Why analysts love these eight medtech stocksThe sector that straddles healthcare and tech has professionals searching for companies that could be tomorrow’s big winners after Pro Medicus.
Tom RichardsonJournalist
Feb 13, 2024 – 5.00am
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The convergence of medicine, technology and artificial intelligence is often touted as one of the sharemarket’s next great investment trends, with the “medtech” sector producing several eye-watering winners for investors over the past decade.
On the S&P/ASX 200, shares in medtech business Pro Medicus are 100 times higher since 2014 and hit a record high of $111.88 on February 12 at an $11.6 billion valuation, thanks to its success selling AI-assisted medical imaging software in the US.
Sophie Smith, an investment analyst at SG Hiscock’s medical technology fund, backs Lumos and Dimerix as potential winners.
Other decade-long winners for investors include $19 billion hearing device pioneer Cochlear, $139.6 billion blood products group CSL and $42.8 billion sleep treatment specialist ResMed.
At the small-cap end of the healthcare market, many professional investors spend their days pouring through medical research, clinical trials data and financial accounts in an attempt to unearth tomorrow’s big winners.
Neuren: Sophie Smith, an investment analyst for the SGH Medical Technology Fund, believes the biotech company will continue its stunning rise – 1609 per cent higher over the past five years.
Neuren has commercialised a drug named Daybue to treat neurological disorder Rett syndrome in children and has other drugs in clinical trials.
“Daybue is exceeding forecasts for initial adoption and patients are tolerating the treatment regimen above expectations,” says Smith. “More excitingly, the next drug [at the clinical trial stage] has produced positive topline results with the phase 2 trial.”
Hashan De Silva, founder and managing partner at medtech investment fund KP Rx, reckons Neuren’s success makes it a takeover target for big pharma. De Silva formerly worked as a healthcare analyst at broker CLSA and hedge fund Karst Peak.
Hashan De Silva. Louie Douvis
As evidence, he points to the acquisition of neurological therapy business Reata Pharmaceuticals by Biogen for $US7.3 billion ($11.2 billion) in July 2023.
By comparison, Neuren had a market value of $2.9 billion on February 12 and De Silva says Reata’s lead drug, Skyclarys, treats a condition two-and-a-half times less prevalent than Rett syndrome.
Arovella Therapeutics: if this succeeds, it’s “probably the cheapest biotech stock in the world right now”, says portfolio manager Andrew Chapman of Merchant Funds Management. The Merchant Opportunities Fund – focused on medicine and biotechnology – has generated compound returns of 16.65 per cent per year for 10 years, compared to the S&P/ASX Small Ordinaries Index at 2.94 per cent per year to June 30, 2023.
“[The therapy] is close to being fully developed,” says Chapman. “It’s trying to develop a cell that will go into your body and kill cancers. I really think this technology has the ability and potential to revolutionise the way we treat complex cancers.” Arovella shares fetched 18¢ on February 12, on a market value around $167 million.
Cyclopharm: In October 2023, the company received approval from the US Food and Drug Administration to launch its lung ventilation agent, known as Technegas. De Silva tips Cyclopharm as a potential sharemarket bolter.
“Technegas has become the standard of care for the diagnosis of pulmonary embolism in every market the company has launched in, and we believe it can replicate the success in the US,” says De Silva. “We see the company’s current valuation [around $170 million at $1.82 per share] as not capturing the derisked US opportunity.”
Dimerix: The company has a drug named DMX-200 at a pivotal 300-patient, phase 3 clinical trial to potentially treat kidney disease.
“We see parallels to Neuren in terms of its latest commercial deal – it’s a promising asset for a rare disease, and it has a management team that focuses on commercial outcomes from an early stage,” says SG Hiscock’s Smith.
Dimerix shares last changed hands for 22¢ on a market cap around $96 million. The business is seeking biotech partners to help fund the drug through to commercialisation.
Inoviq: This is one of Chapman’s top picks. “It has lots of shots on goal. It has developed a platform approach to use multiple diagnostic tests, versus just one, for someone who goes to a radiologist,” he adds.
He believes it will commercialise tests to improve the diagnosis and treatment of different cancers. Chapman says Inoviq’s board is chaired by successful biotech entrepreneur David Williams, with Max Johnston and Phillip Howe also directors. All three executives served on the board of biotech success story PolyNovo, with Williams still its chairman.
“Progress on the [technology] has been excellent,” says Chapman. “I’d suggest all the ingredients are in place for the share price to move higher.
Lumos: The company sells diagnostic tests to help healthcare professionals manage patients’ medical conditions. Smith likes its outlook and says recent capital raisings mean it has the cash runway to deliver on its potential after
the stock performed poorly since its initial public offer in 2021.
“The management team have worked to right-size the business and put themselves in a strong strategic position with their services business to generate cash,” says Smith. “We see this cash generation assisting the acceleration of growth in their product business over the next 18 months which should drive a re-rate in the share price.”
Neurotech International: This is a pick in the medical cannabis sector that Chapman concedes has been among the worst in the world for a couple of years.
Neurotech is developing a medicinal cannabis-based drug that could help neurological disorders such as autism in children, in a similar space to biotech sensation Neuren.
“Its therapy is a unique product, as it’s low tetrahydrocannabinol (THC) and could significantly reduce the economic burden of diseases such as autism,” says Chapman. Neurotech’s ASX-listed shares last closed at 9.7¢ on a market cap of $82 million.
CurveBeam AI: De Silva says its medical imaging equipment will help surgeons and doctors use AI to improve diagnoses and associated treatments. Curvebeam AI sells hardware and software to US medical bodies to scan patients’ hips, knees and feet when in a standing position.
“The technology offers multiple benefits to patients and creates revenue streams for the surgical centres while improving patient workflow,” says De Silva. “The market for device sales in US surgical centres segment is significant at around $4 billion and longer term Curvebeam has various AI diagnostic modules in development.”
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