Scopo's powerplays: Strap yourselves in for some M&A

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.

Themes of the week

The pundits at Bloomberg think that, as deals go, this week’s big telehealth merger is a shocker.

Scott Power says it proves he’s onto a winner.

We’re talking about the $US18.5bn merger between US urgent care telehealth company Teladoc Health and chronic condition manager (also only a telephone call away) Livongo Health.

Bloomberg analysts say merging the two extremely high-growth companies, which are expected to deliver 75 per cent and 100 per cent topline growth in the coming year respectively, will destroy value because why merge when they’re both doing so well?

Power says the merger of the two large US telehealth players is indicative of the size of the opportunity at play.

“We thought there would be consolidation in this space,” he told Stockhead.

“Telehealth is a digital transformation which is happening much more quickly than anyone expected, thanks to the COVID-19 pandemic, and this merger is an example of companies seeking to dominate the management market for both acute and chronic conditions.”

Telehealth is rapidly accelerating after the Australian government began universally funding phone and video consults at the start of COVID-19 shutdowns, and as medical professionals around the world were forced to become comfortable with the practice.

The “asterisk” next to telehealth is that funding is a key risk.

“How much is the government prepared to maintain pandemic funding for tele-consults, that is the unknown,” Power said.

Less sexy but still a big deal was Siemens Healthineers’ acquisition of Varian Medical Systems for $US16.4bn.

Siemens Healthineers was spun out of Siemens proper in March 2018 and the recent purchase marks a major expansion of its operations, from its core diagnostic medicine into cancer treatment.

Varian itself was in the running to buy former ASX play Sirtex in 2018 before being outbid by a Chinese group.

“It’s wrapping its hands around the cancer diagnostics space,” Power said.

“The company is now positioned in such a way that they have a full spectrum of diagnostics, from PET scans to planning and treatment.”

Varian, a $US15.8bn company, is much bigger than lookalikes on the ASX, but Power says Oncosil (ASX:OSL) and Telix (ASX:TLX) are comparable and could at some point become targets for acquirers.

Capital raises are still going strong, because too often they’re trading higher than where they raised money not too many days after the deal closes.

Zelira Therapeutics (ASX:ZLD) raised at 5c and closed three days later on Thursday at 5.9c, while Rhythm Biosciences (ASX:RHY) raised at 6c at the end of July and closed Thursday at 7.8c.

What’s up and what’s down

There were three pieces of news that caught Power’s eye this week, starting with sleep apnea and COVID-19 ventilator maker ResMed (ASX:RMD).

Power liked the fact that gross margins expanded to 60 per cent and noted that the surge in ventilators, which ResMed quickly pivoted to making more of, helped to offset the decline in new patient starts across sleep apnoea.

“But now this is reversing, so the question becomes will the increase in new patient starts across sleep apnoea offset the decline in ventilators? Over the next few quarters, we don’t think so, but the longer term thematic remains intact, if not strengthened by COVID-19,” he said.

COVID-19 has created more focus on respiratory medicine, and it’s expanded digital health and outside of the hospital healthcare.

ResMed reported profit of $US193.3m, up 40 per cent and above analyst estimates, and revenue of $US770.3m.

The second piece of big news was breast density imaging technology company Volpara (ASX:VHT), which appointed as its US CEO, Katherine Singson, a Silicon Valley original who has worked as a marketer with Apple and Pixar where she worked directly for Steve Jobs, and Microsoft ANZ out of Sydney.

“That signals a real change in the way that the services of companies like Volpara will be delivered to the marketplace,” Power said.

“With companies like Volpara that offer a cloud-based service, a lot of installations are done remotely anyway. What is changing is the training, which now takes place much more online, and face-to-face sales meetings were difficult to get even before the pandemic, so they’re having to change how they do sales.

“Look at the fact that she’s the CEO and at her background — she’s well in tune with the latest marketing and sales techniques for cloud software — and I think that’s telling for this kind of health technology more generally.”

And power couldn’t help but notice Parkinson’s play Alterity (ASX:ATH), which had a big run during the week after releasing new data for its lead drug candidate.

The new data, from experimental testing in animals, confirmed that it can preserve neurons and improves motor performance.

Power’s picks

ProMedicus (ASX:PME) is Power’s hot pick of the week.

The share price was down 5 per cent at one point on Wednesday and he says that’s buying territory.

“We think they will record a solid full year result and the outlook commentary will be pretty strong,” he said.

“It’s a buy for us.”

The views, information, or opinions expressed in the interview in this article are solely those of the interviewee and do not represent the views of Stockhead.

Stockhead has not provided, endorsed or otherwise assumed responsibility for any financial product advice contained in this article.