ScoPo’s Powerplays: ASX health stocks... could be worse

ASX health stocks outperforming the broader market but remain flattish for week
Several ASX health plays undertaking capital raising with more expected in H2 CY23
Micro-X successfully tests its Argus bomb detection unit opening door to US$1.8 billion market

Healthcare and life sciences expert Scott Power, who has been a senior analyst with Morgans Financial for 26 years, is back after a holiday to explain what the movers and shakers have been doing in health and gives his ASX Powerplay.

High blood sugar levels have been associated with an increased risk of Alzheimer’s disease, but exactly why has until now been unclear.

However, researchers at Wake Forest University School of Medicine in North Carolina have made a significant breakthrough in understanding the link between type 2 diabetes and Alzheimer’s disease.

In a study published in JCI Insight, researchers discovered that increased sugar consumption and elevated blood glucose levels alone can trigger the accumulation of amyloid plaque in the brain, a contributing factor to Alzheimer’s risk.

The study focused on ATP-sensitive potassium (KATP) channels, which regulate cell activity based on energy levels. The researchers found that consuming sugar water, compared to regular drinking water, led to greater formation of amyloid plaques in a mouse model.

Elevated blood sugar levels were also associated with increased production of beta-amyloid in the brain. While the researchers noted further research is still needed, the findings help clarify the metabolic changes associated with diabetes that make the brain vulnerable to Alzheimer’s disease.

To markets….

And ASX health stocks are looking just a little healthier this week. At 1.50pm (AEST) on Friday the S&P/ASX 200 healthcare index (ASX:XHJ) was fairly flat up 0.97% for the past five days, but it was surpassing the benchmark S&P/ASX 200 (ASX:XJO) which was down 0.24% for the same period.

However, in some positive news the health sector was joined just four of the 11 sectors on the ASX to stay in positive territory during a tough May for markets, rising marginally 0.7%.

Power said many healthcare names have been hard hit by volatility in the markets but this presents a buying opportunity.

“Some of the prices are really quite depressed and you just need to be able to stomach the volatility,” Power said.

“Companies doing well operationally will get re-rated and we think that will come in the second half of this year.”

Capital raises coming through

Power said there are several health names undertaking capital raises at the moment, among them respiratory imaging tech company 4D Medical (ASX:4DX).

Earlier this week 4DX said it had completed its share purchase plan (SPP) with applications of $25 million. The company sought to raise $15 million with the SPP oversubscribed by $10 million.

The SPP follows a placement of $20 million, bringing the total proceeds raised by the company to $45 million.

4DX in May announced a significant technological breakthrough and milestone in its product development strategy.

The company said its CT-based ventilation-perfusion product has now progressed to a developmental stage, which will allow the company to release early clinical data.

ImpediMed (ASX:IPD) is undertaking a placement of $20 million to institutional investors to take advantage of changes in cancer care guidelines in the US.

IPD will be offering shares at a price of 13¢/share, which represents a 16.1% discount to the last closing price and a 25.7% reduction compared to the 10-day volume weighted average price.

Additionally, IPD plans to launch a non-underwritten SPP for eligible shareholders in Australia and New Zealand, with the aim of raising up to $5 million.

The cap raise follows a key catalyst being achieved by IPD with the updated US National Comprehensive Cancer Network Guidelines now recommending the use of bioimpedance spectroscopy (BIS) for all cancer patients at risk of limb lymphoedema.

IPD currently holds the only FDA-cleared BIS technology for the assessment of lymphoedema.

Biotechnology player Argenica Therapeutics (ASX:AGN) said it has received firm commitments to raise $4 million before costs from large existing shareholders, family offices, new institutional investors and sophisticated high-net-worth investors.

AGN recently announced positive results of its Phase 1 trial confirming ARG-007 is safe, well tolerated and has a favourable pharmacokinetics profile.

The company is developing novel therapeutics to reduce brain tissue death after stroke and other types of brain injury, along with neurodegenerative diseases to improve patient outcomes.

AGN said the equity raise will enable it to start its Phase 2 trial of ARG-007 in ischaemic stroke patients.

“The pace of capital raising is really picking up and I think we are going to see that continue as the year rolls on,” Power said.

