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Promising prognosis for healthcare business
Derek Parker From: The Australian January 09, 2010 12:00AM Increase Text Size Decrease Text Size Print Email Share Add to Digg Add to del.icio.us Add to Facebook Add to Kwoff Add to Myspace Add to Newsvine What are these?
Healthcare companies are surprising survivors of the global financial crisis

AFTER the economic woes of last year it seems unlikely, but many Australian healthcare companies did remarkably well. What's more, the sector expects to see in the new decade with continued growth. The secret: good planning and strategic management.

"Most of the larger companies in the sector more than held their own relative to the broad market," says Martin Roth, author of the long-running Top Stocks book series. "Many increased the dividend they paid to shareholders, which is a major achievement during an economic contraction."

He points to biopharmaceutical company CSL. It turned in a profit of $1.146 billion for the year to June 2009, compared with $701 million the year before. And condom manufacturer Ansell reported a $121m profit on sales of $1.352bn, thanks to good sales in China, with its one-child policy.

"Companies dependent on an ongoing flow of investment funds had a very hard time of it for the first part of 2009 and most of 2008," he says. "There were seven consecutive quarters of contraction to the end of 2008, with a significant number of companies either being wound up or moving out of the industry. It was not a good time to be hungry for cash."

There was also a feeling in the biotechnology industry that small companies were not receiving sufficient government support, especially with the winding back of some assistance programs. However, this was dramatically reversed with the introduction of a generous R & D tax credit in the 2009 budget, which will be particularly valuable to smaller firms. Biotechnology will also benefit from another program, the $196m Commercialisation Australia.

Investors opened their wallets in the first half of last year, followed by a big turnaround in the September quarter, which held up in the December quarter. Roth and Blake suggest the key reason was advances in new products. Companies such as drug delivery firm Acrux and respiratory specialist Pharmaxis reported good news from late-stage trials and testing, while companies such as cancer-focused ChemGenex Pharmaceuticals established licensing agreements.

New products also helped established companies boost profits. For example, Blackmores introduced 38 new products in a six-month period, including a new children's range. The company earned $20.8m for the year.

"Although the natural health industry has continued to enjoy strong growth for some years, two years ago Blackmores was growing slower than the market," says Christine Holgate, who took over as chief executive in late 2008. "In some ways the downturn helped us reverse that," she claims, crediting the firm's good reputation with the public and pharmacists for the upswing.

"We keep a close eye on the exchange rate, but we have a natural hedge as many of our supply ingredients come from overseas," Holgate says.

"Our view is that an economic downturn is no time to retreat from the market. It is a time to look for new opportunities and to invest in innovation. It pays to have built up cash reserves in good times so you can stay on course."

Another company that did well despite the financial crisis is Pro Medicus, which provides medical imaging software and internet services. The company has looked to overseas acquisitions for growth. The strategy paid off as revenues from North America and Europe now account for more than 40 per cent of turnover.

Pro Medicus chief executive David Chambers acknowledges the company's after-tax profit was down last year, but explains this was due mainly to the costs of integrating California-based Visage Imaging, which the firm acquired early last year.

"The downturn initially created some angst for us as it had the effect of shutting down buying in the US, which was the market we had been targeting for our growth," he says. "But it also had the effect of lowering asset values across the board, so we were able to fund the $US3m acquisition of Visage through existing cash reserves. It was a very good buy."

He predicts the business will do well in the second half of this year, backed by good cash management practices. Chambers also says the gathering momentum of healthcare reform in the US, Australia and other parts of the world is good news for information technology companies such as Pro Medicus. "We think that 2010 will be a year of transformation for our business. Our strategy is about sustainable growth for the years to come. That means getting the building blocks in place."

It also means emphasising business plans that offer investors returns in a reasonable time frame, a big change in thinking for the sector. That's partly why Roth believes the outlook for this year is promising.

But he adds caveats: "Something to watch is whether the government makes any changes to the Pharmaceutical Benefits Scheme as it tries to find savings for the budget. That can have a significant impact on existing or proposed drug product lines."

Roth says the other big issue, especially for healthcare companies operating internationally, is the prospect of a stronger Australian dollar. "But the companies that might be affected by this are, I think, capable of adapting to changing conditions. After all, they got through a tough year in good shape. That's a positive sign for the future."