The ASX healthcare space is a great place to look for opportunities, as healthcare is one of the industries in which Australia excels globally. Owners of Sonic Healthcare Ltd (ASX: SHL) and CSL Ltd (ASX: CSL) shares are involved in two of Australia's leading international healthcare companies.
Sonic Healthcare is one of the world's largest pathology businesses. CSL is a global biotechnology business that creates biotherapies and vaccines. Both companies operate in countries like Australia, the US, Germany, the UK and Switzerland.
Huge scale
Being some of the largest in the world at what they do, both companies are capable of leveraging certain scale advantages.
Sonic Healthcare has been able to unlock synergies by building networks in its operating countries that utilise the same laboratory infrastructure, saving on costs and allowing it to deliver a solid profit margin.
CSL has built up an impressive number of plasma collection centres and also has significant research and development facilities. The business recently opened a new "world-class" global HQ in Melbourne that included office and lab space for up to 40 biotech start-ups. Every year, CSL invests hundreds of millions of dollars into research and development.
However, while they're both large businesses, CSL is significantly larger with a market capitalisation of close to $150 billion at the current CSL share price. The Sonic Healthcare market capitalisation is currently approximately $13 billion.
Being bigger or smaller isn't necessarily better – their valuations and projected profit growth are more important.
Current valuation
According to the estimates from UBS, Sonic Healthcare is projected to make $475 million of net profit after tax (NPAT) in FY24. This puts the current valuation at 27x FY24's estimated earnings.
Meanwhile, the broker's forecast for CSL is that it will make US$2.99 billion of NPAT in FY24, implying CSL is valued at 33x FY24's estimated earnings.
At first glance, CSL appears to be more expensive and Sonic Healthcare is the better investment opportunity.
However, there's more to consider than just this year's earnings. It is important to also take into account the long-term profit trajectory.
Potential future profit
UBS recently spoke with Sanofi, a flu vaccine competitor. Like CSL, Sanofi's management had a view that "time is not up for existing recombinant flu vaccines despite the advent of mRNA". This should be good news for CSL shares, if it's true.
UBS suggests the biggest competition for CSL's vaccine portfolio was the possibility of an annual "winter combi" product, with the broker pointing to a flu, COVID and RSV product being the most likely challenger. The prospect for that challenger possibility was dealt a blow in the US at the recent ACIP meeting, according to UBS, where a single lifetime RSV vaccine was recommended rather than annual dosing, which meant UBS is "incrementally more confident on the mid term sales growth outlook for CSL".
The broker has forecast that CSL could make US$5.47 billion of NPAT in FY28, putting the current CSL share price at 18x FY28's estimated earnings.
While Sonic is facing near-term cost challenges, including its debt becoming more expensive due to higher interest rates, UBS still predicts the ASX healthcare share's profit can increase by 68% between FY24 and FY28, putting the current valuation at under 17x FY28's estimated earnings.
The FY28 valuations of both businesses are predicted to be very similar.
I'm interested in seeing if Sonic's investments in AI can help it deliver long-term profit growth, which is one of the reasons I invested in the business. The biotech space is competitive, and it's possible that CSL may not be as successful as expected if better treatments are available.
But, between the two businesses, I would say CSL shares have a stronger long-term growth outlook due to their diversified earnings base and significant investments in research and development.