The 4DX, IPD & AGN Share price today:

Aroa share price drops despite solid FY23 result

Soft tissue regeneration company Aroa Biosurgery (ASX:ARX) has dropped more than 5% in the past five days despite recording a solid FY23 result.

ARX said audited full year product revenue of NZ$60.5 million was a 55% increase on FY22 or 38% on a constant currency basis. Total revenue, including project and license fees, was NZ$63.4 million, representing 60% growth on FY22.

Product gross margin was 84%, representing an 8% increase on FY22, and 5% increase on a constant currency basis.

ARX has provided product revenue guidance of NZ$72-75 million, delivering 25-30% constant currency growth on FY23, and total revenue of NZ$73-76 million.

The company said product gross margins are expected to improve to 85%, reflecting growth in the sales mix of the higher margin Myriad and Symphony products despite assumed currency headwinds.

“I was surprised by the share price reaction,” Power said.

He said the results were good including good guidance but the share price dropped. “That was a disappointing but I think it’s reflecting more of the macro picture at the moment,” Power said.

Furthermore, ARX in April received US FDA 510K clearance for its Enivo pump and catheter solution.

The device applies negative pressure to a surgical site, helping to reduce fluid accumulation following surgery.

“There is not a lot of positive share price movement going on out there,” he said.

Morgans has an Add rating and 12-month target price of $1.50 on ARX.

Morgans upgrades heavily shorted Nanosonics

Morgans has upgraded infection prevention company Nanosonics (ASX:NAN) to an Add rating from a Hold with a 12-month target price of $5.49, up from $5.24.

“We have been looking for an opportunity to upgrade NAN back to Add and given the recent share price weakness, we now have ~10% upside to our increased target price of $5.49,” Power said.

The heavily shorted NAN share price has fallen more than 5% in the past month.

“Management has provided clear guidance for FY23 and given its history we are confident guidance will be comfortably achieved.”

NAN’s trademarked CORIS device is attempting to solve a complex disinfection problem in removing the biofilm from the flexible endoscope.

He said the big unknown is the timing of the CORIS commercial launch which is expected before the end of CY23.

Micro-X bomb detection unit proves its worth

Adelaide-based cold cathode X-ray machine manufacturer Micro-X (ASX:MX1) announced this week its Argus IED X-ray camera pre-production unit had successfully completing field testing for improvised explosive devices (IEDs).

MX1 said field tests achieved planned objectives and demonstrated Argus’s ability to produce high-definition backscatter images to increase the rapid threat assessment capability, and safety, of military and police bomb technicians.

“That was a big milestone for Micro-X and it has been a long time coming,” Power said.

“They’ve completed their field testing and now about to put Argus in the hands of customers.

“If the customer likes it they then place an order to buy some of these devices which we think will be a big earnings driver for Micro-X over the next couple of years if they get it all right.”

Morgans has a spec Buy rating on MX1 with a 12-month trading price of 28 cents.

The ARX, NAN, MX1 share price today:

ScoPo’s powerplay – Avita Medical up 11.5% as awaits US FDA nod

Regenerative medicine and wound care company Avita Medical (ASX:AVH) is Power’s stock of the week with the company rising 11.5% in the past five weeks and awaiting two upcoming catalysts.

AVH is awaiting US FDA breakthrough device designation for the RECELL System for application in soft tissue repair, with an estimated market size US$1 billion, and vitiligo, with an estimated market size US$5.2 billion.

The designation is expected in June 2023 with the RECELL system currently used to treat burns.

He said another significant growth driver for AVH is the development of an automated RECELL device, to be known as RECELL-GO, which will automate the cell disaggregation reducing the time of the procedure.

AVH anticipates a FDA submission as a supplementary PMA for RECELL-GO by June 30, 2023 with FDA approval expected Q1 FY24.

“If either or both these indications are approved the market potential for RECELL, which is currently approved for burns, increases by more than 5x,” he said.

“We are confident but when you are dealing with the FDA it’s not over until you have the piece of paper in your hand.”

Morgans has an Add rating and 12-month target price of $5.54 on AVH.

“There is currently ~60% upside to our target price and we would not be surprised to see this target reached on a positive announcement from the FDA,” Power said.

The AVH share price today:

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