Scott Power: ACCC’s approval of Sigma, Chemist Warehouse union turned heads this week

Morgans healthcare analyst Scott Power had his eyes on Sigma Healthcare this week, which soared after the ACCC approves its merger with Chemist Warehouse.

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• Sigma Healthcare soars after ACCC approves its merger with Chemist Warehouse

• Neuren also pumps as it prepares to receive US$50 million from sale of priority review voucher and bumper results

• ASX health stocks up 1.35% in past five days, while broader market down 1.42% 

Healthcare and life sciences expert Scott Power, who has been a senior analyst with Morgans Financial for 26 years, gives his take on the ASX health care sector for the week and his ‘Powerplay’ stock pick.

Power said in terms of the ASX healthcare sector the big news for the week was the ACCC granting its approval to the merger between pharmaceutical distributor Sigma Healthcare (ASX:SIG) and privately listed discount pharmacy chain Chemist Warehouse.

SIG rose 35% in opening trade on Thursday to $2.63 after the consumer watchdog said the merger – announced on December 11, 2023 – would not substantially reduce competition in the pharmaceutical sector. The share price has since come back to $2.5o and is up ~25% in the past five days.

"There is and will continue to be effective competition at all levels of the pharmacy supply chain, capable of constraining a combined Sigma Chemist Warehouse," ACCC chair Gina Cass-Gottlieb said in a statement.

The ACCC said critical to its decision was a genuinely competitive landscape underpinned by rival wholesalers including Australian Pharmaceutical Industries (API), backed by Wesfarmers (ASX:WES), EBOS Group (ASX:EBO) and CH2.

In an effort to get the ACCC’s green light, SIG proposed a number of court-enforceable undertakings, which were accepted.

“To help ensure those pharmacies in longer-term contracts are able to switch easily to a new wholesaler or banner group, we accepted an undertaking that requires Sigma not to enforce contractual restrictions on exit and ensures payments under contracts do not make it costly for a pharmacy to switch,” Cass-Gottlieb said.

SIG must safeguard and delete data of those pharmacies that choose to switch. The merged Sigma Chemist Warehouse must also continue as a pharmaceutical wholesaler under the Commonwealth Government’s Community Service Obligation (CSO) arrangements for five years.

The union will combine SIG's 400-plus pharmacies, under brands Discount Drug Store and Amcal, and its wholesale distribution business (servicing more than 4000 chemists) with Chemist Warehouse’s 600 franchised outlets.

"We were expecting the ACCC to give the green light but until the final decision is made you're never 100% certain," Power said.

"It was good to see the undertakings provided were sufficient to enable the ACCC to give the sign off."

ASX Health Care index

Late afternoon on Friday the S&P/ASX 200 Health Care index (ASX:XHJ) was up 1.22% for the past five days, while the benchmark S&P/ASX 200 (ASX:XJO) rose 1.1% for the same period.

Power is optimistic about the remainder of 2024 for several reasons.

"The uncertainty around the US elections is now off the table, markets are in a seasonally stronger part of the year and investors are looking to rate cuts globally to continue to drive the market," Power said.

Avita heads towards cashflow breakeven

Power's top pick last week, the dual Nasdaq-listed wound-care company Avita Medical (ASX:AVH), reported its Q3 FY24 results, with the company reconfirming it expected to achieve cash flow break-even profitability by the end of Q3 FY25.

In a note to clients Morgans healthcare research analyst Iain Wilkie said results were in line with guidance. Revenue for the quarter was US$19.5m up 44% on the prior corresponding period.

Gross margins were 83.7%, with slight margin compression attributed to engineering and validation costs for Recell Go (a next-gen autologous cell harvesting device), which was approved by the FDA in May for thermal burn wounds and full-thickness skin defects.

Net loss for the period was US$16.2m, up from Q2 FY24 of US$15.4m). Cash and cash equivalents as at September 2024 were US$44.4m.

The company reconfirmed FY24 revenue guidance expected to be US$68m to US$70m, up 37% to 41% on FY23.

"A strong quarter, meeting Q3 guidance and reconfirming FY24 guidance," Wilkie wrote.

"The maintenance of profitability guidance for cash flow breakeven by no later than 3Q25 is a positive.

"The long-term opportunity remains, the significantly larger addressable market opportunity for full-thickness skin defects remains."

Morgans has an 'add' rating on Avita and current 12-month target price of $4.56.

