ASX-listed medtech (medical device) companies saw an impressive performance during Financial Year 15. In stark contrast to the market's gain of 1.2%, an equally weighted index of ASX-listed medtech stocks gained 45.6%. Canaccord believes a number of structural drivers have been responsible for this performance, and anticipates these to continue. In this report we present three companies we believe are best positioned to leverage this thematic.
MEDTECH 'SECTOR' (GREEN) VERSUS XJO (ORANGE) AND DRUG COMPANIES (BLUE)
It is worth highlighting the divergent performance of medtech and drug companies. While medtech gained 45.6%, an equally weighted index of 25 ASX-listed drug-development companies was down by 4.3%.
As demonstrated in the table below, eleven of the sixteen ASX-listed medtech device companies saw share price gains during FY15, with three posting gains excess of 100%. Notably, the companies with better performances were generally those in the early or mature stages of revenue growth.
FY15 PERFORMANCE OF MEDICAL DEVICE COMPANIES
Structural drivers continue to support the thematic
We believe the structural drivers that have supported this strong performance are still in play. These include:
- Commercial demand for products that reduce healthcare costs
- Gross margins that are typically in excess of 80%
- Relatively low regulatory risk
- Policy changes focused on improving hospital performance or establishing a standard of care
- Underlying technology platforms underpin the next generation of products, and new products
- Medtech products often generate revenue within three years of listing (unlike biotech)
- Broader investor engagement achievable because the function of products is easier to articulate
- Ongoing demographic shift, and related increase in medical costs.
Products that reduce healthcare costs
Some of the more successful ASX-listed medtech companies are leveraging structural changes emerging in the healthcare landscape. A key driver in Canaccord’s stock selection has been to harness the commercial demand for products that reduce healthcare costs. While healthcare economics have always played an important part in the adoption of new technologies, there is an increasing focus on reducing healthcare costs through prevention.
With the Accountable Healthcare Programs in the US, hospitals are required to cover the cost of treating any new conditions that develop as a during the course of a patient’s treatment, such as hospital-acquired infections. Hospitals now receive penalties for patients that are readmitted within 30 days of discharge. Any product that lowers the incidence of hospital-acquired complications are likely to see strong adoption. Hospital performance is closely monitored on these metrics, and we expect there will be strong demand for products that assist with outperformance relative to peers.
Three of the Medtech companies that Canaccord covers, Nanosonics (NAN), Impedimed (IPD), and Osprey (OSP), produce devices that will help hospitals improved patient management, as well as meet the goal of improving hospital performance.
Three ASX-listed Medtech stocks best positioned to leverage the thematic
NANOSONICS LIMITED (ASX-NAN | MARKETCAP: A$473M | PRICE: A$1.70 | RATING: BUY | TP: A$2.20)
Nanosonics has a propriety system that allows high-end medical equipment to be rapidly and effectively disinfected at a relatively low temperature of 60°C. This makes it suitable for sensitive equipment that can’t be used by conventional autoclaves. NAN’s first product is trophon, which disinfects ultrasound probes. Trophon and the associated consumables generated sales of $14.3M, and a net profit of $1.2M in H1 HY15. We expect significant sales growth in the next 12-18 months as the company starts selling directly in the US, alongside distribution partner GE, as well as expanding in other geographic markets. The issue of reprocessing of medical equipment has come to the fore in the US after hundreds of patients were infected, and several deaths occurred, from a superbug transmitted by ineffectively disinfected duodenoscopes. Furthermore, a recent study has shown that trophon is the only system shown to kill the Human Papilloma Virus (HPV), the leading cause of cervical cancer. We believe this could drive sales in the gynaecological clinic market, which Nanosonics does not yet service. You can access Canaccord’s full reseach here (VIEW LINK)
IMPEDIMED LIMITED (ASX-IPD | MARKETCAP: A$254M | PRICE: A$0.83 | RATING: BUY | TP: A$1.82)
Impedimed uses a proprietary technology called Bioimpedance Spectroscopy (BIS) which can rapidly and non-invasively establish a person’s tissue composition, i.e.: the proportion of fluid, muscle, fat and bone. IPD’s first product is the L-Dex, which is able to detect potential onset of lymphoedema. This is an irreversible build-up of fluid in the limbs which occurs in 20%-30% of cancer patients. L-Dex is fully approved in the US, EU and ANZ. Last year it secured a dedicated Category-1 CPT code that provides Medicare reimbursement of US$112 per test. In the US, approximately 700,000 – 900,000 new patients are treated for cancers that carry a risk of lymphoedema, and based on current clinical protocols, these patients are likely to be monitored for lymphedema 12-17 times in the 5 years following their cancer treatment. A recent study reported that providing intervention following the detection of sub-clinical lymphoedema using L-Dex, could drastically reduce the proportion of patients progressing to clinical stage disease from 36.4%, to 2.8%. Some studies have reported that patients with clinical stage disease can have additional annual treatment costs of $8,000 - $16,000 per annum. More recently, the National Comprehensive Cancer Network (NCCN) has included a requirement for cancer survivors to be monitored for lymphoedema and treated. The NCCN guidelines are seen as the gold standard for cancer care, and are followed by the majority of leading cancer centres. As the existing methods (tape measure and water displacement) take a long time and are not sensitive enough, we see the NCCN guidelines as a major driver for adoption of IPD’s L-Dex. You can access Canaccord’s full reseach here (VIEW LINK)
OSPREY MEDICAL INC (ASX-OSP | MARKETCAP: A$101M | PRICE: A$0.60 | RATING: BUY | TP: A$1.50)
Osprey has developed an elegant way of reducing the amount of contrast (the dye used to visualise blood vessels in X-rays) used during cardiovascular procedures. With a simple pressure modulation system, the ‘AVERT’ system is able to reduce the amount of dye used by up to 40% without affecting the quality of the image. This is important because contrast dye is toxic to the kidneys and can cause further, permanent kidney damage in the 25% of patients having a cardiovascular procedure that have pre-existing kidney disease. This can result in a poorer long-term prognosis for the patient, and additional treatment costs of up to $15,000 that are borne by the hospital. Given the established correlation between dye-dose and risk of kidney damage, reducing the amount of dye given to patients by 40% should lead to a significant reduction in both the incidence and severity of kidney disease. A recent, independent study reported that hospital-acquired acute kidney damage was associated with higher rates of readmission to hospitals within 30 days of discharge. Exposure to contrast dye is the third most common cause of hospital-acquired infection. As hospital readmissions are estimated to cost the US healthcare system US$26B, of which US$17M is believed to be preventable, for the last 3yrs Medicare have been monitoring readmission rates and penalising hospitals with rate that are too high. This year, 2,610 hospitals (75% of those monitored) were penalised with cuts to their Medicare funding of up to 3%. To avoid these revenue penalties, hospitals will focus on lowering their 30-day readmission rates, and one way to achieve this will be by minimising contrast dye given to patients. You can access Canaccord’s full research on Osprey here (VIEW LINK)
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