Post-covid normalisation is underway in healthcare: Reporting season roundup

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<p><strong>Lewis Jackson</strong>: Australia's not just a nation of miners. Health care companies like ResMed and CSL are world leaders in their respective sectors. And I'm joined today by Morningstar's health care analyst Shane Ponraj to talk about how the sector went this reporting season.</p> <p>Shane, thanks for being here.</p> <p><strong>Shane Ponraj</strong>: Anytime Lewis.</p> <p><strong>Jackson</strong>: Let's start at the sector level, talk us through what were some of the themes you saw coming out of the companies that you cover.</p> <p><strong>Ponraj</strong>: Yeah, I think we're seeing more and more that as vaccines get delivered the winners and losers of COVID are starting to revert to their prior trajectories. So we're seeing elevated demand for PPE and hospital hardware fallback. While CSL, for example, is picking up their plasma collections as things open up overseas. Obviously, Delta has stalled the recovery in Australia given our low vaccination rates, and the path back might be volatile with other variants, but we still expect that long term demand for health care will prove to be relatively inelastic.</p> <p><strong>Jackson</strong>: And were there any unexpected surprises or standout performances among the among the names you cover?</p> <p><strong>Ponraj</strong>: Yeah, we thought AVITA had a good result and came in ahead of its guidance and our numbers. Commercial revenue was up 45% quarter-on-quarter as burn related accidents in the US are normalising. The device itself is seeing more utilisation. We still think the stock has high uncertainty given it's still burning cash and undergoing clinical trials. We think there's a path to profitability by fiscal '24 and remains undervalued for long term investors with a higher risk tolerance. What gives us confidence long term is the continued progress they're currently making. And the product having already been used in over 1,000 vitiligo patients internationally, which remains largely an unmet need, but currently FDA approved products.</p> <p>Blackmores is also tracking well in its turnaround. The result was pretty much in line with our forecast. But given border closures and lockdowns persisting into '22 we think the shift from (indiscernible) to cross border ecommerce is going to be a lot more structural. Blackmores is currently ranked in the top four vitamins across all major China ecommerce platforms and well placed to continue to take share. They also recently expanded into India growing its Halal offering across Southeast Asia. So I think there's a long runway of growth and we lifted our fair value to $90. But shares look fairly valued at the moment.</p> <p>Maybe the most surprising result was Nanosonics, which had a strong rebound after a very soft first half. Consumables, revenue in North America was up 30% half and half as ultrasound procedures recovered. And we lifted our fair value to $3.50. The shares look very expensive at the moment. We see a clear trend of slowing device sales in the main US market. They used to sell roughly 2,000 units in a half. And even with the rebound they are now selling 1,360. Replacement sales are also largely unproven. And Europe remains challenging with sales going backwards in the half. They did finally announce their second major product which aims to clean flexible endoscopes. But there's very little detail and they still need to complete trials before filing for regulatory approval.</p> <p><strong>Jackson</strong>: So that's three good news stories with AVITA, Blackmores and Nanosonics. What about the other side of the table? How about companies that didn't do as well as we expected?</p> <p><strong>Ponraj</strong>: In terms of misses both Ansell and Cochlear are down roughly 10% since they reported. But they've looked overvalued to us for a while and still do. With Ansell we continue to expect pricing and volumes to normalise. As industry supply catches up with demand and margins to be under pressure with less overhead absorption. For Cochlear, we think the boost from the surgical backlog in developed markets has largely played out and the recovery in emerging markets still take a while due to a slower vaccination rollout.</p> <p><strong>Jackson</strong>: And turning to ResMed. So a world leader in equipment dealing with sleep apnea and respiratory conditions. You raise the fair value by 68% last month. Talk us through your thinking there and how should investors approach this stock?</p> <p><strong>Ponraj</strong>: Yeah, there are a few factors with the upgrade, but it was mainly a consequence of Philips having to recall it's DreamStation 1 CPAP device, which has led to incredibly strong demand for ResMed's products. This is also on top of the recent launch of ResMed's AirSense 11 sleep apnea diagnosis where its recovering sleep lapse (indiscernible).</p> <p><strong>Jackson</strong>: Shane, can you just quickly walk us through those devices you're talking about what exactly are they and what are they used for?</p> <p><strong>Ponraj</strong>: So sleep apnea devices are used for people who have trouble breathing at night. And so you commonly just put a mask on your face while you sleep, and it helps you breathe a bit better and have a better sleep at night. Yeah, but with Philips being the only other cloud connected competitor in the space, and really this sort of perfect storm for ResMed, we think now's the time that they can structurally gain significant market share. With that being said, we do think the market is getting a little ahead of itself as the global chip shortage is likely to restrain ResMed's ability to fill the supply gap. And Phillips also just started their repair replacement programme two weeks ago, which is unaffected by the chip shortage as well.</p> <p><strong>Jackson</strong>: So many of our health care names have the majority of their business overseas in overseas markets. How much should investors be concerned about the outbreak of COVID I mean, Asia, but also the US for these companies.</p> <p><strong>Ponraj</strong>: I think companies that have a higher exposure overseas are probably less likely to be impacted by at least the Delta variant. In Australia locally, it's challenged conditions quite a bit and put a pause on elective surgeries. And also just improving the winners. So like Healius and Sonic, have extremely benefited from higher COVID testing. But for companies like Fisher &amp; Paykel or ResMed, or other companies exposed more overseas in Europe and America which have high vaccination rates, they're seeing their trajectories sort of revert back to pre-pandemic levels. As we touched on CSL is expected to increase their plasma collections back to fiscal 2019 levels this year, which sort of opens up the &ndash; which sort of makes the path back to recovery a bit more certain.</p> <p><strong>Jackson</strong>: Fantastic. Shane, you sat across in 10, 20, 30 earnings call this season. Were there any themes that came out of it, any questions from analysts or any responses from management that stood out to you.</p> <p><strong>Ponraj</strong>: Yeah, you definitely hear a few details here and there. What's most important is generally the tone commentary around the outlook. ResMed, for example, was one of the most bullish calls I've heard in a while. But even in that call, there was a lot of talk about cost inflation, which was a common talking point across the board, whether that's high freight or safety costs or component shortages in the supply chain, but even as things open up marketing, and R&amp;D spend returning. So forecasting margins to temporarily shrink for quite a number of health care names, but we think these pressures will mostly resolve over the long term.</p> <p><strong>Jackson</strong>: Fantastic. Shane, thanks so much for being here today.</p> <p><strong>Ponraj</strong>: Thanks for having me.</p>

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