Oliver Mander: Investing in New Zealand’s healthcare sector
Wellington-based business consultant and financial columnist Oliver Mander examines New Zealand’s health spending, and checks how NZX-listed healthcare companies are doing during the COVID-19 outbreak.
New Zealand’s healthcare sector has felt the effects of the global COVID-19 pandemic—both the good and the bad.
On Tuesday 11 August 2020, the 30% of Kiwis living in Auckland learnt they were heading into an Alert Level 3 lockdown due to COVID-19 reemerging in the community. With the rest of the country moving to Alert Level 2, it’s a clear signal to all Kiwis that we can’t be complacent about our future.
A pandemic has always been regarded as a global risk. Swine flu, bird flu, SARS (severe acute respiratory syndrome)—all have informed organisations’ risk management planning over the last two decades. And now, the world is focused on ‘health and wellbeing’ like never before.
How New Zealand’s health spending stacks up
The New Zealand government spends about $21 billion a year on health services such as hospitals, GPs and pharmaceuticals. That’s around 6.9% of our GDP (gross domestic product)—the total worth of the economy. That represents about 80% of the spending on health, mostly through the district health boards. The other 20% is funded by consumers or private providers.
In terms of sector size, that makes ‘healthcare’ a big deal. It’s also growing fast—currently at an annual rate of around 5% per year for each of the last five years.
The growth trend is mirrored in other countries around the world. According to the World Health Organisation (WHO), global healthcare spending has grown by about 3.9% each year between 2000–2017. It’s forecast to rise even more steeply in the future. A Deloitte report completed this year expects growth of 5% per year until 2023.
Health companies on the New Zealand Stock Exchange (NZX)
That global growth is just as well for our local NZX-listed healthcare companies. There are 18 companies listed on the NZX that can be considered as part of the healthcare sector. The following make much of their revenue outside New Zealand.
Fisher & Paykel Healthcare
Fisher & Paykel Healthcare Corporation Limited (FPH) generates 96% of its revenue outside of Australia and New Zealand. It makes hospital-grade and home-use products that support respiratory functions. Unsurprisingly, it’s in high demand right now—as at 20 August 2020, its share price is up 57% since the beginning of 2020.
From a valuation perspective, FPH is the NZX’s largest company by market cap, valued at around $20 billion.
Over the last decade, Ebos Group Limited (EBO) has transformed its niche focus on dental supplies to a broader focus on marketing and supplying medical and consumer products across Australasia. Everything from hospital consumables and pharmaceuticals to pet food. Of its $6.9 billion in revenue, around 77% is generated in Australia.
So far in 2020, its share price has gone down by around 7.5% (as at 20 August 2020) as the impact of COVID-19 takes hold in both Australia and New Zealand.
Market cap: $3.6 billion.
Probably better known as ‘Lumino’ or ‘Maven’, Abano Healthcare Group Limited (ABA) is a chain of dentists around Australia and New Zealand. In early 2020, ABA was subject to a ‘scheme of arrangement’ (a bit like a takeover offer) at $5.70 a share.
As a consumer-focused business, ABA was hit hard by COVID-19, resulting in the scheme of arrangement being withdrawn. As at 20 August 2020, ABA shares are trading at $2.60, 50% down on the $5.20 at the start of the year.
Market cap: $67 million.
AFT Pharmaceuticals Limited (AFT) develops and licenses its own range of pharmaceutical products. They recently raised capital to reduce debt and fund continuing expansion into Europe and Asia. Its revenue to 31 March 2020 was 23.5% ahead of its previous full year result. Unsurprisingly, its shares have maintained a similar momentum, up 43% (as at 20 August 2020).
Market cap: $480 million.
Blis Technologies Limited (BLT) is a Dunedin-based manufacturer and marketer of probiotic products focused on oral hygiene. Most of its sales are overseas. The company was already experiencing strong growth in revenues pre-COVID, with the global pandemic providing a further boost.
BLT has recently announced a planned expansion into probiotic cosmetics, which has been somewhat nervously received by the market. Nonetheless, its share price is up a solid 21% for the year, trading at $0.08 (as at 20 August 2020).
Market cap: $86 million.
Green Cross Health
Green Cross Health Limited (GXH) owns the Unichem and Life Pharmacy brands in New Zealand. Its revenues were relatively ‘flat’ between 2019 and 2020, although the full impact of COVID-19 is not yet known to the market. As at 20 August 2020, its share price is down 15% so far this year.
