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Why the Sonic Healthcare share price has been slammed

Credit: US Army RDECOM

Sonic Healthcare Limited (ASX: SHL) has seen its share price sink 5.7% today to $17.43, following a 6% fall yesterday.

In the past week, Sonic’s share price is down more than 12%, much worse than the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO), which is down 1.8% over the same period.

The main reason for the fall was the federal government’s announcement yesterday that it was going to pull more than $600 million out of funding it currently spends on pathology and diagnostic imaging.

Here’s what the treasurer said in the MYEFO report:

“Removing bulk billing incentives for pathology services, aligning bulk billing incentives for diagnostic imaging services with those that apply to general practitioner services and reducing the bulk-billing incentive for magnetic resonance imaging (MRI) services. This measure is expected to reduce cash payments by $197 million in 2016-17 ($639 million over four years to 2018-19).”

Sonic had more than $1.6 billion in revenues from its Australian pathology ($1.2 billion) and diagnostic imaging ($414 million) last financial year, representing roughly 35% of total revenues. More than half the company’s revenue comes from offshore, including 22% from the US, 19% from Germany and 6% from the UK and Ireland.

But Sonic did report that its Australian pathology operations saw earnings fall last financial year after Medicare fee cuts went through in November 2014.

The company has told the market it expects to see earnings before interest, tax, depreciation and amortisation (EBITDA) of between $850 and $875 million in the 2016 financial year (FY16), roughly 20% growth over the previous year, although that is being helped along by currency tailwinds (falling Aussie dollar).

Foolish takeaway

Sonic is unlikely to see a major impact in FY16 from the MYEFO budget cuts, which begin on July 1, 2016, but will certainly negatively impact FY17 revenues and earnings.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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