ASX health stock fall in past five days along with broader markets
Sonic Healthcare cuts FY24 profit guidance, citing costs pressures and currency headwinds
Aroa Biosurgery FY24 results in line with guidance with total revenue up 12% yoy
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.
How is your diet? New research has highlighted the profound connection between dietary habits and brain wellness.
Published in Nature, the study by University of Warwick researchers in the UK revealed that maintaining a nutritious, well-rounded diet correlated with enhanced brain health, cognitive abilities, and mental wellness.
The dietary choices of 181,990 individuals from the UK Biobank were analysed against a range of various physical assessments, including cognitive performance, blood metabolic markers, brain scans, and genetic factors, providing fresh insights into the interplay between nutrition and overall health.
Participants’ food preferences were collected through an online questionnaire and classified into 10 categories (such as alcohol, fruits, and meats).
Machine learning assisted researchers analyse the large dataset.
Consuming a well-rounded diet was found to correlate with improved mental well-being, enhanced cognitive abilities, and greater amounts of grey matter in the brain, which is linked to intelligence, in contrast to those following less diverse diets.
The research emphasised the importance of gradual dietary adjustments, especially for individuals accustomed to foods high in taste but low in nutritional value. By gradually reducing sugar and fat intake over time, individuals may naturally lean towards healthier food options.
The scientists suggest that genetic factors may also play a role in the relationship between diet and brain health, highlighting how a combination of genetic predispositions and lifestyle choices influences overall well-being.
Lead Author Professor Jianfeng Feng says the study emphasised the importance of establishing healthy food preferences early in life.
“Developing a healthy balanced diet from an early age is crucial for healthy growth,” he says.
“To foster the development of a healthy balanced diet, both families and schools should offer a diverse range of nutritious meals and cultivate an environment that supports their physical and mental health.”
To markets…
And ASX health stocks are looking like they could do with a healthier diet this week. At 1.15pm (AEDT) on Friday the S&P/ASX 200 healthcare index (ASX:XHJ) was down 1.01% for the past five days, while the benchmark S&P/ASX 200 (ASX:XJO) fell 1.1% for the same period.
Power says the broader market is still not doing that much and around the world there’s still cost of living pressures, inflation is still elevated and signs are that interest rates will stay at higher levels for a bit longer.
“But when do see some signs that rates are going to come down that will give the market hopefully another leg up,” he says.
“We have had a pretty lacklustre year in terms of the large caps but hopefully that is also turning around despite the Sonic downgrade.
“We are still on that positive second half of the year uplift, particularly for the smaller end of the market.”
Sonic drops after cutting FY24 profit guidance
Large cap pathology and radiology provider Sonic Healthcare (ASX:SHL) fell ~10%on Tuesday before recovering to close ~6% lower, where it remains at the end of the week, after cutting its profit forecast for FY24 by more than $100m to $1.6bn.
In mid-February, SHL provided guidance for full year underlying earnings in the range of $1.7-$1.8bn, however, the company warned the figure was likely to come in at the lower end of this range. SHL has cited ongoing cost pressure and currency exchange headwinds.
In addition, SHL says several margin improvement initiatives planned for completion in H2 FY24 have been slower to deliver than expected and will contribute to further earnings growth in FY25.
The company says inflationary pressures are expected to ease going forward, with headline inflation rates in its main markets already reducing to a range of 1.4% to 3.6%.
Organic revenue growth remains strong with SHL targeting ~9% for FY24 on pcp with preliminary FY25 guidance calling for constant currency (cc) EBITDA between $1.7-$1.75bn.
Power says the profit downgrade and across healthcare there has been continued cost pressures, particularly with wages.
“In pathology in particular they don’t have the ability to jack up prices because it is controlled by the government so that makes the business model more difficult,” he says.
“But having said that medium and longer term we think Sonic is a very good business.
“In Australia, the US, certain countries in Europe they have very dominant market positions so we remain confident it is a core portfolio holding for our clients despite this weakness which we’ve seen over the past six months or so.”
Morgans maintains an add rating on SHL but has reduced its 12-month target price from $34.94 to $31.19.
Bird flu concerns lift CSL
The ASX’s biggest healthcare name blood products giant CSL (ASX:CSL) was up ~2% on Thursday as globally vaccine manufactures rose on the back of renewed concerns about avian influenza, also known as bird flu.
Two different strains of avian influenza, also known as “bird flu”, have been detected in Victoria, including the first local human infection as concerns grow about the pathogen, which frequently infects poultry and wild birds, could spread more widely in humans.
