This blog is totally independent, unpaid and has only three major objectives.
The first is to inform readers of news and happenings in the e-Health domain, both here in Australia and world-wide.
The second is to provide commentary on e-Health in Australia and to foster improvement where I can.
The third is to encourage discussion of the matters raised in the blog so hopefully readers can get a balanced view of what is really happening and what successes are being achieved.
Quote Of The Year
Timeless Quotes - Sadly The Late Paul Shetler - "Its not Your Health Record it's a Government Record Of Your Health Information"
or
H. L. Mencken - "For every complex problem there is an answer that is clear, simple, and wrong."
Both men running for US president are unfit for the job
One is a good
man in obvious cognitive and physical decline, and the other is a bad man who
lies as he breathes – and who is in his own cognitive tailspin.
When
I look at my country’s presidential contest, the first thought that comes to
mind is that only the Devil himself could have designed this excruciating mess.
Both
men running for president right now are unfit for the job: One is a good man in
obvious cognitive and physical decline, and the other is a bad man who lies as
he breathes, whose main platform is revenge – and who is in his own cognitive
tailspin.
But the most important difference for the country – where you really see the Devil at work – is in the difference between the Democrats and the Republicans. The plain fact is that only one party in America’s two-party system is ready to defend our constitutional order any more. The other party is interested only in gaining and holding power for the sake of it. The GOP’s moral emptiness is manifested in several ways. The party has been purged of virtually every Republican politician unwilling to submit to its Dear Leader – Donald Trump, who attempted to overturn our last presidential election.
The wife of a Republican-appointed Supreme Court justice advocated overturning the results of the election on utterly bogus grounds, which shows you just how little respect that party now has for our sacred institutions.
It is the political equivalent of assuming that because you played Russian roulette once and survived you can play it again.
And it is ready to renominate Trump even though many of those who worked most intimately with him in his first term – including his vice president, secretary of defence, secretary of state, chief of staff, national security adviser, press secretary, communications director and attorney general – have warned the country in speeches, interviews and memoirs that Trump is erratic, immoral and someone who must never be let near the White House again.
One of the biggest mistakes Americans would be making if they were to elect Trump again is assuming that because we survived four years of his norm-busting, law-abusing, ally-alienating behaviour once, we can skate by again without irreparable damage. It is the political equivalent of assuming that because you played Russian roulette once and survived you can play it again. That’s insane.
But that is precisely why this election is so important and precisely why the Democratic Party, which still prioritises defending our democracy, must urgently produce a presidential candidate with the wits, vitality and appeal to independents to build an electoral majority to preserve our constitutional order. Nothing else matters today – nothing, nothing, nothing.
But the leader the Democratic Party has right now, President Joe Biden – someone I admire but who clearly has lost a step cognitively and physically – has combatively dug in his heels, lashed out at his critics and dared them to challenge him at the convention, despite the mounting calls for him to step aside.
One would hope that his wife and family, who surely know the extent of his physical and mental frailties, would prevail upon him to step aside, but they won’t – seemingly oblivious to the risk this is posing to the country and the whole Biden legacy.
My God, the Devil must be enjoying this. I am not.
If Biden were to win, we’d all need to pray that he can get out of bed every day to carry out his agenda as well as he did in the past. If Trump were to win, we’d all need to pray that he stays in bed all day so that he can’t carry out his impulsive agenda, which seems driven first and foremost by which side of the bed he gets out of.
We can do better than this – and we must. Because this is also no ordinary election season. We are at a profound hinge of history that is going to put us on a roller coaster of job market volatility, geopolitical volatility and climate volatility.
The artificial intelligence revolution of the past four years is widely expected to slam into the white-collar job market in the next four like a category 5 hurricane. The lengthy Hollywood writers strike last year was just a tiny foretaste of what this destabilising revolution in white-collar work will look like.
At the same time, we are in the middle of defining the post-post-Cold War order, now that the US-dominated post-Cold War order has come unstuck since the Russian invasion of Ukraine.
Managing a hostile Russia – aligned with an increasingly hostile China, aligned with malign actors like Iran and North Korea, and super-empowered nonstate actors like Hamas, the Houthis and Hezbollah – will take not only incredibly wise US leadership but also a US leader able to forge multiple alliances. The post-post-Cold War world can’t be managed by a lonely American superpower telling all its allies to spend more on defence or we will leave you to the tender mercies of Vladimir Putin.
And finally, speaking of hurricanes, there is every indication that our core climate change challenge – how we manage the disruptive weather that is already unavoidable and avoid the disruptive weather that would become unmanageable – is now on our doorstep. The decisions we make in the next four years may be our last chance to avoid the unmanageable.
Those are just a few of the anticipated challenges facing the next president. And God save us from the unanticipated ones, like massive climate-driven migrations amplifying geopolitical instability. America always needs clear-headed and vigorous leadership, but we need it now more than ever.
Democrats, if they are being responsible, need to imagine Biden two or three years from now, given the inevitable march of time. Do those running the Biden campaign and those Democratic Party leaders who tell Biden to hang tough really believe that in two years he will have the capacity to carry out the rigorous job of president, with all its pressures, even on a good day? He is already saying he doesn’t want to schedule events past 8pm, but the presidency has never been and will never be an 8am-to-8pm job.
And can you imagine the conspiracy theories that will be circulating on social media and Fox News over “Who is actually making decisions?” at the Biden White House when people see a president in two years who is more physically and verbally impaired? The only-Biden Democrats – and the Biden campaign – owe the country an answer to that question. I take no joy in asking it, but ask it we must.