Power's Powerplay – Polynovo's strong revenue growth

Power has chosen another wound-care company, PolyNovo (ASX:PNV), as his top pick for the week.

"Polynovo has been quite weak and drifted back to the $2 mark from $2.50 over the past month," Power said.

"Part of the reason was that there was no trading update provided at the AGM, which left investors a little bit lukewarm.

"But if you look at consensus numbers for the next couple of years the expectation is that revenue is going to grow by at least 25% so we would suggest at around $2 Polynovo is very good buying."

Morgans has an add rating and 12-month price target of $2.85 on PNV.

Neuren soars on US$150m sale of PRV and positive update

Neuren Pharma (ASX:NEU) is up more than 18% in the past five days after announcing its Nasdaq-listed, US partner Acadia had sold a priority review voucher (PRV) for US$150m along with providing a positive update following Acadia's Q3 FY24 results.

NEU will receive one third (US$50m) from Acadia's sale of the PRV, attached to US FDA approval of a drug for a rare paediatric disease. The Rare Pediatric Disease PRV program is designed to encourage development of treatments for serious rare diseases that affect children.

A PRV can be used to expedite the review process for a different product, or sold to another company.

Net sales of trofinetide (sold under the brand Daybue in the US to treat Rett Syndrome) for nine months exceeded the full-year threshold of US$250m for NEU’s first sales milestone income of US$50m.

NEU said its Q3 FY24 royalty income was $13.2m with, the nine months to date total $37.5m. NEU forecasted its full year 2024 income to be $216 to $218m.

"The Acadia third quarter results were in line with expectations," Power said.

"That is two pieces of news which has basically seen $2 put onto the Neuren share price.

"It has been weak but the news has really provided an updraft for the share price."

READ Health Check:  Neuren’s ‘Willy Wonka’ voucher shows how a piece of paper can be worth US$50m

Favourable US decision to benefit Telix

Telix Pharmaceuticals (ASX:TLX) is up more than 8% in the past five days after the US Centers for Medicare and Medicaid Services (CMS) announced that it would pay separately for specialised diagnostic radiopharmaceuticals for Medicare Fee for Service patients in the hospital outpatient setting, beyond the transitional pass-through payment period.

The fast-growing radiopharmaceuticals company said the new separate payment rule would apply to its prostate cancer imaging agent Illuccix after its pass-through status expires, from July 1, 2025.

It will also apply to the company's pipeline of investigational diagnostic imaging agents including TLX007- CDx, a new product for PSMA imaging of prostate cancer.

TLX said that, should TLX007-CDx be approved in the US, it would be the only company with two PSMA-PET imaging agents on the market, enabling broader patient reach, including into currently underserved populations, and with greater flexibility to offer the product most suitable for a patient based on their clinical profile, indication and eligibility for reimbursement.

"The CMS decision provides some additional certainty around the payment for Telix's diagnostics, which has seen their share price up," Power said.

Garbage dump expansion in low-income countries' pandemic threat

Expansion of garbage dumps in low-income countries concentrates people, waste and animals in the same areas and could lead to the next pandemic, according to a new study.

James Cook University Professor Bruce Gummow is a specialist in veterinary preventative medicine (epidemiology). He is also the co-author of a new study with Mahidol University in Thailand about the interaction between waste, animals and the millions of people who make their living as garbage pickers – scouring rubbish dumps for material to resell or reuse.

Professor Gummow said an increasing trend in epidemics from zoonotic diseases, which jump from animals to humans, and emerging infectious diseases (EIDs) has been observed worldwide.

"Garbage dumps act as an interface between humans, animals, and the environment, from which EIDs could arise," he said.

The study analysed nearly 350 scientific articles examining aspects of the situation.

"A high population density of multiple species at a dump site increases the rate of contact within and between species, allowing for the rapid transfer of pathogens and an increased chance of new pathogen strains emerging."

The professor said animals that visit garbage dumps were found to have a high prevalence of infectious diseases and many people who worked as garbage pickers did so in unhygienic, unhealthy conditions and are also generally in poor health.

“Most waste pickers in developing countries were informal workers who were unable to access proper healthcare and, as a result, could potentially carry diseases without being aware of it or able to do something about it if they were," he said.

“We need to urgently reduce interaction between humans, animals, vectors, and pathogens in garbage dumps if our aim is to reduce the emergence of new diseases which can rapidly turn into global pandemics."

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.

Originally published as Scott Power: ACCC’s approval of Sigma, Chemist Warehouse union turned heads this week