I. Sector Landscape and Outlook

The Healthcare & Social Assistance industry accounted for 8.0% of $1,808 billion in total Gross Value Added (GVA) in 2020. The industry’s GVA grew at 4.4% CAGR (1990 – 2020), registering the third-highest growth levels among all other industries. The healthcare sector is the largest employer of Australia. In 2020, the sector’s employee count stood above 1.7 million, expected to clock 1.9 million by 2024.

Mortality Statistics

• Total Death Toll Surged: In March 2021, 33,575 deaths were registered, up by 5% relative to the 2015 – 2019 average. The average number of deaths per day stood 373 during the quarter, relative to 371 in March 2020.
• Heart Disease Deaths Controlled: Ischaemic heart diseases, such as myocardial infarction and coronary atherosclerosis, was marked as the leading cause of death in Australia. However, with sophisticated medical infrastructure in place and technological breakthroughs, the death count for March 2021 quarter declined by 8.0% relative to the 2015 – 2019 average and stood at 3,074.
• Improved Medical Assistance Curtailed Deaths from Cerebrovascular Diseases: These diseases encompass cerebral aneurysms, stroke, and stenosis, dramatically affecting blood circulation to the brain. In March 2021, 2,072 deaths occurred due to cerebrovascular diseases, down 6.9% relative to the 2015 – 2019 average.

Figure 1 - COVID-19 Impact on Death Toll in Australia:

Source: Based on Australian Bureau of Statistics Data, Analysis by Kalkine Group

Medicare Support by Government Initiatives

• Record Investment in Healthcare Reported in FY22 Budget: The Morrison government is expected to invest $121.4 billion in FY22 and $503 billion, spread across four years, to support citizens in health challenges.
• Restructuring of Long-Term National Health Plan: The government assured Medicare for all Australian citizens with estimated funding of $125.7 billion, up from $6 billion. The government announced an investment of $135.4 billion over five years to extend record investment in public hospitals, including funding requirements under the 2020-25 National Health Reform Agreement.

Key Investments Sought in Healthcare Sector

• Investment in Health Products: To explore demand-side opportunities, the government invests $36 million in the health products portal to expedite access to new therapies. The government aims to invest $29.9 million in build the capacity and preparedness of the National Medical Stockpile to access personal protective equipment.
• Investment in Medical Research and Development: Medical research funding via Medical Research Future Fund surged significantly from $61 million in FY17 to $650 million for FY23 and further. Moreover, the Morrison government is inclined towards improvements in healthcare outcomes, and job creation in medical research materialised via $6.7 billion funding in FY22 spread over four years. The funding includes a $3.6 billion investment in National Health and Medical Research (NHMRC), $2.4 billion in Medical Research Future Fund and $500 million in Biomedical Translation Fund.
• FY22 Budget Extends Investment in job creation and life-saving research Programs – The budget inked $85 million investment for new programs incorporated on 12 May 2021. The investment holds $70 million in Clinical Trials Activity, Rate Cancer, Rare Diseases and Unmet Need Program, and $15 million in COVID-19 vaccination schedules and health impact.

Health Service Usage

According to a survey catered by the Australian Bureau of Statistics, 58.1% of people took a pathology test in FY20 relative to 57.0% in FY19. Moreover, 36.0% of people visited a medical specialist in FY20 relative to 35.5% in FY19. Thus, the usage of healthcare services has exhibited an upward trend with improved reach and investment in the sector.

Figure 2: Survey Statistics to Gauge Medical Demand:

Source: Based on Australian Bureau of Statistics Data, Analysis by Kalkine Group

Medical Products

• Capex Scenario: For the March 2021 quarter, capital expenditure in equipment and machinery for the healthcare and social assistance sector declined by 4.6% QoQ and by 10.2% PcP due to diversion in fund flow towards COVID-19 treatment and vaccination infrastructure.
• The reasoning for Boosting Medical Products Manufacturing: In 2019, US exports of medical supplies and equipment to Australia clocked US$1.4 billion. Circa 80% of Australia's demand for medical devices and diagnostics is satisfied by imports, and almost entire medical products and technologies manufactured in Australia are exported.

Index Performance:

The ASX 200 Health Care (GIC) posted 5-year returns of ~+97.41% as compared to ~+34.27% by the ASX 200 Index. Robust healthcare infrastructure, continued government support, increased healthcare services, and healthcare digitalisation and adoption of virtual care models provides vital strength to the sector performance.

Figure 3: The ASX 200 Health Care outperformed the ASX 200 Index in the past five years by whooping ~63.14%:

Source: REFINITIV as on 22 July 2021

Key Risks and Challenges

The initial impact of COVID-19 compromised the health care network with significant pressure under the pandemic operating environment. The healthcare sector is considerably dependent on the private health insurance industry, which is highly susceptible to market trends and economic parameters. Amidst recent pandemic activities, sizable funds, initially allocated for medical product manufacturing and health care services, were diverted towards COVID-19 relief measures, leading to consequential investment drainage. In addition, the behavioral shift towards virtual healthcare models over in-person models may pose a threat to medical testing and treatment centres. With the virtual health care models in place and reliance on new technologies, there are growing concerns of cyber-attack vulnerability.

