Innovation isn't enough – why Morgans says profitability drives ASX healthcare success

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3 days ago

Morgans' Scott Power says path to profitability is key to a successful emerging ASX health care company
While innovation is important, Power says the market loses interest in companies which don't turn a profit
Wound care company Aroa Biosurgery delivered its first normalised profit in FY25 since listing in 2020
What makes a successful emerging ASX healthcare company and a smart investment? It's the question with no single answer but according to the experts there are certain factors investors should look for, including combining innovative science with strong commercial potential, a path to market and profitability.
Morgans' senior healthcare analyst Scott Power has been covering the ASX sector for more than 27 years. He said success isn't just about innovation, but strong sales execution and market delivery.
Successful players secure clinical validation, navigate regulatory hurdles efficiently and target real, unmet needs to help not only patients but deliver returns for investors.
Indeed it is this path to profitability that Power sees as crucial overarching requirement for success.
"You can develop a product and put a lot of R&D into it but ultimately it needs to get to market and be sold with profits being generated if you are going to grow as a listed company," Power told Stockhead.
"Our pool of funding over here is not deep enough to keep funding the next idea compared with the US where capital markets are deeper and can fund R&D right through to commercialisation.
"The market loses interest in companies which continue to produce losses."
Power said that in what has been a tough market for the last several years for the ASX emerging healthcare sector, having a clear path to profitability was imperative.
"In the last month I have seen a turnaround in level of interest and rotation back to the sector with share prices starting to move," he said.
"The companies that are profitable or have a clear path to profitability are the ones being rewarded."
Case in point…
Aroa delivers maiden profit for FY25
New Zealand-based soft-tissue repair company Aroa Biosurgery (ASX:ARX) surged into the black in FY25, delivering its first profit since listing on the ASX in 2020.
Operating under the Kiwi financial year, which ends on March 31, Aroa reported a normalised EBITDA profit of NZ$4.2 million for FY25 – a sharp turnaround from the NZ$3.1m loss recorded in FY24.
Total revenue for FY25 of NZ$84.7m was an increase of 23% on the previous year and exceeded guidance of NZ$81-84m.
"For them it's a balance between how much money they want to continue to invest in R&D and how quickly they want to grow EBITDA," Power said.
"Given their revenue is growing at 20% and they're holding their R&D in absolute terms stable they're getting there and could get their faster by pulling back on the R&D but then it becomes a question of how innovative do they want to remain at expense of profitability?
"It is a tough question to balance because on one hand you have a bigger pool of investors, which will look at you if you're profitable and another smaller pool looking for the innovation, so the next ProMedicus (ASX:PME), Cochlear (ASX:COH) or ResMed (ASX:RMD)."
Strength in innovation
While the point's been made here that a strong path to profitability is critical to sustained success, Power noted Aroa's great strength lies firstly in innovation.
Its products are derived from ovine forestomach matrix (sheep rumen) sourced exclusively from New Zealand. The matrix is processed and sterilised to remove DNA and cells, leaving a tissue scaffold called the ECM for new tissue to grow, which contains a dense network of vascular channels – a structure like human skin – and more than 150 proteins critical to healing.
Aroa has developed several products using its ECM technology including Endoform, Myriad and Symphony – each designed to support soft tissue repair across a range of surgical and wound care applications.
"They have a lot of peer-reviewed scientific studies which have been published," Power said.
"Aroa's scientific know-how is very high and they have continued to innovate with new product offerings, with a strong R&D team."
The company has a hybrid approach to selling its products with a direct sales force for selling Endoform, Myriad and Symphony. Hernia repair and breast reconstruction product Ovitex is manufactured by Aroa on behalf of its Nasdaq-listed business partner TELA Bio.
Does the product fill an unmet need?
Morgans' healthcare analyst Iain Wilkie reckons filling an unmet medical need or shortfall in existing standard of care is also important to success for an emerging ASX healthcare company.
"It either needs to be better than the existing standard of care or perform the same but be cheaper," he told Stockhead.
"You would probably say the easiest path to market is if it is an improvement or filling an unmet medical need."
Wilkie said a good example was EBR Systems (ASX:EBR), which in April gained US Food and Drug Administration (FDA) approval for its WiSE CRT System – the world's only wireless endocardial (placed within the heart) pacing system in clinical use for stimulating the heart's left ventricle.
"EBR has just started selling its WiSE and it has a very clear case of targeting an unmet medical need and fixing a problem which exists and being the only device which can do it," Wilkie said.
He noted Nanosonics (ASX:NAN) was also a good example of a healthcare company addressing an unmet need in the healthcare sector.
Nanosonics has been a leader in infection prevention with its flagship Trophon system – an automated ultrasound probe cleaner that uses sonically-activated hydrogen peroxide mist.
Trophon has become standard of care for cleaning ultrasound probers in several countries, including Australia.
In March 2025, Nanosonics received FDA de novo clearance for Coris, the world's first automated system specifically designed to clean the internal channels of flexible endoscopes.
"They've already got one product which has been selling well for almost two decades and now they're launching their new product," he said.
At Stockhead, we tell it like it is. While Aroa Biosurgery and EBR Systems are Stockhead advertisers, the companies did not sponsor this article.