ScoPo’s Powerplays: ASX health stocks fall but cap raises show money flowing into sector
Health & Biotech
Health & Biotech
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Healthcare and life sciences expert Scott Power, who has been a senior analyst with Morgans Financial for 26 years, explains what the movers and shakers have been doing in health and gives his ASX Powerplays.
Got stuck in traffic on the way to work this morning and felt like you weren’t on your best game afterwards? Well, there may be good reason with a new study showing that common levels of traffic pollution can impair human brain function.
A study by researchers at the University of British Columbia and the University of Victoria was the first to show in a controlled experiment using functional magnetic resonance imaging (fMRI) that exposure to diesel exhaust disrupts the ability of different areas of the human brain to interact and communicate with each other.
The peer-reviewed findings showed just two hours of exposure to diesel exhaust causes a decrease in the brain’s functional connectivity.
“For many decades, scientists thought the brain may be protected from the harmful effects of air pollution,” said senior study author Dr Chris Carlsten.
“This study, which is the first of its kind in the world, provides fresh evidence supporting a connection between air pollution and cognition.”
And ASX health stocks also seem like they’re stuck in traffic this week after having had a strong few weeks. At 1.10pm (AEDT) the S&P/ASX 200 healthcare index (ASX:XHJ) was down 1.75% for the past five days, while the benchmark S&P/ASX 200 (ASX:XJO) was down 0.95% for the same period.
“This week we’ve seen the market in a bit of No Man’s Land really,” Power said.
“It’s been pretty flat with some companies up and others down and there doesn’t feel like there’s a huge amount of direction.”
Power said wound care company Aroa Biosurgery (ASX:ARX), with a market cap of $394 million, has two near-term catalysts which, if achieved, will be positive for the share price. Specifically, a decision from the US FDA on the required regulatory pathway for new product of Enivo on March 23 and the commercial launch of Symphony on April 23.
ARX started operations in 2008 as a soft tissue regenerative company and listed on the ASX in July 2020. The company has four approved products including Endoform/Endoform Microbial for ulcers, Myriad for trauma, Ovitex for hernia repair and Ovitex PRS for breast reconstruction.
Power said the products are based on the Aroa ECM proprietary soft tissue regeneration technology platform which is derived from ovine forestomach.
Enivo is a new tissue apposition system designed to close tissue cavities at a surgical site created by surgical dissection or tissue removal.
Symphony is a new product which has been developed off the strength of AROA ECM. It is applied as a graft and is surgically fixed at the margins. It is designed to support healing during the proliferative phase to reduce time to wound closure, particularly in patients whose healing is severely impaired or compromised due to disease.
The products target the active wound market which is estimated by Frost and Sullivan at US$1.5 billion.
Power said a decision by the FDA on a regulatory path for Enivo should help the share price, particularly if it’s a shorter path.
“The other point to make is that Myriad used for trauma soft tissue repair has sales doing really well and that’s driving Aroa to break even for this financial year,” he said.
“We like the management team, it’s a founder-led business which also appeals to us.”
Morgans has initiated coverage on ARX with a target price of $1.57 and an Add recommendation.
GTG has risen 33% in the past month after announcing an imminent launch of the world’s first comprehensive risk test for breast and ovarian cancer.
The risk assessment test will be able to evaluate a woman’s risk of developing breast or ovarian cancer either from a hereditary genetic mutation, or from the far more common familial or sporadic cancer.
AVR said its two largest holders, Perceptive Advisors and L1 Capital, cornerstoned the placement, each subscribing beyond their existing pro-rata shareholding.
Proceeds from the placement will be used primarily for the clinical development of DurAVRTM, the company’s 3D single-piece aortic valve for the treatment of aortic stenosis and for general working capital purposes.
AVR has also announced it has entered into a non-binding agreement with Yorkville Advisors Global, LP to provide a $50 million SEPA facility.
“It’s an observation that the capital markets are opening up a little bit in the space,” he said.
AVR also this week announced the FDA has granted expanded approval for its DurAVRTM THV System study in “Subjects with Severe Aortic Stenosis”.
The expanded approval removes the previous conditions placed on the study, and will allow Anteris to accelerate certain activities related to study execution.
Power said next week will be a big week of trading updates in the healthcare sector with bloods products giant CSL (ASX:CSL), Ansell (ASX:ANN), which operates in the personal protective equipment space, health imaging company ProMedicus (ASX:PME) and diagnostics company Sonic Healthcare (ASX:SHL) all due to report.
“We are getting into reporting season so there’s going to be all sorts of notes coming out and share prices reacting up or down,” Power said.
First half earnings before interest, tax, depreciation and amortisation dropped 64% to $182 million in the six months to December 31.
It has also reverted back to business as usual with an 88% decline in Covid-19 testing leading to poor performance, along with seasonally weak trading in pathology and imaging around the holiday period.
“The Covid-19 PCR testing have fallen right off and Healius has had a few operational issues across what was once a fairly diverse healthcare company,” Power said.
“It has streamlined its operations to focus in on radiology and pathology.”
HLS announced in December it was selling its Montserrat Day Hospitals, an operator of 11 specialist short-stay hospitals and haematology/oncology clinics, to Nexus Hospitals for an enterprise value of up to $138.6 million.
No FY23 guidance was given in the latest results, but management expects H2 FY23 underlying trading to be “materially stronger” on recovery in market volumes, with January and February daily revenues back to pre-Christmas levels.
Morgans adjusts its HLS FY23-25 estimates, with the target price decreasing to $3.30 from $3.77. An Add rating has been maintained on the likelihood of an improving earnings outlook.
On the back of a disappointing H1 FY23 update is Power’s pick for this week, another diagnostics play Sonic Healthcare.
With a market cap of $13.87 billion compared to HLS at $1.62 billion, SHL is certainly the much larger of the two. However, SHL saw fallout from HLS’s disappointing half year update this week with its share price tumbling ~10% in the past five days.
He said Sonic is a strong company operationally and in terms of geographic diversification.
“It has operations in the US, Germany and a couple of the European centres,” he said.
“It has a good track record in terms of acquisitions of new labs and integration of those businesses and so it’s a real contrast to Healius.”
SHL is investing $17.8 million to acquire a 19.99% shareholding in gut health company Microba Life Sciences (ASX:MAP). The company is seeking to acquire options for an additional 5% equity position, subject to shareholder approval.
SHL is due to report its results next week with Power confident of no big surprises.
“We are more than happy to add to clients’ positions in Sonic,” he said.
The views, information, or opinions expressed in the interviews in this article are solely those of the interviewees and do not represent the views of Stockhead. Stockhead does not provide, endorse or otherwise assume responsibility for any financial product advice contained in this article.
Disclosure: The author held shares in Sonic Healthcare at the time of writing this article.