After ~2 years of lacklustre performance at the index level, the outlook for the ASX 300 healthcare sector is highly attractive.
The sector is well positioned to outperform over the medium-term given its earnings trajectory is considerably stronger than the broader market while the sector’s valuation is also at highly attractive levels.
The Focus Portfolio is exposed to the healthcare sector through its positions in CSL (CSL), ResMed (RMD), and Telix Pharmaceuticals (TLX), which are all explored in this report.
Remaining Overweight Healthcare
The Focus Portfolio retains an overweight exposure to the healthcare sector with a ~12% sector weighting compared to the ASX 300 index weight of ~9.6%.
While our positioning is driven by investment views that are bottom-up in nature, there are two key factors that support a positive stance towards the healthcare sector from a top-down perspective.
1. Structural growth
Healthcare’s long track record of consistent above-market earnings growth is supported by several structural tailwinds including: ageing populations; the rising prevalence of chronic disease; and constant innovation within R&D programs driving the commercialisation of improved diagnostics, therapies, and devices to treat a range of medical conditions.
The ASX 300 Healthcare Index is currently expected to deliver above-average EPS growth of ~20% over the next twelve months, which is well above the ASX 300 Index, at ~4%.
2. Valuation appeal
Despite a robust earnings growth outlook, the healthcare sector’s valuation sits on a material valuation discount to history on both an absolute and relative basis. The ASX 300 Healthcare Index trades on a 12-month forward PE multiple of ~28x, which is below the 5 year average of 33x, and is highly compelling considering the strong (and improving) medium-term earnings outlook and the structural tailwinds supporting the sector.
| Company Name | Ticker | Portfolio weight | Active Weight vs ASX 300 | Market Cap (A$b) |
Valuation multiples | EPS growth | EPS revisions (NTM) | ||||
| PE (NTM) | vs 5 yr avg | FY24 | FY25/26 (CAGR) | 30 days | 90 days | ROIC (NTM) | |||||
| CSL | CSL | 6.5% | 0.8% | 136.0 | 26.9 | -23% | 32% | 16% | -1% | -2% | 15% |
| Resmed | RMD | 3.5% | 2.7% | 45.6 | 22.6 | -32% | 24% | 13% | 0% | 6% | 23% |
| Telix Pharmaceuticals | TLX | 2.0% | 1.8% | 6.1 | 73.6 | nm | >100% | 52% | 2% | 21% | >100% |
| Focus Portfolio | 12.0% | 2.4% | |||||||||
| ASX 300 Healthcare Index | 9.6% | ||||||||||
Source: Refinitiv, Wilsons Advisory.
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Telix Pharmaceuticals (TLX) – Plenty of Upside in the Pipeline
The Focus Portfolio holds TLX at a 2% weight
TLX is a commercial-stage biopharmaceutical company that develops therapeutic and diagnostic radiopharmaceuticals for several different cancer indications.
TLX’s products use targeted radiation to better inform treatment decisions and deliver personalised therapy for cancer. This stands in contrast to many existing cancer therapies which are non-selective and impact healthy tissue and vital organs while treating the disease.
In addition to TLX’s first commercialised product, Illuccix, the company has a significant pipeline of assets with more than 18 clinical trials underway worldwide.
1. Illuccix provides a platform for growth
Illuccix is an imaging agent used in the diagnosis of prostate cancer, which operates in the PSMA-PET market (i.e. prostate-specific membrane antigen positron emission tomography).
PSMA-PET imaging allows for earlier and greater precision detection and more personalised treatment for prostate cancer than conventional imaging methods.
Illuccix has been performing strongly in a commercial sense with Q1 sales of US$112m (+170% vs pcp) driven by ongoing market share gains (current share ~29%) within the expanding PSMA-PET market, where scans are growing strongly due to increased clinical utilisation (replacing conventional imaging methods as the standard of care).
As a successful, established product, Illuccix provides a platform for growth for the broader TLX business (i.e. by generating significant cash flows that can be reinvested into the R&D pipeline).
