Sonic Healthcare
About the author:
- Author name:
- By Dr Derek Jellinek
- Job title:
- Senior Analyst
- Date posted:
- 12 October 2015, 1:56 PM
- Sectors Covered:
- Healthcare
Sonic Healthcare (SHL) is an international healthcare company and leading medical service provider. Dr Colin Goldschmidt, CEO of Sonic Healthcare, presented at our morning meeting today (12th October). Key highlights from the meeting are listed below:
1. Gaining scale and synergies via pathology roll-ups.
More than 50% of revenue is offshore and key business segments include:
- Pathology (80% - 28% in Australia; 22% in US; 19% in Germany; 6% UK/Ireland; 3% Switzerland; 2% Belgium; 1% NZ);
- Radiology (10% in Australia); and
- Primary Care (c10% in Australia).
2. Pathology is in the 'sweet spot' with an aging population and increasing focus on preventative medicine.
The majority of diagnostic testing is with patients aged 60 years +. A key priority of governments around the world is to concentrate on predictive tests in an attempt to keep people out of the health system.
3. An attractive industry, but funders are trying to keep a lid on the costs.
According to the CEO, this is 'nothing to be alarmed about at this stage'. This has been going on since the business started, with Medicare on the domestic front usually taking small fee cuts, which SHL addresses via volume growth, economies of scale, automation and other synergy measures.
4. FY15 was a 'difficult year', with flat profit growth, but management is confident about FY16.
FY15 was impacted by collection centres costs and Medicare fee cuts in the domestic business, as well as headwinds in a key US business. Management is 'feeling better' about the domestic business, noting a slow-down in collection centre roll-outs and cycling the Medicare fee cut (Nov '15), and management is 'bullish' about the US division, which has completed a restructure and is in a 'strong position'.
5. No insight into the ongoing Medicare review, but not expecting major fee cuts in pathology or radiology.
Overall the industry is not too concerned with the review. Management noted that pathology has been pretty well fine-tuned year after year, so it's not 'an industry ripe for any significant fee cuts'. Management also pointed out that the Health Minister understands the cost structure in the industry and the pressure due to the proliferation of collection centres. In radiology, management noted the discussion between industry and the government revolves around the potential for fee indexation (as it hasn't gone up for many years) as opposed to cost outs.
6. The loss of the government contract in Alberta, Canada was 'extraordinarily unlucky', but is not the end of the world.
SHL had won a 10 year ($250m a year) contract against key players, only to see it stripped away by a new government that does not want to outsource healthcare. While a review of pathology services in the region is ongoing, don't 'bank on us winning the contract back'. However, management believes the SHL name and brand is now established, and opportunities may present themselves around the world.
Investment view
Sonic Healthcare looks attractive in our view, and we retain our Add recommendation.
Morgans clients can access our detailed research and share price target on Sonic Healthcare (SHL). If you are interested in finding out more, please contact your nearest Morgans office.
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