Ditto for Trump. What will it mean for America in the age of AI to have a president who swore in an affidavit in a 2022 court case: “Since at least Jan. 1, 2010, it has been my customary practice to not communicate via email, text message, or other digital methods of communication”?
What will it mean to have a president who is a crude oil-loving climate change sceptic when nearly 70 million Americans were under heat alerts last Sunday, a day on which temperatures in Las Vegas hit 120 degrees Fahrenheit for the first time in recorded history?
What will it mean in an age when there is no important problem that can be solved by one country alone – whether mitigating climate change, regulating AI, dealing with massive global migrations or confronting nuclear proliferation – to have a president who believes in America first and only, and that most allies are freeloaders, that US tariffs are paid by China, not American consumers and that global multilateral institutions – NATO, the WTO, the European Union, the WHO, the UN – are an alphabet soup of useless “globalists”?
Of course, I will vote for Biden if he is the Democratic nominee. And you should, too. We have to do anything we can to stop Trump. But Democrats continuing to insist on putting him there are behaving with dangerous recklessness.
I repeat: Just because we managed to barely survive the Trump stress test to our constitutional order once – not without some serious damage – does not mean our democracy can survive another four Trump years with his now Supreme Court-fortified sense of impunity. Especially if we combine the self-induced stress levels from a second Trump term with the boiling external stresses already building up around us.
That would indeed be playing Russian roulette again – only this time with a fully loaded pistol. That’s a game only the Devil himself would design.
Practically
all medical fields will benefit from artificial intelligence (AI) but, for
now, most applications are more science fiction than fact. The medical imaging
industry, however, is already experiencing the advantages — and Pro
Medicus is leading the charge.
Currently, most algorithms approved for use by the US Food
& Drug Administration (FDA) are focused on medical imaging. Plenty more
will come: traditional radiology relies heavily on pattern recognition,
which is an area where AI performs exceptionally well.
Key Points
·AI to improve diagnosis
·Opening platform to AI ecosystem the best bet
·Stock priced for growth
AI has two main applications within medical imaging
— prioritisation and diagnosis.
AI is being used to triage cases by reading through the
endless stream of scans and putting those patients with the highest risk of
pathology at the top of the pile for a radiologist to review.
One German university hospital found that using AI to
prioritise cases reduced the
average turnaround time for reporting critical findings from 80 minutes to
35-50 minutes. This may not sound like much, but there's a major shortage of
radiologists in Australia, Europe, and the US, so small increases in efficiency
mean radiologists can see more patients and reduce wait times.
Diagnostic accuracy
So far, Pro Medicus's bread and butter has been a software
platform that processes medical images remotely and streams the necessary
pixels to the radiologist's viewing station, allowing doctors to access
high-resolution scans almost instantly. This approach improves efficiency and
output, enabling faster diagnosis and more convenient viewing (see Analyst
picks: Uncovered gems).
While superior processing speed is Pro Medicus's main
competitive advantage — allowing it to charge a 50% premium to
competitors — the company is investing in machine learning to enhance
its software's capabilities, including the ability to spot anomalies and assess
patient risk.
The company has taken a shotgun approach to AI. Its
three-pronged strategy includes: (1) developing its own AI algorithms
internally; (2) partnering with third-party providers and universities to
co-develop them; and (3) providing an open imaging platform accessible to
independent AI developers.
The first prong of that strategy is arguably the weakest. In
2021, Pro Medicus received FDA approval for an internally developed algorithm
to detect and categorise breast density. Since then, however, the company has
barely said a word about internally developed AI — there may be further
advances, but we're more excited by a number of partnerships with external
developers.
Earlier this year, Pro Medicus invested US$5m into Elucid, a
US-based AI provider that specialises in a Fractional Flow Reserve (FFR)
evaluation tool for cardiac CT scans, which measures the pressure gradients in
a coronary artery. The procedure's use is limited by its cost, complexity, and
invasiveness, so an AI-driven non-invasive estimation of FFR will be a major
benefit to patients.
Elucid has raised around US$120m in total funding. Pro
Medicus's stake is small, but it shows the company's seriousness about building
relationships with AI providers and funding their growth. Pro Medicus intends
to partner with Elucid and integrate its AI algorithms into Pro Medicus's
imaging platform.
Apple-esque
While developing AI algorithms and partnering with start-ups
are both opportunities worth exploring, our best hopes are pinned on the third
prong in Pro Medicus's AI strategy — its imaging platform.
Most revenue currently stems from image processing, not
charging for AI services, and Pro Medicus boasts impressive financials: gross
margins over 99%, with a free cash flow margin and return on equity each
brushing 50%. Over the past three years, revenue from imaging has grown by 30%
a year. Anything that strengthens the imaging platform's competitive position
is a good thing.
Rather than focus solely on building the best AI models, the
company has opened its imaging platform to third parties by providing
accessible APIs (application programming interfaces). These APIs allow other AI
developers to easily integrate their AI models into Pro Medicus's software.
We think it's the right strategy. Pro Medicus's strength is
in speed and convenience, not AI development and diagnosis; open access is a
way to use external developers — who may be better at AI than Pro
Medicus — to improve Pro Medicus's core product.
Two things are clear: Pro Medicus's platform shows the output
of AI, which is ultimately what matters to the radiologist; and there are
hundreds of companies working on AI algorithms to improve diagnosis across an
endless array of diseases. Given the choice between using dozens of different
applications or using a single platform that shows the output of dozens of
different AI models, we suspect the latter will win out.
