Reshaped Australian healthcare firms hold promise

Most of Australia's leading healthcare firms are expected to post strong first-half profit growth and provide positive outlook statements as the benefits of takeovers and spin-offs start to filter through, according to analysts.

The market has factored bullish outlooks into top healthcare stocks, all trading at price-earnings ratios above 20 compared with industrial stocks in the mid-teens.

"For a number of stocks -- CSL, Cochlear, ResMed, Sonic and Sigma -- earnings are expected to be very strong, and they need to be to maintain those high ratings," said Andrew Waddington, analyst with fund manager BT Financial Group.

The biggest group, CSL, was the only company among top healthcare stocks not to spend the first half of this financial year bedding down an acquisition or reshaping itself. The world's top maker of human plasma products flagged 10 per cent growth in earnings per share this year helped by a stock buyback, higher blood product prices and better yields per litre from the plasma it processes.

However, first-half net profit is expected to fall about 13 per cent, with robust growth in the plasma business offset by a loss of earnings from JRH Biosciences, sold a year ago.

For pathology and radiology group Sonic Healthcare, first-half net profit is tipped to jump 23 percent, boosted by strong demand for pathology and radiology services in Australia and debut earnings from its CPL pathology acquisition in the United States.

UBS and Merrill Lynch estimate Sonic's full-year earnings before interest and tax will be at least AUD$5 million ahead of the top end of the group's $300-A$320 million forecast range. "We expect the first-half 2006 reporting season to provide... further evidence that the sector has the capacity to deliver consistent earnings growth in the medium-term," Merrill analyst Michael Carmody wrote in a preview.

Mayne offspring The reporting season will set the base line for the two companies spawned in November from Mayne Group -- generic cancer drug maker Mayne Pharma, and pathology, radiology and pharmacy group Symbion Health.

Investors, who have driven Mayne Pharma's shares down 12 per cent since it listed, are eager to hear how the group plans to live up to its billing as a growth company in the face of competition in generics and a slim pipeline of new drugs.

New chief executive Thierry Soursac is due to outline his strategy only after completing his business review in March.

Just before Mayne Pharma listed, its former chief said it was trading slightly ahead of expectations. Analysts have already factored in low growth for this year in line with the group's outlook for steady earnings before interest and tax. "Our buy rating is premised on confidence in the potential for a strong rebound in top line growth and margins over a two year view," UBS analyst Alex McGee wrote in a research note.

Shares in Symbion have surged 24 per cent since listing, on the view that new management will be able to slash costs and boost margins to match rivals such as Sonic, DCA Group and Sigma Pharmaceuticals. Symbion's results will be complicated by $70 million in demerger costs, and will determine whether it can pay a dividend based on whether it books a loss on the Mayne Pharma spin-off.

Analysts tip Cochlear, the world's top maker of hearing implants, to book a 33 per cent rise in first-half profit, after it upgraded its full-year profit outlook based on strong sales of its new Nuclear Freedom implant system. All the groups' profits will look very different from a year ago due to new accounting rules that no longer require companies to amortise goodwill, and percentage gains or losses will be based on restated profits for the first-half of last year.