Australians ditch Covid-19 PCR tests despite latest wave, causing Sonic’s revenue to dive

After delivering pathology companies a bonanza, government-funded pathology testing to diagnose Covid-19 has fallen dramatically, Sonic Healthcare’s latest trading update reveals.

Australians queuing in their cars for PCR tests is now a rare sight.

Boom times from Covid-19 tests have come to a screeching halt for ASX-listed pathology group Sonic Healthcare.

Despite Covid-19 infections flaring up again, many Australians are choosing to not have government-funded pathology lab testing to confirm their diagnosis. As a result, Sonic’s pandemic-related revenue has dived 64.8 per cent to $280m in the four months to October 31.

This compares with Sonic reaping $795m from PCR testing in the same period last year.

It comes as the federal government has scrapped mandatory isolation periods, with even Victorian Premier Daniel Andrews – who presided over Australia’s longest lockdown – declaring an end to the pandemic.

In a statement to the ASX, Sonic said Covid-19 testing delivered a higher profit margin than its base operations, with its earnings before interest, tax, depreciation and amortisation (EBITDA) plunging 37.3 per cent to $621m in the four months to October 31.

“As Covid-19 testing largely utilises the infrastructure of Sonic’s base business, the marginal profit on that revenue is higher than for the base business alone. The change in the level of Covid-19 related revenues between periods therefore has a disproportionate impact on EBITDA and margins,” the company said.

There has been a significant drop-off in the number of Australians seeking PCR tests for Covid-19.

“The level of marginal profit on Covid-19 revenue has reduced in the current period versus the prior year due to significantly lower testing volumes and fee reductions in several markets.

“Sonic’s operations have intentionally maintained surplus Covid-19 testing capacity (including staffing) in case of new waves/strains. Costs are being gradually wound down to reflect recent volume levels.”

Taxpayer-funded Covid-19 tests have delivered a bonanza to listed pathology companies such as Sonic Healthcare, Healius, Australian Clinical Labs and Integral Diagnostics, fuelling record earnings and generating billions of dollars in revenue.

Sonic chairman Mark Compton said at the company’s annual meeting on Thursday that pandemic-related services helped propel Sonic to a $1.5bn net profit on revenues of $9.3bn last financial year, which were increases of 11 and 7 per cent respectively.

“We continued our progressive dividend policy, rewarding shareholders with a 10 per cent increase over the previous year, to $1 per share for the year, a significant milestone for the company,” he said.

“From the payment of our inaugural dividend of 2c per share in 1994, the annual dividend per share has never decreased. Thanks to the strong performance of our Australian operations, both dividends for the year were fully franked.”

Queenslanders waiting in line for a PCR test during the early days of the pandemic. Picture: Getty Images

On a month-on-month basis, Covid-19 testing revenue increased $2m for Sonic to $57.7m in October. Testing revenue had declined steadily since July, falling from $94.6m to $72m and $55.6m in August and September respectively.

Analysts forecast in January that Covid-19 was set to inject $160m-plus a year into the coffers of Australia’s biggest pathology companies when the pandemic subsides and the virus becomes akin to the ’flu.

“Our base-case scenario is for long-run Covid PCR testing revenues in Australia to be about $164m, which is about 20 per cent of the level in FY21,” Royal Bank of Canada analyst Craig Wong-Pan said at the time.

“This estimate is based on the size of Medicare-funded influenza tests in FY19, assuming the private Covid market is roughly the same size as the publicly funded market and then including a small increase for higher prices and growth.

“Based on current pathology market shares, this would imply $76m of revenue for Sonic Healthcare, $56m for Healius and $26m for ACL.”

The estimate is more tempered than Citi’s, which also said in January that it expected Covid testing to cost $2.2bn this financial year. Testing costs are set to fall to $900m in the 2023 financial year and to $298m the following year.