Just as Apple's success with the iPhone stemmed from
providing a platform for apps, Pro Medicus's approach allows radiologists to
access a wide range of AI models through a single, streamlined interface.
It's hard to fault Pro Medicus's strategy and, so far, the
company has gone from strength to strength. With roughly $150m of revenue,
Pro Medicus has a 7% market share in North America, double what
it was three years ago.
Unfortunately, the market has already caught on to Pro
Medicus's potential: the stock's market cap of $14bn is 177 times the $80m of
net profit expected in 2024. Consensus estimates are for net profit to more
than double by 2028, making that price-to-earnings ratio more digestible
— but anything other than rapid growth would still clobber the share
price.
We'd love to own Pro Medicus at the right price, but we'll
probably need to wait for a disappointing result before we get an opportunity.
For companies like Pro Medicus, AI is a core component of
their product, making it integral to the user experience; other
companies benefit from AI's capabilities quietly in the background. In Part
2, we'll explain how one such company's AI investments will deliver
improvements in efficiency, costs, and research.
In
Part
1, we looked at how AI is transforming the medical imaging industry through
the innovations of Pro
Medicus. Now, we turn our attention to CSL,
the undisputed leader in blood products and a top-tier producer of vaccines.
AI's potential applications within CSL are extensive,
offering significant improvements in efficiency, speed, and research.
Key Points
·Predictive drug design
·Faster vaccine development will improve
effectiveness
·Manufacturing efficiencies
Traditionally, drug discovery has been a lengthy and
expensive process.
The first phase of drug development involves identifying
potential drug candidates through laboratory studies to evaluate the biological
activity and efficacy of these contenders. A bottleneck in this research is the
sheer quantity of proteins available for study: blood plasma contains more than
4,000 different proteins, sometimes in indescribably small quantities, each of
which could have an important biological effect when concentrated and
administered to patients for a specific illness.
AI can help to prioritise research. By analysing huge
datasets, algorithms can predict how different molecules will interact with
biological targets, identifying promising candidates more quickly than
conventional methods based on trial and error.
AI can analyse research data more precisely than humans to
find unusual patterns or similarities in drug performance. For CSL, this means
a more efficient path to discovering new therapies, reducing time and
cost.
R&D accelerator
Once a drug candidate shows promise in basic research
studies, it progresses to clinical trials, which are conducted in three phases
to test the drug's safety, dosage, and side effects. The clinical trial
sequence is the most expensive part of research and development (R&D),
often costing hundreds of millions and taking more than a decade.
CSL hit this reality check with its plasma-derived
cholesterol drug CSL-112. Earlier this year, the company announced the results
of an enormous 18,000-person Phase III clinical trial and found that CSL-112
was no
better than placebo at reducing cardiovascular events following a heart
attack. CSL spent $500m or so and a decade of research on this single project.
As mentioned earlier, AI is likely to help in the drug
discovery process by proposing molecules worthy of investigation or spotting
anomalies in data. Its most valuable contribution, however, may be eliminating
low-potential drugs earlier in the clinical trial process. Only 1-in-10 drugs
that move from basic research to clinical trials make it through all three
phases to commercialisation. R&D is a lottery where most research spending
is wasted.
The final Phase III trial typically accounts for around 60%
of clinical trial costs. By more thoroughly analyisng the vast quantities of
data produced by earlier trials — or trials of similar molecules — AI may
be able to predict the likelihood of success with more accuracy, helping CSL to
allocate resources more effectively.
When one of CSL's therapies is finally approved, the research
doesn't end there — the company is constantly looking to repurpose drugs,
aiming to find new uses beyond their original indications. Most rare diseases
— CSL's specialty — don't have any approved treatments, so AI has the
potential to help CSL expand the market for its existing products by finding
new therapeutic uses for them. Given the cost of development, an expanded list
of 'off label' uses could add meaningfully to CSL's return on investment.
Vaccine development
AI's fast analysis is especially helpful for CSL's vaccine
division. CSL has a 26% share of the flu vaccine market, making it the world's
second-largest flu vaccine maker.
Influenza viruses mutate frequently, leading to a phenomenon
known as antigenic drift. Small changes in the virus's surface proteins can
lead to new strains that existing vaccines may not protect against.
The issue is that the flu virus is evolving constantly,
whereas vaccine development takes many months. As soon as a new flu vaccine
hits the shelves, it is already out of date because the virus has shifted
slightly since it was developed.
To address this, flu vaccines are reformulated each year
based on predictions of which strains will be most prevalent. This prediction
process involves global surveillance and data collection by health
organisations. Despite these efforts, there is almost always some degree of
mismatch between the vaccine strains and the circulating strains, resulting in
reduced vaccine effectiveness for that season.
CSL can use AI to model viruses and predict immune responses,
speeding up vaccine design. By accelerating the development process,
vaccine strains will more closely match the virus they're targeting.
AI is likely to become a standard feature in flu vaccine
development, so we doubt it will give CSL any competitive advantage or
increased profitability, but you never know — small differences in software
performance could lead to large discrepancies in real-world outcomes. In a
field where effectiveness is paramount, doctors are likely to recommend the
most effective vaccine, so the company that delivers that could dominate the
market. And more effective vaccines overall could improve demand.
Manufacturing
Two final applications of AI that could supercharge CSL's
operations extend beyond R&D into manufacturing and compliance.
The company intends to use AI to improve the efficiency of
its supply chain and assist in meeting its regulatory, legal, and compliance
requirements. Predictive maintenance algorithms keep production equipment
running efficiently, reducing downtime and increasing output. Real-time
monitoring through machine learning models can detect anomalies early,
preventing potential quality issues.
