Medtech stocks are on the radar, and this analyst thinks the sector has further to run
Health & Biotech
Health & Biotech
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Over the past 12 to 18 months, some standout ASX performers in the fintech space have certainly attracted plenty of attention.
So investors may be forgiven for briefly diverting their attention away from other sectors.
But a look around the grounds shows that if the goal is to maintain a small-cap portfolio with upside exposure, ignoring the medtech and biotech space over the past year would have been a mistake.
A summary of the sector’s performance shows the average 12-month return across 48 companies was a robust 66 per cent, driven by a group of 17 different companies that posted percentage gains of at least three figures.
One investment fund with a close eye on the sector is Brisbane-based asset management and corporate advisory firm Altor Capital.
Altor provides advisory services to a number of companies in the space, and Stockhead caught up with portfolio manager David McNamee to get an idea of how he views investment opportunities.
“Across the landscape there’s a couple of ways you can think about it,” he said. “There’s your more clinically orientated biotech plays, and then we’ve seen the rise in healthcare tech plays as well. And there’s different ways of valuing those two verticals.”
In particular, McNamee said the recent wave of medtech success stories was unlikely to be just a flash in the pan.
“I think there’s been an overall shift in the way people conduct business in healthcare to make it a lot more efficient and automated,” he said.
“Traditionally the only way people could get advice was by going to see a doctor, and if you weren’t happy there wasn’t a way to take a second look.”
“Now there’s a whole range of tech innovation that’s been brought in where you can get on-demand, independently verified information in conjunction with your healthcare professionals. And you can do it through your phone, on your computer, and through audio or visual platforms.”
McNamee highlighted Pro Medicus (ASX:PME) — now a $2bn company — and Mach7 Technologies (ASX:M7T) as two examples of leading medtech companies — as evidenced by their 12-month returns which both came in above 100 per cent.
He’s also bullish on Osteopore (ASX:OSX), the 3D body-implant printing company which turned heads last September with a strong IPO debut.
In particular, McNamee pointed to the company’s intellectual property advantage, honed through years of R&D research and patent approvals.
“The time it’s taken to get to that point is significant, and now its effectively a platform-play in medtech that can be individualised to specific patients,” he said.
“Say a guy in Queensland has an issue with his shinbone, they’ve got a platform where you can 3D print a customised bone specific to that patient, and have it to him within the month for surgeons to operate on. It’s got the approvals in place and I think demand can scale globally over time.”
McNamee said the sector as a whole was only going to get bigger.
“People are living longer, and it’s a relatively inelastic demand curve when you’re talking about healthcare,” he said.
“Once you have a tech product that actually works, you can rely on those cash flows through thick and thin. The consumer is unlikely to skimp out for their health when they’re prioritising where to allocate money.”
McNamee added that while the population was ageing, it was also growing and providing advice-on-demand was an important trend for the millennial population.
“In the same way people now Google something on their phone for information, there’ll be a shift towards instant access for the right medical advice,” he said.
“So I think it will become a more prevalent theme in the years ahead.”
On the biotech side, McNamee said the team at Altor saw compelling value in Antisense Therapeutics (ASX:ANP), which is currently running phase II trials for its Duchenne Muscular Dystrophy (DMD) treatment.
The drug also has potential application in the treatment of multiple sclerosis, and while clinical trials have been encouraging the company also has a unique economic profile for a biotech.
“What we’re really attracted to is the capital requirements to get to market are low, in comparison to other drug treatments,” McNamee said.
“If the development phase is expensive it’s much easier if you’re a bigger company. If you’re a small company, and you’ve got a phase II or III trial that requires a huge capital outlay, it’s a very difficult proposition.”
“And that’s because investors know there’s most likely another large cap raise on the horizon, so a lot of those companies trade at a healthy discount.”
More broadly, McNamee said the framework he used for the sector was that many medtech platforms were tied to a broad industry uptrend, while opportunities existed in biotech but as a general rule, investors needed to be a bit more selective.
Here’s the 12-month price performance for the group of ASX-listed medtech and biotech companies tracked by Stockhead.
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