Followers may have missed the plug in the AFR earlier in the...

Followers may have missed the plug in the AFR earlier in the week:

by Trevor Hoey
While the likes of Cochlear and ResMed tend to dominate the headlines in the medical equipment space there is a clutch of smaller players consistently delivering solid returns and laying the foundations for future growth.

Though it would be a substantial stretch to say these will be the Cochlears of tomorrow, they are still worth considering, particularly given their more conservative valuations especially relative to medium-term earnings.

What can definitely be said is that these companies are either profitable or have clarity regarding near-term earnings visibility.

This sets them apart from the likes of drug developers that are counting on blue sky from products that will take years to refine, as well as passing the complex and drawn-out approval stages, before they are eventually brought to market. In far too many cases capital is chewed up and earnings fail to materialise.


Two of the companies reviewed were LifeHealthcare Group and Nanosonics, both of which have had strong share price runs in recent months on the back of promising news flow. Paragon Care is also trading close to its 12-month high, but still appears good value given its conservative price-earnings multiple and predictable outlook.

The group is one of Australia's leading providers of integrated services to Australia's health and aged-care markets, effectively providing significant leverage to the ageing population thematic.

Not only is there robust growth in spending by consumers in this sector, the need for investment has also been recognised at a government level and this should contribute to revenue growth. Products distributed by Paragon include beds, mattresses, storage and shelving solutions.

Paragon has been complementing these organic income drivers with acquisitions. These included LR Instruments and Richards Medical, which were purchased more than 12 months ago and have now been successfully integrated into the group's existing business.

In October Paragon acquired Scanmedics providing exposure to new areas. The group distributes high-end equipment used for procedures such as specialist ultrasound, newborn care and cosmetic medicine.

This is expected to generate revenues of more than $10 million in 2014-15. To put this in perspective, analysts at Bell Potter are forecasting Paragon to generate revenues of about $30.7 million in 2014-15, driving a net profit of $2.7 million, representing earnings per share of 4.1¢.

Earnings per share growth of 15 per cent is forecast in 2015-16, placing the company on a forward price-earnings multiple of about 12.

Bell Potter has a buy recommendation on the stock noting about 45 per cent of revenues are derived from the sale of its proprietary-designed and -manufactured products.

LifeHealthcare Group distributes a range of equipment used in the spinal, orthopaedic and cardiology areas. Following last week's $9.6 million acquisition of M4 Healthcare the company has established a significant market presence in the point-of-care ultrasound market in Australia and New Zealand.

Management highlighted that the acquisition extends the group's existing presence in cardiac ultrasound into the fast-growing point-of-care market, effectively providing access to important new customer segments including emergency departments, intensive-care units and general anaesthesia.

The acquisition will also strengthen LifeHealthcare's relationship with Philips Health Care, the ultrasound-equipment distributor, as it already distributes products on its behalf in Australia.

The point-of-care ultrasound market in Australia and New Zealand is valued at $40 million and the trend towards conducting this form of procedure at the early treatment and diagnostic phases is increasing.

Analysts at Bell Potter responded to the news by increasing 2015-16 earnings-per-share forecasts by 10 per cent, as well as upgrading the 12-month price target from $2.81 to $3.52.

The broker made the point that distributing these devices would not cannibalise the group's existing cardiac ultrasound franchise as the devices have more limited functionality.

Bell Potter estimates the acquisition has provided LifeHealthcare with a 20 per cent share of that market segment.

The recent surge in Nanosonics' share price has mainly been driven by the results of a study released in mid-May indicating its Trophon EPR was the only high-level disinfection system proven to kill natural infectious high-risk human papilloma virus (HPV) under normal use conditions.

The results delivered at the Society for Health Care of America conference showed that the Nanosonics product was the only disinfectant to completely inactivate HPV from ultrasound probes. Two more commonly used alternative measures used in transvaginal examinations were shown to fail to decontaminate the probes in a range between 3 per cent and 7 per cent of cases.

According to the Centres for Disease Control and Prevention in the US, HPV is the most commonly diagnosed sexually transmitted infection, with around 79 million Americans infected and about 14 million new genital infections occurring each year.

Consequently, Nanosonics appears to have tapped into a large market. Analysts at Canaccord responded to the news by increasing earnings forecasts in fiscal years 2016 and 2017, and upgrading the 12-month price target from $2.00 to $2.20.