AI can aid CSL in making more informed strategic decisions,
too. Predictive analytics can forecast market trends, assess demand, and guide
management in where it invests the company's cash pile.
Management expects net profit of US$2.9bn-3.0bn in 2024, up
13 -17%, putting the stock on a price-to-earnings ratio of 32 at the midpoint.
AI has the ability to enhance almost every aspect of CSL's
operations — from drug discovery and expanded labelling to vaccine development,
manufacturing and quality control.
CSL's size and 100-year operating history is a major
competitive advantage as it has troves of research data on which is can train
AI models more effectively. The company spends 9% of revenue on
R&D and its US$1.2bn research budget is bigger than almost any
competitor.
With significant financial resources, CSL can invest in
cutting-edge AI technologies and infrastructure, hire top talent, and
collaborate with leading AI research institutions. We can't think of a
healthcare stock better positioned to benefit from developments in AI. HOLD.
It is interesting that the review
did not extend to some of the smaller AI companies in the health sector of
which there are many in various states of development.
There is also a useful review here:
AI is
already being used in healthcare. But not all of it is ‘medical grade’
Professor of
Medical Informatics, Macquarie University
Artificial
intelligence (AI) seems to be everywhere these days, and healthcare is no
exception.
There
are computer vision tools that can detect suspicious skin
lesions as well as a specialist dermatologist can. Other tools can predict
coronary artery disease from
scans. There are also data-driven robots
that guide minimally-invasive surgery.
Steven Issa stepped down as chief digital officer of the Australian Digital Health Agency (ADHA) two years ago, but any criticism of My Health Record still stings.
“I genuinely believe in it,” Issa told The Mandarin following his presentation at the Qualtrics X4 conference in Sydney. “For families like mine — and those who are frequent fliers in the healthcare system — I can’t tell you how much of a benefit it can be.”
Really you wonder why, after more
than a decade, there is still a belief that the myHR can be a nationally useful
system that should continue to be supported and funded!
It is clear the time has come to
stop wasting money on what is obviously a failed idea – or at least a failed implementation
of an apparently unworkable idea.
Buy Hold Sell: 2 high-conviction healthcare winners for
FY25
Plus, fund
managers outline the key trends shaping the sector.
Livewire Markets
Healthcare
stocks have been some of Australia's most consistent wealth generators, with
stocks like CSL (ASX: CSL) skyrocketing more than 6000% since
listing on the ASX 25 years ago.
Over the past
20 years, the S&P/ASX Health Care Index has far outperformed the rest of
the market, lifting 994% compared to the S&P/ASX 200's 121% over that
same period. By a long shot, it has been the ASX's best-performing sector over
the past 20 years.
And yet, while COVID-19 put our health back into the spotlight, healthcare stocks have been a mixed bag since then. Yes, the developed world's populations are ageing - which spells good things for healthcare companies, but many of the sector's former darlings are now on life support.
So how can investors identify the companies with a clean bill of health?
To find out, Livewire's Ally Selby was joined by two healthcare analysts in Alphinity Investment Management's Stuart Welch and Yarra Capital Management's Marcus Ryan.
They share some of the trends they are seeing in terms of valuation, cost pressures, and supply chain challenges, whether investors need specialist knowledge to be successful when investing in the sector, and the one non-negotiable healthcare companies need to make their way into these fund managers' portfolios.
Plus, they also analyse three healthcare companies, including CSL (ASX: CSL), Ansell (ASX: ANN) and Sonic Healthcare (ASX: SHL), and each name their highest conviction stock pick within the sector.
Note: This episode was recorded on Wednesday 10 July 2024. You can watch the video, listen to the podcast or read an edited transcript below.
Edited Transcript
Ally Selby: Hello and welcome to Livewire's Buy Hold Sell. I'm Ally Selby and today we're taking a deep dive into the healthcare sector. Many of Australia's greatest success stories have been healthcare companies, but since COVID, quite a few of those stocks have been on life support. So to find out which of these stocks have a clean bill of health, we're joined by Stuart Welch from Alphinity Investment Management and Marcus Ryan from Yarra Capital Management.
A lot of healthcare valuations have traditionally been more expensive than the rest of the market. Stuart, I'm going to start with you. With some of the pain that we've seen in this sector, is that still the case?
Is the healthcare sector overvalued?
Stuart Welch: I think people have historically been attracted to healthcare because of the structural defensive growth, and whilst it was upended a little bit during COVID, I think that is still the case. We still see growing ageing populations, increasing chronic disease, and often a lot of new treatments that improve the standard of care. And so I think people are still attracted to those growth stories that can continue irrespective of the economic cycle.
Ally Selby: Over to you Marcus. How much value are you actually seeing within the healthcare sector today?
Marcus Ryan: The sector is trading on a higher PE premium relative to the market, and that's really reflecting investor expectations around the better growth of prospects. Overall, I would describe the healthcare sector today as being modestly cheap. Interestingly, the PE ratio, the premium relative to the industrial companies is around a 50% premium, and that compares to the historical average of around 60%.
We believe though that there's really a story within a story here. Using that same basis of relative PE, what's really interesting is that 10 of the 15 major healthcare companies are trading at higher PE multiples today relative to their historical average. So as we sit here today, we think dispersion in the sector is large and we are really focused on unique stock opportunities rather than the sector overall.
Are there any headwinds facing the sector?
Ally Selby: As you mentioned there, we have seen quite a lot of dispersion in the healthcare sector, particularly when it comes to returns. A lot of those companies have been facing high costs as well as supply chain challenges. In your view, are we still seeing those headwinds today?