Market cap: $148 million.
The core product from TruScreen Group Limited (TRU) detects changes in cervical tissue. It's an alternative to cervical screening in less-developed markets where laboratory services are less accessible. Most of its operational growth is occurring in China, Russia, Vietnam, and India.
The company is still very much in the ‘startup’ phase, raising cash from investors in June to help fund its growth plans.
Market cap: $26 million.
And then there’s Pacific Edge Limited (PEB), developers of test kits that can tell people if they have bladder cancer. They’ve been seeking commercial agreements for its products in the United States for a number of years. In mid-June, it reached agreement with a major US healthcare provider, Kaiser Permanente.
The agreement has transformed PEB’s future—and is fantastic news for long-suffering shareholders. Its ‘big idea’ has come to commercial fruition. But it has been a long time coming.
Shareholders will be hoping for similar agreements to follow. Pacific Edge was well known for its reliance on seeking further investment from shareholders, asking twice in 2019, as well as in 2018, 2017, and earlier. Its last full year of results show a loss of $18.9 million—a slight increase on 2019’s loss. Their total losses since they were founded have reached over $150 million.
There are still risks ahead for PEB. As of its last Annual Report, the company has not booked revenue for 22,000 tests provided in the US. Under the US health system, PEB is obliged to provide its test, but it doesn’t have the right to receive revenue from a patient’s insurance company—unless PEB has a formal payment agreement with them. But the Kaiser Permanente agreement gives PEB the right to recover payment from any Kaiser Permanente patient.
The agreement was reflected in PEB’s share price movement. It went from $0.12 on December 31 2019 to $0.27 prior to the agreement’s announcement. As at 20 August 2020, it’s at $0.66. That sudden movement makes PEB the best-performing share on the NZX this year with a staggering 450% return.
Long-term value and short-term timing
The healthcare sector has outperformed the NZX50 so far this year thanks to stellar returns from Pacific Edge, Fisher & Paykel Healthcare, and AFT Pharmaceuticals. A portfolio of these eight shares, with equal dollar investments in each—or ‘weighted’ according to market cap—would have created a 50% return so far this year. That’s compared with the NZX50’s negative 0.2% return.
The sector, and the events that have shaped it, raises some important reminders for investors.
You get what you pay for
Fisher & Paykel Healthcare has long been an expensive share. Their share price of $34.76 (as at 20 August 2020) and earnings per share (from the latest 2020 results) of $0.50, that means investors are currently paying a mammoth $69 for every $1 Fisher & Paykel Healthcare earns. Don’t bank on the dividend either—if current dividends are maintained, you’ll earn a mean 0.7% in cash on your investment.
But Fisher & Paykel Healthcare is a rare breed—a large company that’s still growing rapidly. Its profitability is growing at a compounding rate of around 20% each year over a five-year period. The scale of this growth—and the increasing likelihood that it can be maintained in a COVID-19 world—is shaping how much investors are prepared to pay for the share.
So even though the return looks paltry on paper, investors are betting that Fisher & Paykel Healthcare will keep inventing new stuff to make itself grow even more.
You can’t ‘time’ the market
Pacific Edge shows this exquisitely. The idea that Pacific Edge is commercialising an easily administered, non-invasive and accurate test for bladder cancer sounds inherently valuable.
But an investor needs to research and then choose whether that story holds value—and whether it’ll become relevant to a market. If so, the question is exactly when it’ll become relevant. Without seeing the future, your knowledge as an investor is always imperfect.
Diversity is your friend
A larger company—like Ebos or Fisher & Paykel Healthcare—is more likely to have a diverse set of businesses or products that make up its revenue streams. There’s strength in diversity: a failure in one part of the business doesn’t bring down the rest.
For a startup business (such as Pacific Edge), their aims are often focused on commercialising a single idea. Pacific Edge, for now, has succeeded. If they hadn’t, we wouldn’t be talking about a share price of $0.66 (as at 20 August 2020). We’d be looking at a business continuing to spend cash and possibly requiring further cash from shareholders to keep going.
If you like the idea of investing in startup healthcare businesses, invest small amounts in a range of them. As an investor, you’ll be creating that diversity in your portfolio for yourself.
Ok, now for the legal bit
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