Healthcare Sector

Australian Stockmarket analyst, Macquarie Research Equities have provided a healthcare sector update including Resmed (RMD), Ramsay Healthcare (RHC) and Australian Pharmaceutical Industries (API). A disappointing profit downgrade yesterday from pharmaceutical distributor Sigma Pharmaceuticals, and a 22% one day fall, has firmly brought focus back to the healthcare sector. Resmed (RMD): Outperform: Following index changes, Resmed is now in the small cap universe. RMD will be cycling tough US industry growth (that RMD itself created through its marketgrowing product launches) for the June quarter result, expected to be reported in early August. However, beyond this point the analysts expect a rosier picture for RMD. RMD's margins are relatively secure in the short to medium term as discounting by competitor Respironics on its Optilife mask should abate. Furthermore, the increasing sales of the high margin Adapt SV and the likelihood that competitive bidding effects will not be material (in the short to medium term) are supportive factors. They expect market growth to continue to be driven by factors including new product launches (particularly for RMD); increased recognition of morbidity associated with OSA and a reduction in the sleep diagnosis bottleneck. Ramsay Healthcare (RHC): Outperform: Guidance has been maintained at 15–20% growth in 'core' EPS for the full year, with the first half up 21% by management definition. The analysts expect the company's track record of under-promising and over-delivering to continue. Key drivers include reduced working capital demand, early returns from brownfield expansion, and the delayed pricing coverage of higher nursing costs in Queensland. Near-term outperformance will be based on growing confidence in current management to execute on the growth opportunities available – such as in hospital expansion, acquisition and the development of the company’s potential in diagnostics and other complementary services. The analysts back management to deliver. Australian Pharmaceutical Industries (API): Underperform: API reported a disappointing FY07 result. Looking bluntly at the results, API is a business in alarming decline. Stripping out asset sales, the margins in the retail business have halved. The distribution business’s margins have retreated by 42bp to an industry low of 1.39%. While there is some indication of stabilisation in the second half, at least in the distribution business, it has become clear in the analysts' view that the takeover premium on API stock is expanding rapidly. While SIP is an obvious predator (ACCC concerns aside), the consolidation of pharmaceutical distributors (including those with retail rollout strategies) is a global theme. Taking into account global peers and global transaction multiples, as well as the off-balance sheet financing employed by API, the analysts believe $1.65 represents a reflection of reduced operational earnings outlook and the consolidation value to an acquirer.