Health Check: Investors catch a falling knife as biotech big names bounce from lows 

Investors who picked the bottom of the recent large cap biotech rout have snared enviable windfall gains.

Investors have made windfall gains in beaten-down big cap biotechs, but it's a case of catching a falling knife. Pic via Getty

• The big-name biotechs present short-term trading opportunities for bold investors

• Nothing to see here, says Sigma Healthcare

• Broker reckons Mach 7 shares should be worth four times more than their current value

 

The topsy-turvy market has created some lucrative trading opportunities in our big name biotechs – but like a good joke it’s a case of getting the timing right.

In the case of radiology imaging giant Pro Medicus (ASX:PME), the stock has declined 7% year to date.

Yet astute investors buying at the April 7 low of $176 are 35% ahead – not bad for a month’s work.

Those buying a year ago have more than doubled their money, despite long-term rumblings that the stock is overvalued.

The experts hold mixed views.

Broker Barrenjoey recently raising its recommendation on the stock to “overweight” with a price target of $275.

Macquarie Equities has a target of $257 but notes the company’s recently announced contract renewals “are clearly largely factored into the valuation”.

Now in the ASX top 100, Pro Medicus is automatically included in index funds and that has kept the shares well primed.

Punting on recovery

Telix Pharmaceuticals (ASX:TLX) shares are about 6% off their record $31.14 on February 25.

But those who bought at the April 7 low of $23.15 are 26% to the good. The stock is 22% higher year to date and almost double on a year ago.

Are they good value? Depends on who you talk to.

UBS and Bell Potter ascribe a $36 a share valuation, implying chunky 24% upside. Morningstar reckons the stock is worth only 19.50 – 33% less than its current level.

Those who bought into CSL (ASX:CSL) at a record $336 in February 2020 have been short-changed to the tune of 24%.

The stock has declined 10% year to date.

But those who weighed in at $233 on April 11 are 9% to the good.

Shares in ResMed (ASX:RMD) and Cochlear (ASX:COH) have also gained around 10% and 8% respectively from their mid-April lows.

The lesson is that beaten-down greats usually present opportunities, but of course no-one rings the bell at the low point.

Damn!

Broker says Mach 7 will put on the after burners

What about the challengers?

Imaging minnow Mach7 Technologies (ASX:M7T) has long been viewed as a mini-version of Pro Medicus, but has yet to take off at warp speed.

In fact, the shares have halved over the last year.

The US focused Mach 7’s quarterly results last week revealed no new contracts, but receipts gained 28% to $11.4 million.

Cash flow improved to $2.6 million and contracted annual recurring revenue is at a healthy $30.8 million.

Broker Morgans values the stock at $1.37 – around four times the current valuation.

Investors await the new CEO Teri Thomas, who starts in July.

The dynamic Thomas headed the NZ-based breast imaging house Volpara Technologies, which last year was taken over by South Korea’s Lunit for around $200 million.

Mach 7’s $80 million market cap is backed by $25 million of cash.

The board concurs the stock is undervalued, having instituted a share buyback program that has acquired $1.2 million of stock to date.

Sigma chemist merger is going to script

No news is good news at Sigma Healthcare (ASX:SIG), which reports that no nasties have emerged since the company officially subsumed the larger Chemist Warehouse on February 2.

In a trading update, the chemist retailer and drug wholesaler says underlying earnings have risen 36% in the last nine months.

That’s at the same clip as Chemist Warehouse’s December half earnings, up 36% to $328 million.

Sigma/Chemist Warehouses has become the giant of the apothecaries with 879 franchises stores, 3500 wholesale pharmacy customers and close to $10 billion of annual revenue.

The company also reports that it expects to grow retail outlets at the same clip as over the last five years: 33 per year.

The company is also eyeing judicious expansion offshore, where it has 81 stores (mainly in New Zealand but also in Ireland, China and Dubai).

Still, uninspired investors today sold down the stock by about 5%.

Cardiex vies for local approval

Australia might be a puny medical device market relative to the US, but given the Trumpian uncertainties it’s still an attractive geography.

Having won US Food and Drug Administration (FDA) approval of its Conneqt Pulse heart app a year ago, Cardiex (ASX:CDX) has lodged an approval application with the local Therapeutic Goods Administration (TGA).

“The world’s most advanced personal arterial health monitor”, Conneqt Pulse provides users with a holistic snapshot of their cardiovascular system, including central blood pressure and arterial stiffness.

The app includes the Cardiology Report, a comprehensive assessment of heart health.

The science is based on pulse wave analysis, which deciphers the hidden signals within each heartbeat to generate advanced vascular biomarkers.

Since launching in the US in mid-January Conneqt Pulse sales are off to a good start, with 3000 units sold.

By the end of June management expects a sales run rate of 900 units a month, for annual revenue of $4-5 million.

Cardiex also has devices for hypertension, cardiovascular disease and other vascular health disorders.

In its quarterly report last week, the company said the Trump administration’s cost cutting drive had affected sales to pharmaceutical companies and research organisations in the March quarter.

This is because clinical trials have been delayed or cancelled, partly because of the funding squeeze on the National Institutes of Health (which funds hundreds of studies).

As for the tariff threat, the company is “actively monitoring developments and exploring mitigation strategies, including supply diversification and regional logistics optimisation”.

The sales projections for Conneqt Pulse are based on existing inventory not subject to tariffs.

The TGA lodgement follows the recent finalisation of a market agreement between Cardiex and manufacturing partner, Andon.

The TGA registration process is expected to take three to six months.