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3 underloved ASX healthcare shares with strong comeback potential

The healthcare industry is a solid gamble – people are going to seek healthcare regardless of the state of the economy. According to Deloitte, global healthcare spending is expected to rise at a compound annual rate of 5% between 2019 and 2023. This will present many opportunities for the sector. 

A report from the Australian Institute of Health and Welfare also found that $467 million was spent on an average day in Australia’s health system. With the aging population and increasing emergence of chronic diseases, this number is likely to grow. Healthcare is something that everyone will need at some point in their life, leading to a huge opportunity for investors. 

The healthcare industry is made up of many different types of companies that are impacted by different variables. Broadly, the sector can be divided into pharmaceutical companies, medical device companies, and healthcare provider companies. Pharmaceutical companies manufacture drugs and typically spend highly on R&D. Medical device companies create devices used in patient care, including everything from disposable gloves to pacemakers. Healthcare providers are at the front line of patient care, delivering healthcare services to patients. 

Australia boasts a significant number of listed healthcare companies, including stars such as CSL Limited (ASX: CSL). Here we take a look at 3 underloved ASX healthcare shares with the potential to make a strong comeback. 

Cochlear Limited (ASX: COH) 

The Cochlear share price remains more than 23% down from its February high, with the spread of coronavirus impacting on its bottom line. Cochlear is a medical device company which produces cochlear implants used to help the hearing impaired. The implants use electrical stimulation to replace the function of the inner ear, but require surgery to implant. 

Infection control measures introduced to combat coronavirus resulted in many implant operations being deferred. This caused a significant decline in surgeries across major markets with elective surgeries postponed across the United States and Eastern Europe. The decline in surgeries caused a 60% fall in Cochlear’s sales revenue in April. 

Implant surgeries have been restarting but the rate of recovery is unclear. In China, surgeries recommenced in late February and are now running close to pre-virus rates. Implant surgeries have also restarted in the US, Germany, and Australia.

Cochlear has significantly reduced non-essential spending and capex (capital expenditure) pending a sustained increase in surgeries. Ultimately, many of the delayed surgeries are expected to progress once hospitals resume normal operations. In the meantime, the company has strengthened its liquidity position with a $1.1 billion equity raising. 

Longer term, Cochlear says there remains a significant unmet need for cochlear and acoustic implants that should underpin its long-term growth. The company’s enhanced liquidity position will enable it to weather the temporary decline in demand caused by COVID-19 while continuing to progress the R&D pipeline. 

Ramsay Health Care Limited (ASX: RHC)

The Ramsay Health Care share price remains nearly 21% down from its February high, with the private hospital operator drafted into the coronavirus fight. Ramsay Healthcare is one of the largest hospital operators in Australia and operates more than 500 facilities across 11 countries. Ramsay has promised to assist governments in managing the pandemic and, in return, governments have guaranteed its viability. 

Covid-19 resulted in the suspension of non-urgent elective surgery in each of Ramsay Healthcare’s major operating regions. As a private hospital operator, the cancellation of elective surgeries hit Ramsay Healthcare’s bottom line hard. However, COVID-19 partnership agreements were entered into with governments under which the hospital operator agreed to retain capacity to respond to the pandemic. Under these arrangements, governments and health authorities agreed to a core principle of meeting private hospital operators’ operating costs, or in the case of France, providing 85% of revenue from the previous corresponding period. Arrangements vary from region to region and the duration of agreements also varies.

The suspension of elective surgeries resulted in an uncertain operating environment, with Ramsay choosing to raise $1.2 billion in equity in April to enhance its financial flexibility. Managing Director Craig McNally said, “the equity raising will strengthen Ramsay’s balance sheet and liquidity position, as well as increase financial flexibility during the unprecedented operating environment. More importantly, it will ensure that we can continue to pursue our growth initiatives and position us to take advantage of other growth opportunities that may arise”.

Ramsay operates 72 hospitals in Australia which have seen the controlled reintroduction of some surgeries. The effect of the government agreements is that profits cannot be generated during the period of their operation. But the very fact that governments are contributing to the ongoing viability of private hospital operators demonstrates their importance. These government initiatives will also ensure Ramsay Health Care can maintain its extensive hospital platform intact, ready to support previously deferred surgeries when the operating environment normalises. 

Nanosonics Ltd (ASX: NAN)

The Nanosonics share price is down over 14% from its February high. Nanosonics manufactures a disinfection device for ultrasound probes that is used globally. Ultrasound probes are used in many medical procedures. These include pregnancy screening, real time imaging guidance during procedures, and to diagnose and treat soft tissue injuries. 

Nanosonics saw a significant increase in Q3 FY20 sales versus the prior corresponding quarter, demonstrating continued underlying growth momentum. Nonetheless, access to hospitals became more limited as a result of COVID-19 which may extend the timeline of planned adoption by some hospitals. This may result in lower than anticipated growth in the installed base in the fourth quarter. 

Prudent measures were taken on operating expenses which were likely to decrease in the fourth quarter, without impacting underlying strategy. The supply chain is being closely managed and is currently well positioned to meet customer demand for capital equipment and consumables. Consumables sales in the third quarter were in line with pre-COVID expectations, with the impact of COVID-19 on sales in the final quarter yet to be revealed. 

Understanding and awareness of the importance of ultrasound probe decontamination is growing, which could lead to increased sales in future. “Now more than ever the importance of infection prevention has gained prominence not only within the healthcare community, but across the broader community“, CEO Michael Kavanagh said.

Nanosonics has a strong balance sheet with no debt and has been benefitting from the stronger US dollar. 

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Kate O'Brien owns shares of Cochlear Ltd. and CSL Ltd. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Cochlear Ltd., CSL Ltd., and Nanosonics Limited. The Motley Fool Australia has recommended Cochlear Ltd., Nanosonics Limited, and Ramsay Health Care Limited. 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 Scott Phillips.

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Kate O'Brien