Marcus Ryan: I would say we are partially seeing those headwinds. What's interesting is we observe supply chain challenges across the sector. We're really noticing that it's evolving from being broad-based wage cost inflation pressures and product-specific shortages to now being more discreet issues like Red Sea shipping cost increases. We expect this to manifest when we think about the margin potential. 12 of the 15 major healthcare companies today are actually continuing to have margins below pre-COVID levels.
These issues could still provide a challenge to get those margins back. As you mentioned, FY24 was the year for stock dispersion within the healthcare space. In fact, while the sector put on almost 10% for fiscal '24, what was amazing is that the best returner Pro Medicus (ASX: PME), a healthcare technology company, jumped 119%. Whereas at the other end of the ledger, pathology names, actually dropped 25%. They were really hit hard with some of those inflation issues. So, moving forward, the key themes we are monitoring across the sector are AI, GLP-1s and how that'll impact the sector.
Ally Selby: Stuart, over to you. What are some of the major trends you're seeing right now in the healthcare sector?
Stuart Welch: So I think Marcus has touched on one of the key ones. I think it's margins. So as we came through COVID, there were COVID beneficiaries and COVID losers. Normally it's a very stable industry. We had the companies that were able to provide the pathology tests, for example, or respiratory systems for COVID patients winning. And some of the hospitals that were quasi-nationalised and CSL (ASX: CSL), for example, which couldn't collect plasma, struggle.
I think every company has been recovering at different stages, but I think in the last 18 months, they have been hit with margin pressures and that's been relatively universal across the space. And so I think that's one of the key trends in terms of trying to understand the performance of the sector - what's the outlook and trajectory for that margin recovery and how quickly that's going to come through relative to people's expectations. Do you need specialist knowledge to be successful in healthcare investing?
Ally Selby: All the stocks in the sector are incredibly different. Do you feel like you need specialist knowledge to be able to be successful when it comes to investing in healthcare stocks?
Stuart Welch: Quite a few other sectors are a lot more homogenous. The healthcare sector is very heterogeneous. So firstly, you have the different sub-sectors, so you've got things like hospitals, pathology companies, radiology companies, aged care. But then also the three largest companies are leaders in various specific sub-segments like Cochlear's (ASX: COH) cochlear implants, sleep apnea for ResMed (ASX: RMD), and blood plasma products for CSL. Each one of those has very different fundamentals, and so it's very hard to apply a one-size-fits-all kind of approach to healthcare.
On top of that, it's not only the products they offer and the markets within which they operate, which are often highly regulated and vary country by country, but you also have to have an eye on the competitors. So it's often the product you don't know about that could upend some of these companies as well. So there's a lot to keep on top of, if you're not doing that full-time, I would suggest...
Ally Selby: ...Maybe not doing it at all. Do you feel like you need a medical degree or any kind of knowledge like that to be able to invest in these stocks?
Marcus Ryan: The answer to that would be definitely for the healthcare sector. Our investment process does lean into engagement with specialists and we find that's a really helpful part of the process, particularly for healthcare. When I think about specialist expertise, it could be with a prescribing physician who's close to patient trends. And what we've really found is that can often help identify and validate potential points of inflexion for businesses early on.
Today, consensus expectations are in excess of 15% profit growth for the healthcare sector over the next two years. That's really quite staggering compared to the last two years when the sector only generated 4% per annum earnings growth. And it's these specialist engagements that help to discern which companies will have the capacity to meet or beat those expectations.
One non-negotiable when investing in healthcare stocks
Ally Selby: Okay. Marcus, one more question today before we get into buy, hold, sell. For you, what is one non-negotiable that you believe every healthcare stock needs for it to make its way into the portfolio?
Marcus Ryan: What we find really interesting when we look across the sector is that stocks are trading on anywhere from 15 times earnings to in excess of 100 times earnings growth. And what that says to us is a key ingredient is understanding the durability of revenue and the sustainability of earnings growth. That's our number one focus and I'd call that our non-negotiable.
In addition to that, I'd say before we actually put a new healthcare name into the portfolio, we're often asking the question, "Does this make sense from a portfolio perspective? Could there actually be a better stock outside of the healthcare space that makes better sense?"
And just finally and impressively when we think about the healthcare sector over the last decade in Australia, and this is actually quite staggering, the sales growth and the earnings growth from the healthcare sector per annum is in excess of three times the growth rate of what we've seen from ASX industrial companies. And it really encourages us with that active research to lean into the sector and to find the best stock ideas.
Ally Selby: Over to you, Stuart. What's your one non-negotiable when investing in healthcare stocks?
Stuart Welch: So it is something we apply to all of the stocks that we put in the portfolio. And what we're looking for is quality, reasonably valued companies that are in or entering an earnings upgrade cycle. These are companies where we think the earnings power has been underappreciated and earnings can come in ahead of expectations. We apply that lens across all companies that we invest in. And healthcare is no different. We do think that one of the key drivers of that over the next 12-18 months is going to be margins for some of the reasons we've talked about already.
Ally Selby: Let's get into buy, hold, sell now. First up today we have CSL, which is Australia's biggest healthcare company by a country mile. Stuart, going to start with you today. Is it a buy, hold or sell?
Stuart Welch (BUY): We think that one's a buy. It's a company that is yet to recover from COVID. Margins are still 800 basis points in their key business bearing below where they were pre-COVID. And it's been struggling with some of those inflationary cost pressures that we've been talking about in the healthcare space. One of the key drivers to improve that is the Rika system, which is a new plasma collection system. This will decrease the amount of time required to collect a donation but also increase the volume of donations that they can take from patients as well. And we do think that the rollout of that is going a bit faster than what people currently expect and that there's some margin upside from that as that comes through.
