Scott Power: The lowdown on Sonic's $700m German excursion

Sonic Healthcare to buy LADR – Laboratory Group Dr. Kramer & Colleagues in Germany for ~A$700 million
ASX health stocks fall 2.3% over past five days, while the broader market fell ~1.5%
Chemist Warehouse could list on the ASX by early February 2025 after a $28.9 billion merger with Sigma Pharmaceuticals

Healthcare and life sciences expert Scott Power, who has been a senior analyst with Morgans Financial for 26 years, gives his take on the ASX healthcare sector for the week and his ‘Powerplay’ stock pick.

Scott Power said a big story for the week in the ASX health care sector was pathology and radiology provider Sonic Healthcare (ASX:SHL) inking a deal to buy ‘top 5’ German medical lab company LADR – Laboratory Group Dr. Kramer & Colleagues (LADR) for €423 million (~A$700 million).

LADR provides testing services through a network of standalone and hospital-based laboratories throughout Germany with a presence in Poland and a small joint-venture interest in Finland.

Sonic said it would issue new shares to the value of ~€222m (A$367m), with the balance of the acquisition to be funded from its existing cash and debt facilities.

In CY24, LADR’s revenues were expected to be ~€370m (~A$610m), with an EBITDA of about €50m (~A$82m), which Morgans calculates represents ~7% of Sonic’s total revenue.

Sonic expects the deal to boost EPS immediately, with high single-digit gains in three years from synergies like cost savings in procurement, lab overlaps, logistics and equipment.

Power said Sonic had a good track record in identifying key acquisitions internationally and have historically integrated them well. The company has recently been on a buying spree, adding practices in Germany, Switzerland and the US.

“We maintain a positive stance on this stock as a core portfolio holding,” he said.

“It now appears to be through all it’s post-Covid issues, which included staff shortages, rising inflation across their cost base.

“They have a very good track record of acquiring and integrating businesses around the world and this is a large acquisition in Germany.”

Morgans has an add rating on Sonic and 12-month target price of $32.21.

ASX health stocks fall amidst profit taking

As of Friday’s close, the S&P/ASX 200 Health Care index (ASX:XHJ) was down 2.3% for the past week while the benchmark S&P/ASX 200 (ASX:XJO) 1.5% for the same period.

“There seems to be some profit taking coming in after the post US election rally,” Power said.

“The US Federal Reserve will make their interest rate decision next week and the expectation is for a cut so that should be a positive for the market broadly, which underpins our belief we will have a strong run into Christmas and into January.”

Chemist warehouse could be on ASX by February

Privately-owned discount pharmacy chain Chemist Warehouse could list on the ASX as early as February 2025 after a $28.9 billion merger with pharmaceutical distributor Sigma Healthcare (ASX:SIG), pending shareholder voting on certain resolutions.

Sigma this week gave an update on its proposed merger with Chemist Warehouse, including that it expects the documentation shareholders require to vote on certain resolutions in connection with the proposed merger to be released this calendar year. If all goes well the merger is expected to occur in February 2025.

The ACCC announced in November it did not oppose the merger of Sigma and Chemist Warehouse.

Sigma said the end date under the merger implementation agreement for the transaction had been extended to March 31, 2025.

Morgans has a hold rating on Sigma and 12-month target price of $2.21.

Power’s Powerplay: Clever Culture Systems

Clever Culture Systems (ASX:CC5), formerly LBT Innovations, is Power’s stock of the week with its APAS (automated plate assessment system) Independence instruments (culture plate readers) continuing to gain traction among big pharma.

Based in Adelaide, Clever Culture’s trademarked APAS Independence instruments use artificial intelligence and machine learning software to automate the imaging, analysis and interpretation of microbiology culture plates.

The company said its technology remains the only US FDA-cleared AI technology for automated culture plate reading and was being sold to microbiology laboratories in the pharmaceutical manufacturing sector for the reading of environmental monitoring culture plates.

Management estimates the total addressable market for its product range is US$2.8bn. The company has recently received orders for APAS independence instruments from AstraZeneca and Bristol Myers Squibb.

Power said typically each instrument generated ~$1m in revenue including 50% hardware, 25% software licensing, 15% service and 10% implementation, with contracts usually five to seven years.

“The expectation is that there will be more orders flowing from other Top 10 global pharmaceutical companies,” Power said.

“It is an interesting story that we think has really turned the corner.”

Capital raisings coming through

Power said there’s been several recent capital raisings, in a sign money was being deployed and confidence returning to the healthcare sector.

Paradigm Biopharmaceuticals (ASX:PAR) this week announced it had received firm commitments for $16 million through a placement to sophisticated and institutional investors, supporting the start of its upcoming phase III trial of he repurposed pentosan polysulfate sodium (aka PPS, aka Zilosul) to treat knee osteoarthritis (OA).

Cynata Therapeutics (ASX:CYP), which specialises in cell therapies, announced it had undertaken a placement to sophisticated and professional investors to raise $8m million. A further $115k has been raised through the issue of shares at the placement offer price to directors.

“There are multiple cap raising not only in healthcare but in the market more broadly and it would appear the IPO window is opening,” he said.

Research Corner: Ultra-processed food could speed up ageing

A Monash University-led study has showed an association between eating too much ultra-processed foods and biological ageing.

Published in the journal Age and Ageing, the study found for every 10% increase in ultra-process foods consumption, the gap between biological and chronological age rose by 2.4 months.

Biological age measures how your body is aging internally, which may be faster or slower than your chronological age based on your lifestyle and genetics.

UPF examples include chips, carbonated drinks, ready-to-eat meals, sausages, burgers, chicken and fish nuggets, sweet or savoury packaged snacks and energy bars.

The cross-sectional study assessed data involving 16,055 people from the US aged 20-79, whose health and lifestyles were comparable to those in other western countries such as Australia.

First author Dr Barbara Cardoso, from Monash University’s Department of Nutrition, Dietetics and Food and Monash Victorian Heart Institute said the findings underlined the importance of eating as many unprocessed and minimally processed foods as possible.

She said despite the study participants being in the US, the relevance of the findings applied to Australia, as on average UPFs represented almost 40% of total energy intake among Australian adults.

“The significance of our findings is tremendous, as our predictions show that for every 10% increase in ultra-processed food consumption there is a nearly 2% increased risk of mortality and 0.5% risk of incident chronic disease over two years,” she said.

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.

Disclosure: The author held shares in Sonic Healthcare at the time of writing this article.