ScoPo’s Powerplays: Health stocks bounce up and down as markets tumble

M&A activity remains strong in health sector despite falling markets
Polynovo shares defy bearish market surging ~28% in past five days
Audeara reports it is continuing to see a rebound to more normal trading conditions

Healthcare and life sciences expert Scott Power, who has been a senior analyst with Morgans Financial for 24 years, explains what the movers and shakers have been doing in health and gives his ASX powerplays.

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HEARING LOSS DUE TO AGEING, NOISE AND CERTAIN CANCER MEDICATION HAS BEEN IRREVERSIBLE – UNTIL NOW.

Scientists have been unable to reprogram existing cells to develop into the outer and inner ear sensory cells, essential for hearing, once they die.

But scientists at Northwestern University Feinberg School of Medicine have discovered a single master gene that programs ear hair cells into either outer or inner ones, overcoming a major hurdle preventing the development of these cells to restore hearing.

To Markets…

Investors globally may not be liking what they are hearing this week with the bears certainly out of hibernation. By close on Thursday the Australian share market had fallen to a fresh three-month low with all sectors in the red.

But with a fighting spirit the market rallied on Friday. By 1pm (AEST) on Friday the benchmark S&P/ASX 200 index was up 1.38% and down 2.31% in the past five days to 7037.70 points. The S&P/ASX 200 healthcare index was up 2.11% at the same time on Friday and down 0.29% for the week.

Growing unease among investors follows a raft of factors including worsening economic conditions, war in Ukraine, and a slowing China economy due to Covid lockdowns.

Power said the pain for markets and the healthcare sector may continue for some time yet but investors should not despair with many quality companies oversold.

“My gut feel is a lot of companies have been sold down so heavily we are at capitulation point and I think we sort of have to bounce along the bottom a little bit longer,” Power said.

“But some stocks are so oversold that when they bounce they will put 10, 15 or 20% in the blink of an eye.

“Now is the time to show a bit of courage and start placing some of your bets again.”

Pfizer’s bid for Biohaven a positive sign for M&A

The big news in health this week is pharmaceutical and biotech giant Pfizer (NYSE:PFE) making a US$11.6bn cash bid to buy Biohaven Pharmaceutical Holding Co (NYSE:BHVN) to tap into the migraine market. The primary asset from the deal is Biohaven’s already approved Nurtec ODT, which belongs to a class of migraine treaments called calcitonin gene-related peptide (CGRP) inhibitors.

“The Pfizer bid for Biohaven shows there are still plenty of deals being done worldwide and I think that we can expect that to continue,” Power said.

He would not be surprised is if there is further M&A activity in Australia, particularly in the aged care sector.

US investing giant KKR has put in a $20bn bid for private hospital operator Ramsay Healthcare (ASX:RHC), while Equity firms CapVest and BGH are also currently in a bidding war for fertility company Virtus Health (ASX:VRT).

“What we saw with Ramsay was private equity coming in to put a bid on the table for what is considered to be fairly strategic assets,” he said.

“I think you could make the same argument for the aged care sector in that the assets these companies own are freehold and fairly strategic.”

He said Japara Health was already taken over by retirement, living and hospital provider Calvary leaving Estia Health (ASX:EHE) and Regis Healthcare (ASX:REG) as the two other listed aged care providers.

“Estia made the announcement earlier this week alluding to a profit downgrade or lower revenue numbers on the back of the likely timing of receipt of government funding to help them with pandemic costs,” he said.

“It’s just a deferral but the share price came down a bit, falling ~4.95% to $2.11 in the past five days.”

Power said Regis Healthcare has remained stable throughout the volatility and have had a bid on the table before from a consortium involving Washington H Soul Pattinson (ASX:SOL) for $1.80 per share which they have rejected.

“It wouldn’t surprise me if there is some activity on that front from private equity or some of the big wealth funds looking for what I would class as strategic healthcare assets,” he said.

Integral diagnostics to buy Exact Radiology

Radiology and diagnostic imaging provider Integral Diagnostics (IDX) has made a deal to buy Exact Radiology, which has clinics in Brisbane and South East Queensland.

The acquisition comes with an upfront price tag of $37.5m in cash, on a cash and debt free basis – as well as an earn-out of up to $1.875m to be completed within FY22, subject to revenue performance targets being achieved.

“They are again looking for strategic assets to build out their footprint and are now the fourth largest radiology provider in Australia behind I-MED, Sonic (Sonic Healthcare ASX:SHL), and Healius (Healius ASX:HLS),” Power said.

I-MED Radiology Network has been publicly listed, then delisted and privatised and is now owned by the global private equity firm Permira.

Polynovo shares surge ~28%

Wound care company Polynovo (ASX:PNV) has seen its share price rally ~28% to $1.20 in the past five days.

Polynovo has reported solid Q3 FY22 results and recently put out an announcement saying several candidates are being considered for the CEO role. The company’s search for a CEO has been slower than expected and it is hoping to make an appointment by the end of the current financial year.

“Polynovo’s share price is really up this week which is obviously a real outlier to the rest of the market,” Power said.

“They still haven’t found a new CEO but have posted a fairly solid Q3 results and are looking pretty good at the moment.”

Audeara sees rebound to normal trading conditions

Hearing device company Audeara (ASX:AUA) has followed up on its recent Q3 FY22 cashflow report with positive news that it is continuing to see a rebound to more normal trading conditions.

The company said April preliminary results indicate continued improvement over March driven by the addition of new clinics initially stocking Audeara products, as well as restocking from existing company.

Audeara said this was a pleasing outcome as it recovers from Covid-19 and flood disruptions in January and February. Power said March was Audeara’s third highest month on record with a ~A$2.1m run-rate with the wording of the update suggesting April is again higher.

Audeara has signed allied health provider Healthia (ASX:HLA) as a reseller for its hearing devices.

“The signing marks the first deal outside of the traditional audiology clinic channels,” Power said.

“Financial implications are hard to gauge given the early stage nature of the signing and how quickly HLA expect to add audiology functions within existing footprint, but at least initially – looks like a reasonable initial platform with 46 businesses and a good spread nationally.”

The company has also announced the rollout across the remaining 90 clinics within Amplifons’ Bay Audio network post the initial handful of pilot sites. AUA’s products are now available for sale in all 111 locations.

The Audeara share price is down ~50% in the past year to ~8.4 cents. Morgans has a 12-month target price of 22 cents.

ScoPo’s Powerplay

Nanosonics’ (ASX:NAN) is Power’s stock of the week. Nanosonics has developed and commercialised the trophon EPR device, a unique automated disinfection technology, which was the first major innovation in disinfection for ultrasound probes in more than 20 years.

Nanosonics’ share price has been feeling the pinch with its shares sold off this year due to a profit downgrade which came on the back of a major change in its US sales model. Share in Nanosonics have tumbled ~33% in the past year to ~$3.62 but Morgans still has a buy rating and 12-month target price of $5.43.

“Nanosonics has come under a huge amount of selling pressure and we are one of the brokers who still have a buy on the stock and have been feeling the pain,” he said.

“They are going more towards a non-exclusive basis for distribution and are taking much more control over their customer base.

“It’s resulted in a short-term dip in their profits but we think the transition will be smooth enough, and while it’s a bit hard to call at the moment, it’s been a stock certainly oversold.”