Ally Selby: Its share price has recovered around 12% over the past 12 months. Its share price is now trading back near $300. Marcus, is it a buy, hold or sell?
Marcus Ryan (SELL): For us, Ally, CSL today is more of a sell. We like parts of the industry that CSL operates in. We like parts of the business, and we like the management team, but what we just cannot get our heads around is the mispricing opportunity. Building on some of the margin comments that Stuart made, where we see things a little bit differently is we feel some of that margin upside story seems to be well captured by consensus expectations. When we also think about competing products and generic products, we sense that that's going to be an ongoing feature of the industry. And just finally, we feel it's actually a very well-loved stock. Interestingly, if you look at analyst reports, 12 of the 16 brokers covering CSL have it on a buy or a very strong buy. And we just think that limits the potential for positive news flow.
Ally Selby: Okay, next up today we have Ansell, which sells protective equipment like medical gloves. Marcus, staying with you, is it a buy, hold or sell?
Marcus Ryan (BUY): For us, Ansell, a leading personal protective equipment company, is a buy. This is really predicated on a bunch of key points. We see the healthcare part of the business as returning to system growth as they rotate through COVID impacts. We like the cyclical upside potential from the industrial side of the business. Thirdly, we actually see the business quality and the earnings quality improved as a result of their April acquisition of the Kimberly Clark PPE business. And just finally, we think the valuation's attractive. The stock's trading at a PE discount relative to where it historically traded.
Ally Selby: Okay, its share price has fallen around 3% over the last 12 months, but most brokers rate it as a buy. Stuart, over to you. Is it a buy, hold or sell?
Stuart Welch (SELL): We would look at that as a sell. It's been getting some earnings downgrades. It's had, I think, earnings downgraded by 40-50% over the last couple of years. And actually, the first half was no different - earnings missed by about 40%. And the key issue is that these guys benefited greatly during COVID. They sold a whole lot of gloves. In fact, people ordered a lot more than they needed and have been stockpiling them. And that's been impacting the outlook for the business. And that first-half result was a 40% miss at the NPAT line. At some point that will normalise, but I think we'd need to see some evidence that that is normalising before we could get comfortable stepping into it to make sure there are no further earnings downgrades ahead of us. Sonic Healthcare (ASX: SHL)
Ally Selby: Okay. Next up today we have Sonic Healthcare, which is a pathology services provider. Its share price has fallen around 25% over the last 12 months. Is there value there, Stuart, or is it a trap? Is it a buy, hold or sell?
Stuart Welch (SELL): That would also be a sell for us. It was a huge COVID beneficiary as well doing a lot of the pathology tests for COVID patients. And during that period, they were actually able to repay pretty much all of their outstanding debt, excluding leases. And what's happened subsequently is that they've been redeploying that capital into acquisitions that should drive growth. The underlying base business earnings power has been eroded through inflation. So they've got a fixed reimbursement from the government. And as those higher costs have come through, that's eroded the margin of the underlying business. We've seen that as some of those COVID tests have receded. And so I think we would again just need to see a bit more evidence that those inflationary pressures are under control and that the margins have stabilised before we could get comfortable investing in Sonic.
Ally Selby: That said, most brokers rate the stock or buy, or at least on the system that I was looking at. Marcus, over to you. Is it a buy, hold or sell?
Marcus Ryan (HOLD): For us Ally, Sonic would be more of a hold at this point in time. The challenge we have at the moment is just trying to understand, particularly the pathology industry, how it actually can lift margins back anywhere close to where they were pre-COVID. Building on some of the themes that Stuart touched on, what we're observing at the moment is volume demand for pathology services is still quite sluggish. We're seeing the cost pressures linked to labour costs still inflated. And while some of the acquisitions we would say look pretty good on the surface, the overall earnings trajectory is still challenged. And as a result of that, we have to be a hold.
Ally Selby: Okay, we asked our guests to bring along their highest conviction healthcare stock today. Really excited for this one. Marcus, I'm going to start with you. What stock are you backing?
Marcus Ryan (HIGH CONVICTION BUY): Our key pick in the sector is the sleep apnea treatment leader, ResMed. For us today, we see the real opportunity centring around the concern that the increased prevalence of GLP-1 drugs could erode ResMed's market opportunity moving forward. We've done a tonne of calls over the last couple of weeks, building on the specialist knowledge question from earlier, to try to understand what physicians are saying and what patients are doing. And frankly, we're getting a picture back from these experts that is very different to what's embedded in the current share price and frankly, very positive for ResMed.
So what we're hearing back from the sleep practitioners, and the weight loss practitioners, is that CPAP - which is the treatment that ResMed put forward to sleep apnea - is still the primary solution for sleep apnea. The other thing we're observing is that GLP-1s, if anything, are just increasing the treatment awareness for sleep apnea.
We see ResMed as the key mispricing opportunity in the large-cap healthcare space. We like the market opportunity. There's a tonne of penetration opportunity for the company. It's the market leader. We still see high single-digit EBITDA growth over the next few years. And the stock's trading at a tremendous discount PE relative to the past.
Ally Selby: Okay. Over to you, Stuart. Your time in the hot seat. What's your highest conviction healthcare stock right now?
Stuart Welch (HIGH CONVICTION BUY): It would be Cochlear. So Cochlear produces cochlear implants to improve hearing. Their key market is the adult market. They've always had a huge addressable market. The challenge for Cochlear has been unlocking that, and system growth has been reasonable in the low mid-single digit range.
