Where to find value opportunities in Australian healthcare and 3 stocks to watch

Australia is home to some extraordinary biotech success stories, and according to Wilson Advisory’s Dr Melissa Benson, the outlook remains strong. That comes with a caveat, however—the majority of ASX-listed healthcare companies are heavily dependent on US sales and, therefore, subject to challenges in that market.

While we all talk about the big names like CSL and Resmed, the ASX holds far more opportunities if you know where to look. Benson is seeing the most opportunity in oncology and rare diseases, with Australia hosting several leaders in these spaces.

In fact, Benson notes that there are opportunities for value hunters in the rare disease space and shares her two preferred picks.

“In both instances, the market is totally focused on existing revenue streams (drugs on market) and if they may be slightly downgraded in the near-term (which has an immaterial impact on future earnings) and are missing the far bigger pipelines opportunities (5-10x),” she says.

In this final written interview for the biotech mini-series, Benson discusses the big opportunities in Australian healthcare, why the Ozempic obsession is far from over, and three stocks she is watching with major catalysts ahead. Dr Shane Storey also joined to share Resmed and CSL’s ongoing prospects.

What is the outlook for Australian healthcare and are we heading into a biotech boom?

Australian Healthcare’s outlook remains strong, with healthcare a sector supported by (largely) market independent fundamentals like aging and societal demand as we learn more and advance new technologies. Digitisation of healthcare has also helped grow the market.

If we think about ASX-listed healthcare, the majority is really dependent on the US market as a sales driver—and of course, there are some interesting political battles ongoing there. However, unlike some other sectors, we expect a defensible growth outlook.

More broadly, biotech has had a strong 12 months, but earlier-stage (pre-revenue) companies are very much at the mercy of “risk-off” market swings. Political uncertainty in the US market can be a big driver of risk appetite that, in spite of company fundamentals, can make for a tough time for biotech.

Happily, I think we are coming out of a tougher period across 2022- 23 and markets are receptive to higher risk right now. 

In Australia, local success stories like Telix (ASX: TLX), Neuren (ASX: NEU) and Clarity Pharmaceuticals (ASX: CU6) are certainly helping local interest levels in biotech investment.

Which areas of the biotechnology space do you see the most opportunity in?

Oncology is always a key space in biotech given the sheer size of the growing market – radiopharmaceuticals, in particular, is a huge growth area within oncology – and there are numerous ASX-listed companies really leading the way, such as Clarity Pharmaceuticals and Telix Pharmaceuticals.

Rare disease is another key area of opportunity – particularly for smaller ASX-listed biotech where the end market opportunity size can be significant, but the investment in R&D and marketing to address those markets is a lot smaller than something like oncology (smaller/faster clinical trials, less competition/no approved alternatives). Neuren is a key example, but others like PYC Therapeutics (ASX: PYC) and Percheron (ASX: PER) still have those opportunities in front of them.

What are the biggest risks you are seeing across the sector?

Benson: 

Risks for the sector include market risk appetite, as mentioned before. Particularly for earlier stage companies in development that may not have earnings or even revenues – in a risk off environment, investors can flee to “safer” pastures. But fundamentally, in Healthcare and specifically biotech, (drug/device) clinical trial risk and regulatory approvals risk are always the major ones for those relevant stocks that investors need to take a view on.

Where are you seeing value opportunities across the healthcare and biotechnology sector?

In rare disease. We have seen two key value opportunities present in past months in Neuron and Clinuvel Pharmaceuticals (ASX: CUV).

In both instances, the market is totally focused on existing revenue streams (drugs on market) and if they may be slightly downgraded in the near term (which has an immaterial impact on future earnings) and are missing the far bigger pipeline opportunities (5-10x) that in each case open up markets that are multiples of their existing revenue streams. Small downgrades to sales of either DAYBUE (in case of NEU) or SCENESSE (in case of CUV) become immaterial to the investment case for each stock.

Positive investment theses are focused on new opportunities: being a new drug (NNZ-2591) for NEU that has been successful in Phase II trials; or a new indication for CUV (vitiligo) that expands their existing drug’s market by ~10 fold. Short term focus, and lack of longer-term (1-2 year) vision sees both trade well below (30% or more) an appropriately risked valuation for each.

Weight loss drugs like Ozempic have been a big media focus. Do you expect this to continue and are you seeing investment ideas in this theme?

We completely expect that weight loss drugs and GLP-1s will continue to be in our news flow for years to come, as there are a swathe of new drugs in development – all attempting to improve upon the existing marketed options. Investment in this theme still poses many of the same challenges as with any drug – competition.

In this case, there are a huge number of biotech and pharma companies racing to enter this market which we anticipate to become very crowded, and whilst it’s a huge market to share, we are yet to see the longevity of use of these drugs.

Early reports suggest they are challenging to tolerate, and increasingly we are seeing reimbursement support be restricted or dropped. These are headwinds for adoption of these drugs as without reimbursement (notably in the US), they become too expensive for patients to access – and then we may see a race to the bottom on pricing. So, there are still a lot of moving parts, and the first generics for the segment are coming to market now and will continue over the coming years – that should shake things up.