Figure 4: Key Risks and Challenges:

Source: Analysis by Kalkine Group

Outlook

In the medical product sector, Australia holds potential to address medical challenges, such as malaria, antibiotic-resistant tuberculosis, and vector-borne diseases. To improve medical accessibility, government estimated a $43 billion investment in the Pharmaceutical Benefits Scheme (PBS). In FY21, the government introduced the New Medicines Funding Guarantee to facilitate the cost of PBS medicines. The sector plans to commercialize genetic and stem cell technologies, regenerative medicine, genomics, and mRNA to transform the medical product industry. Incorporating digitalization into healthcare products and services is improving the sectors’ value proposition. Australian manufacturers of medical products are heavily indulging in co-investment project models to amplify output and mitigate risks.

II. Investment theme and stocks under discussion (MSB, REG, CSL, ARX)

After understanding the sector, let us now look at four companies listed on the ASX. The price potential of the companies under discussion has been analysed based on the ‘EV/Sales’ multiple method.

1. ASX: MSB (Mesoblast Limited)

(Recommendation: Buy, Potential Upside: Low Double-Digit, Mcap: A$1.27 billion)

MSB is engaged in the development of regenerative medicine products. MSB has a regenerative medicine technology platform based on specialised cells known as mesenchymal lineage adult stem cells.

Valuation

Our illustrative valuation model suggests that stock has a potential upside of 24.21% on 22 July 2021. Moreover, we believe that the stock might trade at a slight premium compared to its peer average EV/Sales (NTM trading multiple), given the high potential for regenerative medicine technology. For the said purposes, we have taken peers such as Paradigm Biopharmaceuticals Ltd (ASX: PAR), Telix Pharmaceuticals Ltd (ASX: TLX), Clinuvel Pharmaceuticals Ltd (ASX: CUV), to name a few. Considering the recent updates on remestemcel-L trials, resurgence in royalty revenues from TEMCELL during the March 2021 quarter, completion of US $110 million placement off late, and valuation, we give a “Buy” recommendation on the stock at the current market price of $1.950, down by ~0.511% on 22 July 2021. 

2. ASX: Regis Healthcare Limited (REG)

(Recommendation: Speculative Buy, Potential Upside: Low Double-Digit, Mcap: A$575.99 million)

REG is engaged in the provisioning of residential aged care services.

Valuation

Our illustrative valuation model suggests that stock has a potential upside of 20.68% on 22 July 2021. Moreover, we believe that the stock might trade at some premium compared to its peer average EV/Sales (NTM trading multiple) given improving top-line and explicit government support. For the said purposes, we have taken peers such as Estia Health Ltd (ASX: EHE), Japara Healthcare Ltd (ASX: JHC), Healthia Ltd (ASX: HLA), to name a few. Considering the surging top-line, effective funding strategies, and valuation, we give a “Speculative Buy” recommendation on the stock at the current market price of $1.900, down by ~0.784% on 22 July 2021. In addition, the stock has delivered an annualised dividend yield of 1.05%.

3. ASX: CSL (CSL Limited)

(Recommendation: Hold, Potential Upside: Low Double-Digit, Mcap: A$132.04 billion)

CSL is engaged in developing, manufacturing, and marketing pharmaceutical and diagnostic products, cell culture media, and human plasma fractions.

Valuation

Our illustrative valuation model suggests that stock has a potential upside of 11.74% on 22 July 2021. Moreover, we believe that the stock might trade at a slight premium compared to its peer average EV/Sales (NTM trading multiple) given improving sales among all product segments. For the said purposes, we have taken peers such as Clinuvel Pharmaceuticals Ltd (ASX: CUV), Immutep Ltd (ASX: IMM), Medical Developments International Ltd (ASX: MVP), to name a few. Considering the top-line growth potential, improved bottom-line figures, and valuation, we give a “Hold” recommendation on the stock at the current market price of $289.240, down by ~0.307% on 22 July 2021. In addition, the stock has delivered an annualised dividend yield of 0.97%.

4. ASX: ARX (Aroa Biosurgery Limited)

(Recommendation: Hold, Potential Upside: Low Double-Digit, Mcap: A$374.83 million)

ARX is a New Zealand-based soft-tissue regeneration company engaged in distributing and manufacturing medical and surgical products in complex wounds and soft tissue reconstruction.

Valuation

Our illustrative valuation model suggests that stock has a potential upside of 11.84% on 22 July 2021. Moreover, we believe that the stock might trade at some premium compared to its peer average EV/Sales (NTM trading multiple), given its unique product lines, FDA approvals, direct sales strategy, and favorable pilot studies. For the said purposes, we have taken peers such as Nanosonics Ltd (ASX: NAN), Alcidion Group Ltd (ASX: ALC), Paradigm Biopharmaceuticals Ltd (ASX: PAR), to name a few. Considering the increasing product revenue expectations, rising industry requirements and regulatory approvals, and valuation, we give a “Hold” recommendation on the stock at the current market price of $1.225, down by ~1.607% on 22 July 2021.

Note: All the recommendations and the calculations are based on the closing price of 22 July 2021. The financial information has been retrieved from the respective company’s website and REFINITIV.  

Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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