Scott Power: ASX health stocks fall but quarterly reporting was ‘overall positive'
ASX heath sector falls 1.3%, trailing ASX 200 up 1.1% as macro picture remains uncertain but 'little bit better'
Soft-tissue repair company Aroa Biosurgery reconfirms FY25 reported revenue guidance of NZ$81-84 million
Medical imaging softer solutions Mach7 Technologies delivers 'mixed' quarterly result ahead of leadership change
Healthcare and life sciences expert Scott Power, who has been a senior analyst with Morgans Financial for 27 years, gives his take on the ASX healthcare sector for the week and his 'Powerplay' stock pick.
At 3pm on Friday, the S&P/ASX 200 Health Care index was down 1.4% for the past five days, while the benchmark ASX 200 was up 1.1% for the same period as Power said "the macro picture remains still quite uncertain but a little bit better".
"We've got the federal election out of the way, which provides some certainty now," he said.
"The issues remain the same, growth is slowing, consumers are tightening their belts a bit with cost of living still at the forefront of a lot of people's minds."
Power said focus will now be on the Reserve Bank of Australia when it meets on May 20 to see if Australia's central bank cuts the cash rate from 4.10%.
"If they lower rates, it will reflect progress in controlling inflation but a slowing economy," he said.
"They'll want to bring interest rates down to keep growth at a sustainable level."
Quarterlies overall positive as Aroa reconfirms FY25 guidance
Power said the latest quarterly results season has been "overall positive", with most of the companies under Morgans coverage "hitting expectations".
New-Zealand-based soft-tissue repair company Aroa Biosurgery (ASX:ARX) posted its Q4 FY25 results, reconfirming FY25 guidance for reported revenue in the range of NZ$81-84 million – Morgans forecast NZ$81.1m – and normalised EBITDA of NZ$2-4m with Morgans forecast is NZ$2.8m.
"Probably the most important one was Aroa," Power said.
"Given they had a couple of downgrades during the year, it was important to see them reconfirm guidance for FY25."
Aroa reported cash receipts for Q4 FY25 were NZ$20.1m, up from NZ$18m on the previous corresponding period (pcp).
Myriad sales were up 32% on pcp, and Ovtiex sales, via Aroa's US partner TelaBio, were up 17% on pcp.
During the quarter Myriad Matrix and Myriad Morcells were assigned permanent unique Level II Healthcare Common Procedure Coding System (HCPCS) codes by the Centers for Medicare & Medicaid Services (CMS) in the US.
The body of peer review clinical evidence continues to grow with more than 100 studies published to validate Aroa's extracellular matrix (ECM) platform which helps improve clinician adoption.
"Management also believes the 10% US tariff on imported goods from New Zealand would likely be offset to some extent by its other commercial arrangements which makes sense to us," Power said.
He said compared with its ASX peers Aroa was trading at attractive levels.
"Also, recent international merger and acquisition activity in the wound care space supports a higher valuation for ARX," he noted.
"We expect ARX will grow its revenue on average by 20%+ pa for the next three years, driven mainly by its Myriad product."
Morgans has revised its recommendation to speculative buy for Aroa and maintains a 12-month target price of 93 cents.
With a March financial year-end Aroa will report its full year results on May 27.
Mach7 delivers mixed result ahead of leadership change
Morgans healthcare analyst Iain Wilkie has described the Q3 FY25 results of specialist in medical imaging software solutions Mach7 Technologies (ASX:M7T) as "mixed" with a small net decline in contracted annual recurring revenue (CARR) offset by stronger positive operating cashflow.
"Performance YTD has been fair but relatively subdued following delays to the Veterans Affairs (VA) contract and only one new material contract," Wilkie wrote in a note to clients.
"We continue to view new contract growth as more a function of timing (long-lead time) versus demand.
Wilkie wrote Mach7's baseline business continues to perform well, however, has been poised for several years to break into profitability which "frustratingly hasn't quite materialised".
However, Wilkie believes Mach7 remains compelling given its low valuation, strong industry tailwinds, and highly rated product.
"A modicum of success we view as likely to yield a material shift in sentiment," Wilkie wrote.
Mach7 started an on-market share buy-back in March purchasing $1.2m worth of stock to date.
Former head of NZ-based breast imaging software company Volpara Technologies Teri Thomas has been appointed managing director and CEO, starting on July 1.
Volpara was last year was taken over by South Korea's Lunit for ~$200m.
