Today I’m going to explore the #healthcare sector on the #ASX. It’s the 3rd largest sector being ~10% of the index with 182 companies (behind financials ~28% and materials ~21%). The wild wild west of pharma is anything but boring, and today we’re on the hunt for compounders.
Healthcare in 🇦🇺 has had some spectacular successes. You can’t start an overview without mentioning CSL $CSL $CSL.AX that is now $135bn market cap and 6.5% of the ASX200. Though the next biggest health stocks is only $15bn, and 100 of 182 are <$100m, so the pool is quite thin.
Looking for the proverbial needle, I did a shallow dive on the 182 stocks that make up the sector, painstakingly categorizing them based on their ‘investability’.
The chart below summarises what I found.
Biopharmaceuticals are the crapshoots of the ASX. People think it’s the 700 mining explorers, but they haven’t got a touch on the roulette wheel of biopharma. CSL leads the world in blood/plasma/vaccines, and is a testament to excellent management and R&D compounding returns
Diversifying crapshoots is also one strategy, such as combining biopharmaceutical R&D with oil and gas exploration, or alternatively with sales of air conditioners in Malaysia.
Probably inversely correlated at least.. ? 🤷
The reality of biopharma developments are that it takes a long time, costs a lot of money (often requiring capital raises) and only a fraction ever achieve commercial development let alone decent returns for shareholders.
For example Avita ($AVH.AX $AVH $RCEL) have developed spray-on-skin for burns that was popularised after the Bali Bombings in ‘02. While the technology is fantastic, adoption by burns doctors has been slower than expected, and now face increasing competition e.g. Renovacare.
Cannabis has a huge potential market size of $5bn sales p/a in US alone. Though much of this will be competing against big pharama’s opioids and other drugs.
With their interests at stake and over 400 trials underway, personally I’m in no place to pick a winner on the #ASX
Medical devices such as Cochlear ($COH.AX $COH) and Resmed ($RMD.AX $RMD) have lead the world in hearing and sleeping respectively. This has spawned a large number of copy-cats, laughably some looking at very exotic diseases that may never find a market but look great in a PPT.
An example that I have discussed before is Medical Development International ($MVP.AX $MVP), which combines late stage pharama with mature medical devices and yet a long runway for growth. A deep dive with @claudewalker was done on @ARICHLIFE arichlife.com.au/medical-develo…
The S-Adoption Curve for innovation inc. medical devices highlights that even with good technology, it may not be rewarding for shareholders.
I personally prefer to leave some of the returns on the table and focus more on the early/mid stage adoption of proven technologies
Continuing to lose money as devices / drugs go into development is not uncommon. Niche markets, stiff competition, new innovations, etc all conspire to reduce future shareholder returns even once commercialised. The below is more common than people like to admit.
Health SaaS is also high on the radar for folks – really hard to identify winners here, and so many individual customers (e.g. hospitals) that independently need to be won.
Seems partnering with a company in Israel makes it almost a sure bet according to some pundits 🤷
Diagnostics and imaging is a large part of the sector due to likely to market growth, new products/services and more consolidation. Some are even profitable!
Apart from SHL, examples include Capital Health ($CAJ.AX $CAJ) and Quantum Health ($QTM.AX $QTM)
An up-and-comer is Volpara Health ($VHT.AX $VHT) who are developing breast screening and mammography services. Main issue is their screening tech hasn’t been sufficiently validated by research, so they’ve pivoted to Breast-SaaS and run at x15 price:sales.
Roll-ups in the allied health sector are potential compounders. For example, we have seen the success of SHL in diagnostics and Specsavers (not listed) in optometry. With such a fragmented sector and yet concentrated buyers (insurance companies), potential for more roll-ups.
Examples of potential rolls-ups include 1300SMILES ($ONT $ONT.AX) for dental, or Healthia ($HLA.AX $HLA) for podiatry off a small base. Surprisingly across allied health there are few ASX listed companies despite 200k employees, supply constraints and significant growth.
h/t to @EquityMates that had a podcast on the dental industry’s roll up with Pacific Smiles $PSQ $PSQ.AX CEO Phil McKenzie @pacific_smiles - I think Bryce has his retirement tied up in this already.
Picks and shovel businesses that profitably supply the medical sector is also an option. E.g. SDI ($SDI.AX $SDI) sells dental materials; Trajan ($TRJ.AX $TRJ) sells equipment for testing; Probiotec ($PBP.AX $PBP) contract manufacturing of drugs and packaging.
In summary, this is just a snapshot of how I have done a top-down sector analysis to identify potential research targets. I’ll share some deep dives in the coming months.
If you have specific info or requests on any of the stocks mentioned (or not!), please comment below!
If you enjoyed this, bash the like / retweet / follow buttons.
A deep dive per week is my commitment to FinTwit.
Questions and feedback always welcome. DYOR.
Disclaimer, I'm long MVP ($MVP) on the ASX, and Novo Nordisk ($NVO $NOVO-B.CO) and Biogen ($BIIB) internationally.
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The global salmon industry is in turmoil as fears of contagion of the Norwegian resource tax hits the Faroe Islands.🐟
P/F Bakkafrost $BAKKA is down another 12% overnight, while the big Norwegians $MOWI $SALM $LSG continue to slide.
Let's take a look at the Faroe Islands 🧵👇
1. Yesterday I looked at Norway's resource tax and figured it was too difficult to find a good risk/reward bet. Right now the best forecasters of European monetary and fiscal policy seem to be a random number generator. Today I'm looking at Faroe Islands.
Norway produces over 50% of the world's Atlantic salmon. So this is kind of a big deal.
Unsurprisingly, the largest salmon companies in the world are also in Norway. In fact, the four largest are from Norway. This is because they have a huge cost advantage in the cold fjords which provide better growing conditions.
Delorean's $DEL $DEL.AX update to the market has left a fair bit to be desired. Engineering division has been decimated, financing remains out of reach, though retail is doing alright. Time to hit the panic button? 🚨
Let's take a closer look 🤏🧵👇
If you don't know what Delorean is, please don't @ me, just look at the original deep dive.
Clean Seas $CSS $CSS.AX FY22 results look really good. I recently spoke with Rob Gratton (CEO) and got to understand more of their business model and strategic direction.
Here's a short thread on my thoughts and why I don't hold 🤏🧵👇
The FY22 results look very strong. Volume growth (3.7kt), ~20% increase in pricing, ~37% revenue increase, 19% reduction in production costs, etc. And for the first time, profitable! 🎯
But I have mentioned before, this is really a bull-whip effect from the diabolical FY20 which saw inventory build up etc, and now being sold in FY22.
Treasury Wine Estates $TWE $TWE.AX FY22 results came out, and they're good considering the China wine-ban is still being flushed out. Total revenues down, but margins and NPAT are both up 🍷😋
Let's take a quick look 👇
You can find my original thread here where I outlined TWE as an asset play, with the hope that profits may return in due course.
To put in perspective the FY22 results, you can see here the 1H22 results were less negative than the market expected. But 2H22 has been pretty strong, which is why NPAT is up *only* 4% but almost 10% if you annualise 2H22.