We’ve had a few reader questions about Pro Medicus and Nanosonics, two of Australia’s medical device stars; today I’m taking a look at them, plus three other medical device stocks that could offer more rewarding buying at the moment than PME and NAN, which look fairly fully priced at current levels.
1. Pro Medicus (PME, $58.00)
Market capitalisation: $6 billion
Five-year total return: 60% a year
Analysts’ consensus target price: $57.25 (Thomson Reuters), $54.49 (FN Arena)
Pro Medicus is not only a top medical technology stock – it’s one of the Australian market’s best technology stocks, full stop.
I looked at Pro Medicus (and Nanosonics) in November 2014 [1] when PME was trading at 88 cents and NAN was at 97 cents.
At the time, the market was not able to get its head around what a world-beating technology its
Visage file compression and streaming technology was. Visage is perfect for the digitisation of healthcare imaging: it allows radiologists to organise, enhance and manipulate medical images, including generating 3D images from scans to get a better picture of patient health. Its archiving system stores scans, with the platform allowing medical professionals to view information remotely, even on a smartphone, and be able to give instant diagnoses.
The company is expanding Visage’s use into other fields such as cardiology and ophthalmology, which also involve large amounts of imaging. Where it started as a system that was installed onsite, Visage is fully cloud-based, and is available to clients on a pay-per-view basis, if they want that. Most revenue in PME’s most important market, North America, now comes this way. It’s another tailwind behind Pro Medicus – add cloud-based convenience to the increased digitisation of imaging software and health records in general, and the ageing population. The company is also at the forefront of using artificial intelligence (AI) to help clinicians interpret images, to make diagnostic decisions remotely. Even COVID has helped, as Visage has helped radiologists work remotely.
I spoke to a fund manager recently whom I cannot name – the conversation was under Chatham House-rules – who said Pro Medicus is ten years ahead of its competitors, in what it offers its clients, and in its ability to handle the file sizes required.
Pro Medicus signed a string of big deals in FY21, it boosted its revenue by 19.5% to $67.9 million, and lifted net profit by 33.7%, to $30.9 million. Its gross margin was 63.2%, and on a net profit basis, about 45%. Return on equity was about 43.5%. It is a great story, and analysts see continued profit growth. PME is so busy conquering North America that it has barely got started in Europe.
But in the medium term, the stock has shot past fair value. PME is up almost two-thirds in 2021 alone.
2. Nanosonics (NAN, $6.49)
Market capitalisation: $1.9 billion
Five-year total return: 13.1% a year
Analysts’ consensus target price: $6.28 (Thomson Reuters), $6.22 (FN Arena)
I also looked at Nanosonics in April 2020 [2], at $5.80. The company is an infection prevention specialist that has disrupted the way that ultrasound probes are disinfected between use: where traditional disinfectant methods use corrosive chemicals that are both inefficient and potentially hazardous to the user, Nanosonics’ product Trophon is a biocide that is much more efficient and environmentally friendly: the only by-products are oxygen and water, meaning no exposure to toxic chemicals, and no hazardous by-products or waste to dispose of afterwards. The system is now sold in 21 countries, with North America contributing more than 90% of revenue.
In FY21, Nanosonics reported a 3% increase in revenue, to $103.1 million, but a 15% slide in net profit, to $8.6 million. This result was better than the market expected, given that COVID-19 – while it certainly highlighted the need for infection prevention – made it difficult for Nanosonics in terms of getting into hospitals to sell systems and install them. And analysts are quite bullish on earnings prospects this year and next: on FN Arena’s consensus numbers, analysts expect 54% earnings per share (EPS) growth in FY22 and 74% in FY23, particularly as the US ultrasound market grows.
When reporting its result in August, Nanosonics also introduced its long-awaited new product, Nanosonics Coris, aimed at transforming the cleaning of flexible endoscopes. The company says that more healthcare-associated outbreaks have been linked to contaminated endoscopes than any other medical device. And with more than 60 million flexible endoscopy procedures being conducted across the United States and the five largest markets in Europe each year, this provides it with a significant market opportunity in the coming years. However, NAN will launch the product in 2023.
3. AVITA Medical (AVH, $5.00)
Market capitalisation: $124 million
Five-year total return: 128.5% a year
Analysts’ consensus target price: $9.11 (Thomson Reuters)
Regular readers would know that I’ve been following regenerative medicine company AVITA for quite a while, first mentioning it in this newsletter in September 2014 [3], at 9.6 cents (the equivalent of $1.92 today). I took another look a year ago [4], at $7.86, which hasn’t proven such a good call, as COVID-19 curtailed the company’s efforts to roll-out its RECELL technology in its major market, the US.
The RECELL technology, which was developed by plastic surgeon Professor Fiona Wood at Royal Perth Hospital to treat burns patients, takes a small sample of the patient’s own skin, from which, using a proprietary process, AVITA prepares a “suspension” of skin cells, which is then sprayed onto areas of the patient requiring treatment and regenerates natural healthy epidermis. The beauty of the RECELL process is that because skin cells contain information to “know” what a person’s skin should look like – for example, facial skin cells “know” that they are facial skin cells – they can signal and recruit other cells, including nerve cells, to come in.