Addressing the issue Morgans healthcare analyst Derek Jellinek wrote a note saying while the US Centers for Disease Control and Prevention (CDC) and many experts maintain that the public health risk is still very low, with only two US cases of bird flu having ever been reported in humans, the US Federal Government, pharmaceutical companies and researchers are all preparing in case mass vaccination ever becomes necessary.
“In this regard, the US government has partnerships with the three main pharmaceutical companies (CSL, GSK and Sanofi) that have seasonal influenza production capacity and would be able to scale up production of bird flu vaccines if needed,” he wrote.
However, he says there’s some nuances that would make it difficult to scale up a bird flu vaccine, such as the majority of candidate bird flu vaccines are made in eggs, which causes a bit of a dilemma, given the virus can kill the chickens that produce the eggs needed for the vaccine .
“The US does appear to keep a ‘secret’ chicken stockpile to avoid any contamination and maintain security…but how long this would last is anyone’s guess,” he says.
He says further addressing the concern, bird flu vaccines can be made in cell-based cultures (grown in a lab dish), with CSL having the only FDA approved cell-based vaccine for bird flu (H5N1 strain) called Audenz.
“Not only does Audenz currently form part of the US National Pre-Pandemic Influenza Vaccine Stockpile, which has around several hundred thousand filled vials and syringes that could be deployed during an initial wave of vaccination, but management have previously noted that it could deliver up to 150 million doses of this cell-based bird flu vaccine within six months of an avian influenza pandemic declaration,” he says.
Morgans has an Add rating on CSL with a 12-month target price of $315.40.
Aroa FY24 results in line with guidance
Soft tissue repair company Aroa Biosurgery (ASX:ARX) reported its FY24 result , which Power says was in line with guidance and Morgans forecasts.
Total revenue rose 12% yoy to NZ $69.1m, EBITDA loss was NZ$3.1m, gross margins were 85% and the company reported a net loss of NZ$6.1m (Morgans forecast a loss of NZ$5.5m).
Power says Myriad family of products continuing to be a key focus. The company saw a 73% increase (70% on cc basis) in full-year Myriad product revenue to NZ$23.3m with active accounts growing by 31% to 218 and total sales staff increased by 23%.
As forecast due to inventory management by its US distribution partner Nasdaq-listed Tela Bio, full-year OviTex/OviTex PRS product revenue fell 7% and 8% from FY23 on a reported and cc basis to NZ$32.6m.
However, inventory issues normalised in H2, with Tela Bio’s demand for the products re-aligned with their sales to deliver a 19% rise in OviTex/OviTex PRS revenue.
ARX is working towards breakeven in FY25 and forecasts FY25 total revenue of NZ$80-87m, reflecting 21-32% cc growth on FY24, driven by continuing Myriad sales momentum and TELA Bio’s sales re-aligning with their revenue forecasts. Morgans is forecasting $85.6m with consensus NZ$84.6m.
The company expects to end FY25 with a normalised EBITDA profit of NZ$2-6 million.
“The guidance they provided for FY25 for having their sales up between 21-32% was quite a wide range,” Power says.
“We’re sitting at the upper end of that guidance range so we’re confident as the year progresses they’ll be able to upgrade that guidance.”
Morgans has an Add rating and 12-month target price of $1.20 on ARX.
The CSL, SHL & ARX share price today:
ScoPo’s Powerplay – EBOS trading on attracive multiples
Pharmaceutical distributor EBOS Group (ASX:EBO) is Power’s top pick for this week.
Power believes EBO is a good alternative to another pharmaceutical distributor and Amcal owner Sigma Healthcare (ASX:SIG), which is currently subject to a proposed merger with Chemist Warehouse. The merger was announced in December 2023.
“EBOS is looking very attractive from a valuation perspective particularly when you compare it with Sigma which is working through the ACCC process to try and acquire the Chemist Warehouse business and that has some time to play out,” Power says.
“EBOS’s share price has been quite weak and against our valuation of $39.20 we think that’s a pretty good opportunity given we are coming into the flu season and they have a pretty good history of integrating their acquisitions.
“They have had a number of acquisitions over the last couple of years so they will start to flow through their numbers.”
Power says EBO is forecasting a dip in earnings in FY25 because they lose the Chemist Warehouse contract from July 1, but Morgans expects that subsequent years will more than make up for that FY25 dip.
“Their FY25 numbers will be down but their history is 10% plus EPS growth over the last 10 years so we expect that strong momentum of EPS growth to continue from FY26 onwards,” he says.
Morgans also has an Add rating on EBO.
The EBO share price today:
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.
At Stockhead, we tell it like it is. While Aroa Biosurgery is a Stockhead advertiser, the company did not sponsor this article.
Disclosure: The author held shares in CSL and Sonic Healthcare at the time of writing this article.
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