reality of it is that there have not been too many follow-on success stories. Viralytics got taken over by Merck and Sirtex by a Chinese consortium so that’s a couple of examples but there have been many companies around whom there has been plenty of hype and they have petered out.
Digital health seems to be growing quickly.
Definitely. ResApp are one of the leading ones and it’s of interest, it is absolutely a trend. Successes or failures are apparent fairly quickly, you don’t have five or six-year-long clinical programs.
Regarding those companies with long clinical programs, any advice for investors?
The nature of these companies is that everything depends on clinical milestones and it can take a long time. Just need to recognise that. If you look at the well-established ones they are generating revenue from overseas. They are more diversified healthcare companies.
What are some of the challenges facing healthcare companies in the next few months, years?
A high percentage of government involvement. Aged care is a case in point. It is going to struggle until this Royal Commission is done and dusted. For emerging companies, it’s a question of funding. Are you funded until your key inflection point? And what’s your exit strategy?