The technology is better than the current standard-of-care for burns, which is the skin graft: the US Pentagon, which has helped AVITA with sponsoring trials, and has used RECELL to treat personnel wounded in Afghanistan, describes it as offering a possible “paradigm shift” in skin injury treatment. Apart from burns, RECELL also has applications in other skin related areas such as chronic wound care (trauma, ulcers), plastic surgery, vitiligo (an auto-immune disease that results in a loss of colour or pigmentation in patches of skin), aesthetics uses (for example, skin rejuvenation) and tattoo removal. Because RECELL uses the patient’s own skin, the body will not reject the treatment. The RECELL system was approved by the US Food & Drug Administration (FDA) in September 2018. In June this year, the company received FDA approval for expanded use of RECELL for paediatric patients.
The main reason why you would buy – or stay on – AVITA is the prospect that RECELL becomes the “standard of care” in how large burns are treated in the US, with the bonus of AVITA extending the reach of the RECELL platform technology into areas such as vitiligo, paediatric scalds, wound care, soft-tissue reconstruction (for example, after car accidents), cancer reconstruction and regenerative dermatology, for example, anti-ageing treatments. In August, AVITA reported that the FDA approved the company’s request to amend its pivotal clinical trial investigating RECELL’s application in vitiligo lesions, to bring-in data from its other research programs and speed-up the trial.
AVITA is another great Australian biotech story – although it has re-domiciled to the US – and longer-term, analysts and quite a few fund managers are very bullish on its prospects.
4. PolyNovo (PNV, $1.96)
Market capitalisation: $1.3 billion
Five-year total return: 48.1% a year
Analysts’ consensus target price: $2.50 (Thomson Reuters), $2.62 (FN Arena)
Coming out of research from the CSIRO, PolyNovo is aiming at a similar market to AVITA, but with a different technology. PolyNovo’s NovoSorb Biodegradable Temporising Matrix (BTM) technology is a lattice-style device to treat serious burns and other major wounds: it is a 2-millimetre-thick biodegradable polymer foam wound scaffolding that has three layers: a sealing membrane, a bonding layer and the foam scaffolding that enables integration.
NovoSorb provides a ‘home’ for cells to migrate and disrupts the ability of collagen protein fibres to form knots and bundles. It is placed on the wound area where it forms a closed protective zone, temporarily closing the wound and helping the body to generate new tissue. After use, the material biodegrades and is excreted either through urine or respiration. The material can be produced as a fibre, a cardiac stent or films and foams.
PolyNovo has FDA approval for NovoSorb and sells it in the US; it was approved for sale in Europe in December 2019. The company says it has a US$1.5 billion market opportunity in the treatment of full-thickness wounds and burns – but that NovoSorb could easily be extended into the hernia and breast treatment markets, which are even bigger.
The major difference with AVITA is that where the former creates a living layer of skin – a new epidermis – PolyNovo’s product works at deeper layers, the dermis, slightly underneath the skin. PolyNovo’s product is more applicable to deeper wounds.
PolyNovo also looks to have a nice runway for growth.
5. 4DMedical (4DX, $1.58)
Market capitalisation: $418 million
Three-year total return: n/a
Analysts’ consensus target price: $1.70 (Thomson Reuters)
Imaging company 4DMedical (4DX) surged on to the ASX screens in its August 2020 float, with the shares, issued in the prospectus at 73 cents, opening for trade at $1.47. 4DX reached $2.60 in October 2020, but more than halved subsequently, plumbing $1.19 in May 2021.
4DMedical aims to disrupt the respiratory diagnostic imaging market with its unique four-dimensional lung imaging technology, XV Lung Ventilation Analysis Software (XV LVAS), which maps and measures lung motion and air flow by converting sequences of X-ray images into four-dimensional quantitative data. The 4Dx technology accurately and quickly scans lung function as the patient breathes, to provide sensitive, early diagnosis and to monitor changes over time. At the heart of the process is a proprietary technique 4DMedical has developed, inspired by wind-tunnel technology, that combines fluoroscopy and advanced visualisation to generate high-resolution images of the motion of, and airflow through, lung tissue.
In May 2020, the XV LVAS technology received 510(k) clearance from the FDA, following a major confirmatory clinical trial of the XV Technology, conducted at Cedars-Sinai Hospital in Los Angeles, California. The clinical trial showed that XV gave clinicians much more detailed information than the commonly used pulmonary function test (PFT) and computed tomography (CT) imaging methods, confirming 4Dx’s belief that the unique and non-invasive XV technology enables unprecedented insight into pulmonary functioning, which is critical in the analysis and treatment of respiratory diseases.
The clinical trial demonstrated that XV not only matched the performance of current ‘gold-standard’ measures and other clinically available measures, it was more predictive than other measures in assessing the onset of conditions such as radiation-induced pneumonitis and/or pulmonary fibrosis.
In addition, the trial found that XV was clearly superior to the major incumbent testing technologies, PFT and CT, in detecting loss of regional lung function associated with early-stage disease progression, both in terms of sensitivity to structural changes in the lung (where it was compared to CT) and in standard lung function tests (where it was compared to PFT.) 4DMedical says XV is a break-through medical technology and a potentially world-changing advance in better and more timely diagnosis – and thus, improved treatment outcomes – for all lung disorders, including asthma, chronic obstructive pulmonary disease (COPD), cystic fibrosis and cancer.
4DX has the technology in eight separate clinical trials, and three clinical pilot programs, in Australia and the US. Earlier this month it announced the successful completion of Phase One of a clinical pilot program with Australia’s leading medical imaging provider, I-MED Radiology Network (I-MED), whose radiologists have been using XV LVAS in patient settings, on respiratory diseases including asthma, COPD, bronchiectasis, sarcoidosis, silicosis and “long COVID.” The company says Phase One of the trial resulted in “overwhelmingly positive feedback from I-MED radiologists and patients.”
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