2. Second generation Illuccix will mean ‘higher for longer’ pricing
TLX’s second-generation Illuccix product, Illuccix 2, is in the near-term pipeline.
In simple terms, Illuccix 2 appears to be clinically equivalent to the first-generation asset, albeit with subtle formulation changes that allow for a larger distribution radius.
If successful, Illuccix 2 will allow TLX to win a second 3-year period of transitional pass through (TPT) pricing in Medicare, noting Illuccix’s initial pricing ‘honeymoon’ is set to expire in July 2025.
With Illuccix 2 targeted for 1H 2025, this will allow TLX to avoid taking a ‘price cut’ (from the removal of TPT) on Illuccix in mid-2025.
Therefore, Illuccix 2 will allow TLX to keep supplying clinics with a product they understand but with the advantage of reimbursement dollars flowing through for longer.
‘Higher for longer’ pricing for Illuccix will benefit TLX’s gross margins and therefore earnings over the medium-term.
3. Telix’s pipeline offers significant upside potential
A key appeal of TLX is that its extensive pipeline offers significant valuation and earnings upside potential, which is complimented by the robust cash flows already generated by Illuccix.
Following recent pipeline updates on TLX591 (SELECT rPFS data) and Zircaix (BLA submission) there is still a cavalcade of catalysts that represent ‘de-risking’ points in TLX’s valuation and will drive the share price over the next 12 months.
| Asset | Description | Expected Catalyst(s) | De-risking value ($/sh)* |
| Commercialised | |||
| Illuccix | Prostate cancer diagnostic | Quarterly sales updates | |
| Pipeline | |||
| Zircaix | Kidney cancer diagnostic | 4Q CY24 - approval, Q1 CY25 launch | $1.60 |
| Pixclara | Brain cancer diagnostic | 4Q CY24 - approval, 1H CY25 - launch | $0.45 |
| Illuccix 2 | 2nd generation prostate cancer diagnostic | 1H CY25 - approval/ launch | $2.00 |
| TLX591 | Prostate cancer theraputic | Mid CY25 - interim phase III ProstACT GLOBAL trial readout | $2.50 |
*Wilsons Advisory Research estimated valuation development.
Source: Telix Pharmaceuticals, Wilsons Advisory.
ResMed (RMD): Overweight and Breathing Easy
The Focus Portfolio holds RMD at a 3.5% weight
RMD is the dominant global leader in CPAP (continuous positive air pressure) devices, which are used to treat sleep disordered breathing (i.e. obstructive sleep apnea (OSA)).
RMD is a high-quality business with several key investor appeals:
- large underpenetrated global market that is benefiting from structural tailwinds.
- sticky customer base reflecting the inherent ‘lock in’ associated with medical devices.
- strong recurring revenue base (~50% of mix) driven by high margin consumables / software subscriptions.
- supportive industry structure with limited competitors and #2 player Philips sidelined from the market.
1. GLP-1 fears are now weighing less on RMD’s share price
The bear/short thesis for RMD over the last year has been that increased usage of GLP-1 weight loss drugs could structurally reduce demand for CPAP devices over the long-term (on the simplistic view that less obesity = less OSA).
Our view remains that CPAP will remain the standard of care for OSA, which points to an enduring need for RMD’s products. Clinical trial evidence has shown that weight loss (using GLP-1s) combined with CPAP, rather than weight loss alone, is safe and offers the best (and most complete) treatment for OSA.
Moreover, real world evidence has shown that GLP-1s have actually been a demand tailwind for CPAP. RMD’s study of >660k subjects found that patients prescribed a GLP-1 medication exhibited >10% higher propensity to start CPAP therapy over those not taking the drug. This demonstrates that greater GLP-1 usage has brought new OSA patients into the CPAP purchase ‘funnel’ (i.e. driving obesity patient referrals from doctors).
2. The focus is back on the (strong) fundamentals
RMD’s impressive Q3 result painted a positive picture of the company’s medium-term earnings outlook.
A mid to high ‘teens’ EPS CAGR in FY25/26 will be underpinned by solid top line growth coupled with margin expansion, which will driven by:
- Mix benefits from strong growth in higher margin mask/software sales (with mask resupply to flow through from the strong device placements already seen).
