Sonic Healthcare (ASX:SHL) is the 28th largest stock on the ASX by market capitalisation. They are a healthcare business focused primarily on pathology, but also have a radiology business and some other small related businesses including medical centres and occupational health services. They are the largest operator of pathology labs in Australia with 37% of the market share.
But they provide services to more than just Australia. This dominant position in Australian pathology only accounts for 25% of their revenue. They derive 35% from European laboratories and 26% from US laboratories. 10% of revenue comes from the Australian radiology business.
The structure of the pathology industry in Australia is currently in a state of flux as the third largest operator Australian Clinical Labs (ASX:ACL) has lodged a hostile takeover bid to acquire the second largest player, Healius (ASX:HLS). Were the acquisition to be successful, the combined Healius/ACL would have 42% of the Australian pathology services market. The directors of Healius are strongly opposed to the transaction. The Chairman of Healius explicitly stated in the company’s takeover statement that “the offer is plainly inadequate…”
However, even if it were to proceed in some amended form, the ACCC would also be likely to review it on the grounds that it may lessen competition, but they may deem that having two strong players still provides a sufficient level of competition. The offer has been structured as a nil premium merger.
A new merged entity means Sonic would face a stronger competitor which may put some pressure on both its growth strategy and margins. However at this stage the probability of the deal going through is not high.
Pathology and diagnostic businesses should receive a boost from some of the measures announced during the recent Federal government budget. Nearly 12 million people will be eligible for new bulk billing subsidies when they visit a GP. More affordable GP visits should lead to an increase in visits and a flow on increase in the volume of diagnostic tests ordered.
At present about 16% of the population of Australia are over 65. By 2066 this is expected to increase to 21%. The over 65s population is expected to grow at about double the rate of the broader population. Similar effects are playing out in Europe and the US.
Older people tend to…
