Thread by @DownunderValue

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

h/t @MattJoass and @Greenbackd who have a really good chat about investing along the s-adoption curve acquirersmultiple.com/2021/02/ep-102…

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!

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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.