Scott Power: ASX health stocks stumble but rotation into sector ‘picks up steam'

News.com.au

3 days ago

ASX heath sector falls 0.65 % in past five days but returns 9% in July in a strong comeback
'Mostly pretty good' June quarterly reporting season comes to end
Clarity Pharmaceuticals completes $203 million capital raise to institutional investors
Healthcare and life sciences expert Scott Power, who has been a senior analyst with Morgans Financial for 27 years, gives his take on the ASX healthcare sector for the week and his 'Powerplay' stock pick.
After 5% and 5.4% gains over the past two weeks and being up for most of the week the ASX Health Care Index (ASX:XHJ) fell 0.65% in the past five days after heavy falls across broader markets on Friday as US tariff concerns again played on investor sentiment.
The benchmark S&P/ASX 200 (ASX:XJO) finished the week fairly flat, up 0.01%.
However, in some good news the healthcare sector has had a strong start to FY26 up 9% in July after a disappointing FY25 in which it finished down 4%.
"The rotation into healthcare seems to be picking up steam and our sense is that this is likely to continue into FY26," Morgans' senior healthcare analyst Scott Power said.
"The small end of the sector is looking particularly attractive."
ImpediMed doubles unit sales as Mach7 welcomes new CEO
As the June quarter reporting season wraps up, Power described it as 'mostly pretty good' for the sector with a few noteworthy ones released this week.
ImpediMed (ASX:IPD) sold a record 44 of its lymphodema detection devices called Sozo in its target US market during the June quarter, double the March quarter. Total contract value was also a record with $6.3 million for the quarter.
"It was a solid quarter and I think they've really started to turn the corner in terms of the US install base," Power said.
Morgans maintains a speculative buy on ImpediMed with a 12-month 15 cent target price.
Health imaging stock Mach7 Technologies (ASX:M7T) reported its Q4 FY25 result with Power saying while there were no major surprises and most information flagged in a recent trading update, outlook from its new CEO Terri Thomas was positive.
Mach7 reiterated FY25 guidance of revenue between $33m-$34m and CARR of ~$30m-$31m.
Power this week caught up with Thomas, who took over on July 1 and was previously head of former ASX-listed breast imaging company Volpara Technologies, which was taken over by South Korean firm Lunit last year.
"In the first 30 days Terri has been there she's made some changes and with her guiding hand I think in the next 12 months we're going to see Mach7 kick some big goals," Power said.
"The company is moving towards profitability as well."
Morgans has an add rating on Mach7 and 12-month target price of $1.37.
Provider of oral appliance treatments for sleep-related breathing disorders and obstructive sleep apnea (OSA) Somnomed (ASX:SOM) delivered top-line growth ahead of expectations, with strong performances in key markets North America and Europe.
Growth was driven by both new and returning customers, as well as successful price increases across its product range. With previous manufacturing delays now largely resolved, SomnoMed is planning to expand production capacity by more than 25% in FY26.
In a note to client analyst Iain Wilkie said the increased manufacturing capacity combined with more efficient turnaround should leave Somnomed in a strong place to handle expected continued growth over the short-term.
"FY25 has been a strong year for SOM and the market has responded positively to it, up ~50% over the past 12 months and up 250% since May 2024 following the overhaul of the business with a new management team, repayment of its debt facilities, and addressing manufacturing inefficiencies," Wilkie wrote.
Consensus target price for Somnomed is 80 cents.
Micro-X supply agreement marks turning point
Micro-X (ASX:MX1) rose ~40% on Wednesday after news it had tapped into a network of 700 hospitals with a three-year supply agreement through a major US healthcare provider, the first of its kind for the company.
Micro-X secured the contract after a highly competitive tender process and a successful in-hospital trail of its Rover Plus mobile radiology system. The company is in discussions with a second major procurement group for a similar supply agreement.
It's good news for the company, which has undertaken a strategic review of its operations and is now focusing on medical imaging for its cold cathode X-ray technology, halting further work on its Argus bomb detection device after the commercial launch didn't attract sufficient customer interest.
"The agreement they've signed is good validation that their strategy on focusing on the medical imaging side of the business is paying off," Power said.
Micro-X is also developing a head CT scanner and full body lightweight portable CT scanner. A security project – an airport baggage scanner self-check-in – is being funded by the US Department of Homeland Security.
"They are getting paid to develop that system but the core focus is back on medical imaging," Power said.
"Clearly it is now paying off and they're talking about potential other agreements coming through.
Morgans has a speculative buy rating on Micro-X and 12-month target price of 17 cents.
Clarity completes mammoth $203 milllion capital raise
Radiopharmaceutical group Clarity Pharmaceuticals (ASX:CU6) completed a large $203m institutional placement, struck at a 15% premium to the company's 15-day average price, to fund their clinical program.
"The capital raise was a pretty big achievement for them," Power said.
Executive chairman Dr Alan Taylor told Stockhead the 'fast, well executed and sizeable' placement was to a small group of local institutional investors "close to the company'.
"I have never done a deal that fast," Taylor said.
"A week ago, I would have said we were not doing a capital raising, but there was a lot of interest from a very concentrated group ."
Power's Powerplay: 'Solid set of numbers' for Aroa
New Zealand soft tissue repair company Aroa Biosurgery (ASX:ARX) reported its third consecutive quarter of positive net cash flow since listing on the ASX in July 2020 and reaffirmed its FY26 revenue guidance.
Operating on the New Zealand financial year, cash flow from operations for the June quarter was NZ$1.7m, with cash receipts of $22.5m.
Net cash outflows from investing activities for the quarter were NZ$900,000, primarily reflecting routine capital expenditure.
Net cash flow was NZ$500,000 with total cash on hand increasing by NZ$200,000, after adjusting for the impact of movements in exchange rates. The company ended the quarter with a cash balance of NZ$22.2m.
"Importantly, the company reaffirmed full-year FY26 total revenue guidance of NZ$92–100m representing growth of 20% at the top end which is where we sit and are happy to sit there," Power said.
"They've reported a solid set of numbers."
Normalised EBITDA for FY26 of NZ$5–8m represents growth of 19–90% on FY25.
"Aroa has really turned the corner and is now producing sustainable profits going forward," Power said.
Morgans maintains a speculative buy and 12-month target price of 77 cents on Aroa.
The views, information, or opinions expressed in the interview in this article are solely those of the interviewee and do not represent the views of Stockhead.
Stockhead has not provided, endorsed or otherwise assumed responsibility for any financial product advice contained in this article.
At Stockhead, we tell it like it is. While Aroa Bisurgery is a Stockhead advertiser, the company did not sponsor this article.