Under the current CEO, they've put a whole bunch of long-term growth initiatives in including medicalizing hearing loss, putting in standards of care, seeing studies come through that link hearing loss with accelerated dementia, and a bunch of initiatives to try and free up clinic capacity and operating theatre capacity to be able to service those patients as well.
We think a lot of those long-range initiatives are starting to bear fruit and we're actually seeing an acceleration in system growth, which we think can move further as well. And that's really the key driver for Cochlear, which is the leader in the space. They own that space. They've got a 65% market share, they invest far more in R&D than anybody else and they've got a far superior product suite. And we see more of that coming, which further extends their lead, but also helps free up the industry to grow more as well.
Ally Selby: Well, I hope you enjoyed that healthcare special of Buy Hold Sell as much as I did. If you did, why not give it a like? Remember to subscribe to our YouTube channel. We're adding so much great content just like this every single week.
I can confess I have holdings in most of these – and am certainly not equipped to offer share purchase advice – but I reckon each of these is worth a close look!
Make up your own mind and seek your own advice!
Overall I reckon the healthcare sector is quite investable as part of a properly diversified portfolio – if you have a few spare dollars available!
The
Australian Digital Health Agency has released a five-year roadmap for raising
the uptake of national healthcare identifiers in Australia.
Developed with the
Department of Health and Aged Care and Services Australia, the National
Healthcare Identifiers Roadmap 2023-2028 outlines specific actions to
take for the broad adoption of healthcare identifiers, which are unique numbers
used to identify individuals, healthcare provider individuals, and healthcare
provider organisations. These identifiers are issued through the national system,
HI Service, operated by Services Australia.
WHY IT MATTERS
The federal
government envisions a future where national healthcare identifiers are readily
available and universally used by all individuals and healthcare providers in
all health information exchanges and digital health projects involving health
information sharing. It also aims to reduce or eliminate the mismatch in
individuals' identification; streamline the management of identifiers and
associated documents, such as digital certificates; and enable individuals to
use identifiers to control their information and manage their privacy.
"Increased
adoption of the national healthcare identifiers will mean Australians will
avoid having to retell their story as they move across the health system,"
Simon Cleverley, assistant secretary of Digital Health at DoHAC, explained.
"Access to
information in real time will also support healthcare providers to make
well-informed clinical decisions and care plans."
In the coming years
until 2028, the government will pursue the activities outlined in the roadmap,
focusing on legislative changes, service improvements, technical updates, and
operational enhancements.
It seeks to reform
the HI Act, which implements the national system for assigning unique
healthcare identifiers; publish a federal government policy position on HI
Service adoption; develop a simple guide to the HI Act; create a template of
policies and guidelines on healthcare identifiers use; and issue a
policy on healthcare
identifiers use in consumer applications.
Work to improve the
HI Service includes enhancing data matching (including for Aboriginal and
Torres Strait Islander peoples) and data quality, reviewing existing messages
and responses, improving search considerations, creating individual healthcare
identifiers for newborns, and enabling consumers to enter or verify
registration data and easily update their information.
On the technical
side, the government seeks to create guidance for organisations on appropriate
structures, the conduct of a conformance review and update of the HI Service,
the update of its technical standards, the extensibility of the HI Service
architecture, and the development of guidelines on clinical systems
architecture and functional requirements.
To improve
operations, a stakeholder engagement and communication plan and educational
materials for the HI Service will be developed. There will be a review of
support arrangements and monitoring and feedback processes and the continuous
improvement of the HI Service. Finally, there will be a review and update of
the HI Service's governance structure and processes.
THE LARGER CONTEXT
The creation of the
National Healthcare Identifiers Roadmap is part of actions outlined in the
National Healthcare Interoperability Plan 2023–2028. The plan also seeks the
wide uptake of healthcare
identifiers "to enable a connected and interoperable health system
where every person, healthcare provider, and organisation can be accurately and
quickly identified."
Also part of the
ADHA's Interoperability Plan is collaborating with industry. In 2022, the
agency partnered with Health Level Seven Australia to raise the adoption of FHIR standards across the Australian
health system.
ON THE RECORD
"Healthcare
identifiers are the linchpin for safe, secure, and seamless information sharing
across the nation’s healthcare system in near real time. They are central to
the evolution of digital health and will empower Australian healthcare
consumers to have continuous care across all healthcare facilities in every
corner of Australia,” Peter O’Halloran, chief digital officer at ADHA, said in
a media statement.
What is not
mentioned here is that use of Healthcare Identifiers have been facilitated by
theHEALTHCARE IDENTIFIERS ACT 2010 so
that the system is now 14 years old. Surely if it was so usefully implemented it would have
been fully adopted by now? How can we still be developing an implementation
plan from 2023-2028!
We
are living big history. We do that so often we don’t always notice. But a proud
president is hunkered down in the White House, and his party is frantically
trying to decide whether to press him to step aside from his bid for
re-election after a catastrophic 90 minutes revealing that he is neurologically
not up to the demands of a campaign or a second term. (And revealing, too, that
his true condition, the depth of his decline, had been kept,
quite deliberately and systematically, from the American people. Oh, the
histories that will be written, and the villains that will be named.)
To
me it feels like August 1974. The president’s position isn’t going to get
better, it is going to get worse. The longer he waits to step aside the
crueller his departure will be.
The
post-debate polls show he is losing support both overall and
in the battlegrounds. A cratering like that doesn’t happen because you had a
bad night, or a cold, or were tired. It happens when an event starkly and
unavoidably shows people what they already suspected. It happens when the event
gives them proof.