"Again, Mach7 is one of those companies on the verge of building a sustainable, profitable business, which the market is looking for and their contract pipeline has been growing but perhaps not at the pace we would have liked but sustainable profit is in sight," Power said.
Morgans maintains an add rating and 12-month target price of $1.37 on Mach7.
Power's Powerplay: EBR applies for key reimbursement
EBR Systems (ASX:EBR) has applied to the US Centers for Medicare & Medicaid Services (CMS) for the Transitional Pass-Through (TPT) reimbursement scheme for the WISE CRT System for outpatients.
The application follows US Food & Drug Administration (FDA) approval of WiSE, the world's first and only wireless solution for pacing the left side of the heart.
Morgans' healthcare analyst Derek Jellinek wrote in a note to clients that the TPT program was designed to provide additional reimbursement for certain new or innovative medical devices, drugs, and biologicals that do not have an established payment rate.
He said the aim was to encourage the adoption of innovative technologies by ensuring that hospitals are adequately compensated during the initial period (from 2-3 years) when these products are introduced into the market.
CMS has already proposed approval of the WiSE for new technology add-on payment (NTAP) reimbursement to treat inpatients beginning October 1, 2025.
TPT reimbursement for WiSE is expected to be effective from the same date.
"We believe submission for TPT reimbursement is yet another key milestone," Jellinek wrote.
"Not only does it underpin a critical value proposition to support adoption of WiSE for outpatients, but when combined with the proposed approval of NTAP reimbursement to treat inpatients, should help to broaden patient access while lowering barriers to accelerate market acceptance."
Morgans has a speculative buy on EBR and 12-month target price of $2.86.
"Following FDA approval the EBR share price has actually fallen, with a fair amount of expectation built in and we were a little surprised at how deep the retracement has been," Power said.
"Having said that, EBR are in a good position for a targeted launch of WiSE and will be very specific in getting the products in the right hands and ensuring the doctors are properly trained and early sales are successful."
Early days in strategic realignment for MicroX
Adelaide-based cold cathode X-ray machine developer Micro-X (ASX:MX1) raised $4m during Q3 FY25 and a further $2.4m from strategic partner Billion Prima, a Malaysian security technology company.
Additionally, Micro-X entered a development agreement with Billion Prima for $3.2m to commercialise a baggage and parcel scanning unit over the next 12 months.
The agreement together with cash receipts from customers and other project work resulted in a cash balance of $5.1m as of March 31, 2025.
Micro-X has realigned its business to focus on medical imaging, deprioritising security and defence.
"The realignment makes sense and the business is funded to execute on the strategy," Power said.
"It's early days in the realignment and customer receipts from imaging are still modest, although a major US hospital is evaluating the Rover+ mobile x-ray unit which could result in material sales over time.
"The share price has come under a lot of pressure like so many of these microcaps over the last 24 months and it's important they start delivering in terms of getting some big sales orders for their mobile x-ray device and make progress on their contracted projects, which they will see money for when hitting milestones."
Morgans maintain a speculative buy recommendation and 12-month target price of 17 cents for Micro-X.
Morgans upgrades PolyNovo after Macquarie conference
Morgans upgraded wound-care company PolyNovo (ASX:PNV) from a hold to a speculative buy and its 12-month target price from $1.37 to $1.69, after the company's presentation at this week's Macquarie Australia Conference.
PolyNovo highlighted that strong growth was returning with consensus having revenue at ~20% for next three years.
"The company highlighted a record month in March with total sales of $11.9 million , up 71% on pcp and with sales of $84.4m, up 31.1% for nine months," Power said.
Pharmaceutical distributor Sigma Healthcare (ASX:SIG), which completed its merger with discount pharmacy chain Chemist Warehouse in February, also reported strong growth at the conference and in an ASX trading update.
Sigma reported normalised EBIT growth for the group of ~36% for nine months YTD was consistent with Chemist Warehouse Group's H1 FY25 growth.
"The Chemist Warehouse and Sigma merger is all coming together and they have provided enough information that the business is tracking well," Power said.
Morgans has an add rating on Sigma with a 12-month share price of $3.12.
The views, information, or opinions expressed in the interview in this article are solely those of the interviewee and do not represent the views of Stockhead.
Stockhead has not provided, endorsed or otherwise assumed responsibility for any financial product advice contained in this article.
At Stockhead, we tell it like it is. While EBR Systems is a Stockhead advertiser, the company did not sponsor this article.
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