ScoPo's Powerplays: ASX health stocks feeling the love as Avita Medical kicks off 2024 strongly

ASX health stocks rise 1% in past five days outpacing broader markets
Avita Medical releases strong preliminary FY23 results, enters distribution deal
Interest continues to grow in merger of Sigma Healthcare and Chemist Warehouse

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 Powerplay.

There’s an old saying “love is blind”, meaning that when we’re in love with someone we cannot see their imperfections or faults.

Now the saying has gained scientific support with an Australian study bringing us closer to understanding romantic love’s transformative effect on the brain.

The collaboration between researchers from the Australian National University, University of Canberra, and University of South Australia has explored how a specific brain region elevates our romantic partner during the initial stages of love.

This research, recently published in the journal Behavioural Sciences, examined the connection between the brain’s behavioural activation system and romantic love, and involved a survey of 1556 young adults self-identifying as being in love.

The survey delved into participants’ emotional responses to their partners, their behaviours in their presence, and the extent to which they prioritised their partners above everything else.

Findings reveal that falling in love alters brain activity, leading us to prioritise our loved one as the focal point of our existence.

ANU lead researcher and PhD student Adam Bode says the study sheds light on the mechanisms that cause romantic love.

“We actually know very little about the evolution of romantic love,” Bode says.

“As a result, every finding that tells us about romantic love’s evolution is an important piece of the puzzle that’s just been started.”

Bode says its thought that romantic love first emerged some five million years ago after we split from our great ape ancestors.

“We know the ancient Greeks philosophised about it a lot, recognising it both as an amazing as well as traumatic experience,” he says.

“The oldest poem ever to be recovered was in fact a love poem dated to around 2000 BC.”

University of Canberra academic and UniSA Adjunct Associate Professor, Dr Phil Kavanagh, says the study shows that romantic love is linked to changes in behaviour as well as emotion.

“We know the role that oxytocin plays in romantic love, because we get waves of it circulating throughout our nervous system and blood stream when we interact with loved ones,” Kavanagh says.

“The way that loved ones take on special importance, however, is due to oxytocin combining with dopamine, a chemical that our brain releases during romantic love.”

The next research stage involves investigating differences between men and women in their approach to love, and a worldwide survey identifying four different types of romantic lovers.

To markets….

And ASX health stocks are feeling a little loved up this week. At 12.55pm (AEDT) Friday the S&P ASX 200 healthcare index (ASX:XHJ) was up 1% for the week, while the benchmark S&P ASX 200 (ASX:XJO) was flat for the same period.

“The broader market is still up and down with whether interest rates have peaked or not but as far as we’re concerned the healthcare market is looking good coming off some much lower share prices last year,” Power says.

“In terms of procedure volumes, getting wage inflation under control in the hospital systems – that all seems to be normalising now which is good.

“What is very exciting is the smaller end of the market and a really good example is the announcements by Avita Medical (ASX:AVH).”

Avita Medical hits FY23 guidance set up for strong year

One of Morgan’s key healthcare picks for 2024, regenerative medicine company AVH has risen 15.7% this week following some significant announcements.

AVH has provided preliminary FY23 financial highlights with commercial revenue for Q4 expected to be US$14.1 million and FY23 revenue of US$49.8 million, up 46% on pcp, and in line with its revised guidance of US$49.5-50.5 million.

Gross margin for the full year is expected to be 84.5% in line with guidance of 83-85%, while guidance for Q1 FY24 of $14.8-$15.6 million is up 42-50%.

Power says FY24 guidance of $78.5-84.5 million, up 57-69%, compares to its forecast of $70.2m with Factset consensus $77.4 million. Cash as at December 31 was $89.1 million.

AVH also provided an update on its TONE post-market study for Vitiligo, which started in July 2023, to evaluate repigmentation and understand the impact of repigmentation on improving quality of life for patients with this disease.

The company says it has completed enrolment with 109 patients at investigational sites across the US earlier than anticipated. Patients will be followed for a 12-month period, with the primary follow-up period being six months after treatment.