- The ongoing mix shift towards the higher priced AS11 device (with supply now ‘unconstrained’).
- Further unwind of the elevated component costs seen in prior periods (noting RMD ‘paid up’ to secure supply).
- Operating leverage (with SG&A costs controlled).
3. ResMed is still undervalued
Notwithstanding RMD’s solid earnings-driven share price recovery, the company remains on an excessive valuation discount at a 12-month forward PE multiple of ~23x, which is a ~30% discount to both the 5-year average and RMD’s ‘pre GLP-1’ level. We expect RMD’s valuation to re-rate higher as GLP-1 concerns progressively abate and the market shifts its focus to the strong fundamental outlook of the business.
CSL (CSL) – Modestly Overweight
The Focus Portfolio holds CSL at a 6.5% weight
CSL is a global leader in the production of blood plasma therapies (Behring), flu vaccines (Seqirus), and nephrology (Vifor). The Focus Portfolio’s modest overweight to CSL reflects a combination of ‘pros’ and ‘cons’ with respect to the company’s risk/reward dynamic over the medium-term.
1. Positive on Behring's margin recovery due to ‘Rika’ rollout
The outlook for CSL’s earnings hinges on the speed and strength of Behring’s gross margin recovery, which we are becoming increasingly constructive towards.
While gross margins remain depressed due to increased collection costs, CSL has taken steps to structurally improve its margins via the rollout of the ‘Rika’ plasma donation system.
Rika will drive efficiency benefits from 1) ~30% shorter donation times for patients (allowing more donor appointments per facility per day), as well as 2) ~10% higher plasma yields via the use of a personalised nomogram (allowing ‘bigger’ people to donate more blood).
The rollout of Rika across CSL’s collection network over the next 12 months will be a key driver of Behring’s margin recovery to pre-covid levels - which CSL has guided it will achieve over a 3–5-year time horizon starting this year.
As consensus forecasts are conservative (implying a gross margin recovery to pre-pandemic levels in FY28), there is upgrade potential over the medium-term if CSL can execute effectively.
2. Pipeline has become somewhat less attractive, limiting valuation upside
Our decision to reduce CSL’s portfolio weight earlier this year was driven by the failure of CSL112 to meet its primary endpoint.
Read Opportunity Brewing
The inability of the asset to pass its phase 3 trial materially reduced CSL’s sum-of-the-parts valuation (Wilsons Advisory Research valued CSL112 at $91/share).
As it stands, CSL’s pipeline is now less compelling – offering relatively limited structural growth to earnings or incremental valuation upside over the medium-term.
3. Maintaining a positive skew
On balance, our increasingly constructive view on the outlook for Behring’s earnings recovery warrants our modest overweight exposure to CSL, albeit our level of conviction is tempered to an extent by the subdued outlooks of Vifor and Seqirus and the somewhat uncompelling level of R&D pipeline upside over the medium-term.
Valuation wise, CSL is broadly in line with our ‘fair value’ range, balancing the fact that a) CSL trades on forward PE of ~27x which is below its 5-year average, and b) CSL is somewhat ‘expensive’ relative to global biopharma peers.
To become more constructive on CSL, we are looking for a) developments in the R&D pipeline, b) demonstrated progress on Behring’s margin recovery, and/or c) a meaningful turnaround in the performance of Vifor and Seqirus.
Written by
Greg Burke, Analyst
Greg is an experienced analyst in the Investment Strategy team. He is the lead portfolio manager of the Wilsons Advisory Australian Equity Focus Portfolio and is responsible for the ongoing management of the Global Equity Opportunities List.
About Wilsons Advisory: Wilsons Advisory is a financial advisory firm focused on delivering strategic and investment advice for people with ambition – whether they be a private investor, corporate, fund manager or global institution. Its client-first, whole of firm approach allows Wilsons Advisory to partner with clients for the long-term and provide the wide range of financial and advisory services they may require throughout their financial future. Wilsons Advisory is staff-owned and has offices across Australia.
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