Before
the debate a majority of those polled said they no longer thought he had it in
him physically or mentally to do the job of president anymore. After the debate
that number reached 72%. You can’t un-ring that bell.
There’s
no repairing this. His staff can’t spin or muscle their way out. He is
neurologically compromised, we can all see it, it isn’t his fault. You have no
governance in how you age and at what speed, or what illnesses or conditions
arise. You only have governance in what you do about it.
Those
who support the president offer suggestions on conference calls. “Just get him
out there—long, live interviews, lots of news conferences, a big rally in the
round with Q&A from the voters.”
They
don’t know what they’re talking about. He can’t do what they want him to do. He
can’t execute it. He tried to do it last week—the debate was, in effect, a
live, high-stakes interview. He won’t be able to do it next week or next month
either. Old age involves plateaus and plummets. It gets worse, not
better.
The
president’s staffers fantasize that they can plow ahead with teleprompter
events—he looks stronger at the podium. But no one doubts he can stand and
read. His staffers think they can smooth past things with supportive interviews
with sympathetic journalists, but that won’t work either, not long term.
Because everyone saw the debate, or, since, has seen pieces of it, and the image of a debilitated president has burned its way
into the American brain and there’s no erasing it.
A
big part of the president’s personal mythos, and it is shared by all of
Biden-world, is that the guy’s a survivor, he always pulls through, you knock
him down, he gets back up. An inner belief like that can get you far and gird
you. But it can also harden into mere conceit and unrealism, and blind you to
the real facts of current circumstances.
I
don’t agree with the narrative that what was revealed in the debate was a
sudden and dramatic decline. What he has been showing, for at least two years,
is a steady and unstopping decline. In January 2022 we worried here about the
president’s propensity for “unfinished sentences, non sequiturs; sometimes his
thoughts seem like bumper cars crashing and forcing each other off course.” In
April 2022 we wrote of a poll in New Hampshire that asked if Joe Biden was
physically and mentally up to the job if there is a crisis. Fifty-four percent
said, “not very/not at all.” In June 2022 we said there’s a broad sense it’s
not going to get better: “He has poor judgment and he’s about to hit 80 and
it’s not going to change.” Voters feel “unease.” In December 2022: Mr. Biden
doesn’t think he’s “slipping with age,” but he’s wrong. “He’s showing age and
it will only get worse, and he will become more ridiculous, when he’s deeper
into his 80s.”
Trusted
Biden intimates must tell him to get out of the race. “You got rid of Donald
Trump. You got us out of Afghanistan. You passed huge FDR-level bills that
transformed the social safety net. . . . You did your job in history. You
fulfilled your role. And now you should go out an inspiration.”
In
September 2023 Mr. Biden had been busted in the press for telling tall tales
that didn’t check out. We noted that while repeated lying is “a characterological fault, not knowing
you’re lying might suggest a neurological one.” “The age problem will only get
worse.” “In insisting on running he is making a historical mistake. . . . He
isn’t up to it.”
What
we saw in the debate isn’t new. That’s why voters won’t accept the idea that it
was just a bad night. They think it’s been a bad and worsening two years.
small
a thing for such big history. In any case it isn’t about one man’s personal
needs, or his family’s enjoyment of importance and the blessings of proximity
to power. It isn’t a party question or a White House question, it’s about
America. Can America afford for another four years to have an obviously
neurologically impaired president? No, it isn’t safe. It is on some level
provocative. Weakness provokes. The president’s rationalizers point out that
he’s fine from 10 a.m. to 4 p.m. I am sure presidents Xi of China and Putin of
Russia will only decide to take back Taiwan or move on Poland at lunch time
EST, to keep things fair. Why wouldn’t they schedule their aggressions around
the president’s needs?
The
elected officeholders of the Democratic Party should take responsibility and
press the president to leave. You can’t scream, “Democracy is on the line,” and
put up a neurologically compromised candidate to fight for it. They haven’t
moved for two reasons. One has to do with their own prospects: You don’t want
to be the one who kills the king, you want to be the one who warmly mourns the
king and takes his mantle after someone else kills him. The other is fear of
who would replace him on the ticket, and how exactly that would happen.
Journal
Editorial Report: Democrats now face a hard choice.
These
are understandable fears. But the answer isn’t to hide in a dumb fatalism, a
listless acceptance of fate. It makes no sense to say, “Joe Biden is likely
going to lose so we should do nothing because doing something is
unpredictable.” Unpredictable is better than doomed.
This
is a party afraid of itself, literally afraid of its own groups and component
parts. They are afraid of their own delegates. Party professionals think
letting the convention decide would reveal how fatally shattered and divided
the party is—how wild it is. But that’s how the party looks now, with its
leaders in Washington frozen and incapable and no one in charge.
What
a tragedy this is. A president cratering his historical reputation, his wife
and family ruining any affection history would have had for them when Donald
Trump wins. They have no idea how they’re going to look.
To come right to the point Joe Biden
has seen (much) better days and needs – for all our sakes – give up the
Presidency rather than thinking he can go on for four more years
Joe Biden is well past his prime and
over the next four years will just get worse – dementia / cognitive decline is
not something that improves – without a specific remediable cause—and so we can
assume it will just get worse.
Joe needs to simply sign off and let
someone else steer the ship. He is a good man, and was a good president- time
to rest and sleep more!! To go on is frankly wrong.
Sadly we do not have a system that
manages this issue well – food for thought I reckon. It is really hard to know when your time is up - and even harder to accept it!