We have actually been keenly identifying companies that have been unfairly discounted due to GLP1s (seen as competition) such as ResMed (ASX: RMD) and seen that as a way to find investment ideas out of the GLP1 thematic.

ResMed endured concerns over the impact of Ozempic early in the year but its share prices have since recovered. Can it maintain its growth?

Storey: 

ResMed achieved 20% profit growth in FY24 notwithstanding some transitory headwinds at the start (e.g. supply chain constraints and becoming a victim of their own success, absolutely dominating the US market which is lower gross margin for them).

We assess ResMed can back this up with another 15% profit growth in FY25. 

The ‘GLP-1 narrative’ certainly threw up some challenges for the share price. We felt that the real-world evidence ResMed disclosed early in 2024 would be the end of that saga, because those data spoke to how effective combination therapy (a GLP-1 drug taken in combination with CPAP) could be.

In parallel, the consistent feedback we’d received from the clinical community spelled out the limitations of GLP-1s (generally as treatments for diabetes and obesity) and as incomplete solutions to treating sleep apnoea (when used alone).

At times, it appears that investors lost sight of what was actually happening in the sleep industry and ResMed’s competitive position within it. ResMed's main competitor (Philips) has been sidelined by a product recall since 2021 and may never return to its former position. Smaller competitors are investing to scale up and compete but we assess that will be a hard slog for them.

CSL (ASX: CSL) had a major setback earlier this year. How is the rest of its business looking and is its pipeline sufficient to maintain market dominance?

Storey: 

For investors, CSL’s gross profitability has been the focus for these last post-COVID years. We are confident that their FY24 result will confirm progress on that front. It has just taken a long time for some of the longer-dated, unhelpful pandemic impacts to work their way through CSL’s financial statements. We assess that 1H24 was a turning point and there’s a strong pathway of improvement to come.

We are also interested in how CSL's plasma products complement some of the in-hospital products that came in via the Vifor Pharmaceuticals acquisition. The R&D pipeline still plays a massive role in how we look at CSL.

When the CSL112 R&D program failed earlier this year, we were disappointed because we really liked the asset and could see how transformative it could have been to CSL Behring’s gross margin. That said, there are pipeline assets emerging.

We are particularly enthusiastic about CSL’s developmental product for treating hereditary angioedema – a compound called garadacimab. 

We’re expecting major market approvals for that in a few months’ time. 'Gaz' as we refer to it, is a potential blockbuster and super-profitable.

What criteria do you use to assess biotechnology companies?

We first and foremost look at the quality of the clinical data – whether it be a drug or device or diagnostic – we assess how it compares to the current standard of care and if it could change clinical practice (by superseding another drug or device, or providing a first approved treatment, or displacing another process/test). 

If the clinical data stacks up, we look at the market size (typically in the USA and Europe – as they are really the major markets for biotech) and the competitive landscape (i.e. what does it need to displace to make sales). 

If there is a clear opportunity that is unmet, or you can see a good (and importantly feasible) way in which they can take material share – that is when we dig further and value the business. 

These are really core: a) supportive data; b) large market; c) a way to displace or take material share. We also look at risk profiles of the drugs – for example, from the perspective of them receiving marketing approvals - a new class of drug with a high side effect profile, may have a different risk profile for approval than a known drug but simply in a new formulation. 

All of this is taken into account as criteria to form our view.

What three stocks are you watching and why?

3 stocks on the top of the list include Clinuvel, Neuren and Percheron. All three have important clinical trial readouts in the coming 12 months that will be catalysts.

In the case of Percheron, they have an all-important clinical trial readout in December that we have waited several years for! If we see that their drug is able to help boys with a rare disease, Duchenne muscular dystrophy, retain their upper limb function it could set up potential European approvals and open up discussions with US regulators about expanding their trial/access.

Neuren also has a rare disease trial readout, this time in Angelman’s syndrome, where they are seeking to show that their drug is able to improve symptoms of the disease, like communication and cognition. This would represent the 3rd positive readout from the same drug across different neurodevelopment disorders – all of which lack effective approved treatments.

Finally, Clinuvel should have a readout from their Phase III trial in vitiligo – another rare condition where people loose skin pigmentation, with a very high attached mental health burden. CUV are seeking to show that their already approved drug, SCENESSE, has applicability across multiple diseases beyond where it is approved for use today.

Can you share an interesting or strange thing you’ve learnt or experienced across your time analysing healthcare and biotechnology companies?

An interesting or strange thing… is perhaps the perception from investors that medical device companies are less “risky” than drug companies to invest in. And whilst that is certainly true in terms of the clinical trial development pathway – where devices are subject to far lower ‘hurdles’ than drugs to prove their clinical utility, I would perhaps argue, that medical devices can face a tougher job once approved to make sales vs approved drugs.

We are generalising, but a drug approval, in many instances, grants you some type of market exclusivity, and we see earnings develop quite quickly from successful drug launches that typically tend to have a longer lead time in devices, often just due to the margin differentials between the two (drugs generally higher margin vs device).

Learn more

Wilsons Advisory think differently and delve deeper to uncover a broad range of interesting investment opportunities for their clients. To read more of their latest research, visit their Research and Insights.

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