Furthermore, AVH has announced that it has entered into a distribution agreement with Stedical Scientific to commercialise PermeaDerm Biosynthetic Wound Matrix in the US.

The product is already FDA approved for use in a variety of wound types and complementary to AVH’s RECELL device. The initial agreement is five years and is expected to have gross margins of 50% of the average sale price.

“With the exception of the slight downgrade to revenue guidance back in November, AVH has consistently achieved its set guidance and hit key milestones,” Morgans healthcare analyst Emily Porter wrote in her latest client note.

“The company is well positioned to grow given its recent expansion into full thickness skin defects, which represents ~10x the opportunity of the existing burns market.

“We view the FY24 revenue guidance of 57-69% growth yoy as impressive.”

Morgans healthcare maintains an Add rating on AVH and has lifted its 12-month target price from $5.90 to $6.40.

Quarterly reports around the corner

Power says Brisbane-based medical software technology company ImpediMed (ASX:IPD) will be among healthcare names to watch when their latest quarterly report comes out at the end of January.

The company will be looking to put a board stoush behind them in 2024 with new leadership including the appointment of interim CEO Dr Parmjot Bains.

“It will be the opportunity for the new CEO to introduce herself to the market and explain what the strategy is moving forward,” Power says.

Soft tissue repair company Aroa Biosurgery (ASX:ARX) is also due to release what Power believes “will be a solid third quarter result”.

“It will underpin our belief that the second half of FY24 will be strong and profitable for them,” Power says.

He says health imaging stock Mach7 Technologies (ASX:M7T) is also due to report its quarterly result at the end of January.

“That will be a nice guide for us in terms of how their full year is looking,” Power says.

Interest builds in Chemist Warehouse

Power says interest continues to grow in the merger of pharmaceutical distributor and Amcal owner Sigma Healthcare (ASX:SIG) with Chemist Warehouse.

SIG announced in December it has entered into a merger implementation agreement (MIA) to merge with CW Group Holdings Limited (CWG or Chemist Warehouse Group).

The company will acquire Chemist Warehouse through a cash-and-scrip deal with CWG shareholders receiving $700 million in cash combined with SIG shares, leading to their ownership of 85.75% of the merged entity (MergeCo), pending various approvals, including that from the competition regulator ACCC.

SIG shareholders will hold the remaining 14.25% in the reverse listing deal. The indicative MergeCo market capitalisation will be more than $8.8 billion and is expected to sit well within the S&P ASX200 following quarterly re-balancing.

“The next couple of months we should get some sort of update on how that proposed merger is going,” Power says.

“Our suggestion to our client base was to start taking a part position in Sigma until we can get some more information on how that merger is progressing.

“Start building a position because we think if the merger ultimately happens and is successful then that combined business will be very strong and a powerful group going forward.”

The AVH, IPD, ARX, M7T & SIG share price today:

ScoPo’s Powerplay – Percheron as interest remains in rare diseases

Percheron Therapeutics (ASX:PER), which was formerly Antisense Therapeutics (ASX:ANP) is Power’s pick of the week as globally there remains a lot of interest in rare diseases.

“It’s another trend we’re looking at and we’ve seen the success of Neuren Pharmaceuticals (ASX:NEU),” Power says.

“The question becomes for investors who else is out there in that rare disease space and the one we have formal research on is Percheron Therapeutics.”

PER’s lead program is ATL1102, an antisense inhibitor of the CD49d receptor, which is targeting Duchenne Muscular Dystrophy (DMD).

“Within the next couple of months we expect recruitment to complete for their pivotal trial and top line results should read out later in the year,” Power says.

He says this week the JP Morgan Healthcare conference was being held in San Fransisco with rare diseases one of the main themes.

“There’s been a huge amount of news flow coming out of that conference with global companies giving updates and we’ve seen interest in the radiopharmaceutical sector and rare diseases.”

The PER share price today:

Disclosure: The author held shares in Mach 7 Technologies at the time of writing this article.

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.