Sonic Healthcare - the investment case

We discuss the investment case for Sonic Healthcare, a global pathology provider with Dan Moore (analyst Investors Mutual).  With the ageing of the population, thematically healthcare seems like a good investment.

Transcript of Podcast

 Mark Draper: Here with Dan Moore, Investors Mutual analyst and we are talking about Sonic Healthcare which is a pathology operator that most people would know as Clinpath. That is an Adelaide name and is different interstate. Dan can you give us a flyover view of Sonic Healthcare and what they do and where they are located, I think is most interesting.

Dan Moore: Sure. Thanks Mark. Sonic Healthcare is really a global pathology planner and that they operate in a number of countries around the world. They have substantial earnings in Australia but they also, and they are the biggest pathology planner in Australia but they are also the largest player in Germany which they have a very significant operation. They are the largest player in the U.K. They are the largest player in Switzerland and close to the largest in Belgium and they are number three in the U.S. so they are quite a big global player. They also own a small radiology business in Australia and a medical centre business in Australia which I think is also the largest as well so globally diversified, diagnostics company but mainly pathology and they like to be and their strategy is to be the largest player in whatever geography they operate in.

Mark Draper: And in terms of management team, I think one of the features of Sonic, you have had a very stable management team Colin Goldschmidt has been there forever and the strategies have been in place forever. Can you talk through just a little bit of what their strategy has been in the last ten to fifteen years?

Dan Moore: Sure. Their strategy, as I said before, is to be the largest player in any market they operate in and they have achieved that through consolidating a number of markets over twenty years and they started doing that in Australia where pathology was a cottage industry and the benefits of consolidation and why this is the strategy that they tried to achieve is pathology is a fixed cost business. If you are the largest player, you will have the lowest cost base per test and it is quite synergistic if you own your own lab and then you can buy another lab and bring the pathology volume from that lab into yours and then effectively shut down the other lab. It is very synergistic to earnings and it delivers a lot of cost savings and they have done that very successfully in Australia. They have done it very successfully in Germany. They are starting to be quite successful in the U.K. and in the U.S they are number three so in the U.S they are getting there but that has been the strategy and when you are the largest player, it also allows you to deal with any government funding cuts that happen from time to time. If you are a small player, you know, those funding cuts can put you out of business but if you are the largest player who can survive any cuts, it allows you the opportunity to buy out the smaller players at cheap prices when they are really struggling. So that has been the general strategy for over twenty years executed by Colin and Chris, the CEO and the CFO, they have been there well over twenty years. It has been quite a big success story in Australia.

Mark Draper: So consolidation is part of cost cutting story, the other side of it and most people will relate to the aging of the population and a health care player like this, can you give us any feel for the growth in pathology tests and revenues and the flip side of the cost-cutting story?

Dan Moore: Sure. Yeah, no it is definitely one of the other benefits of pathology is being a diagnostics service. It can save you money through the health care system. If you diagnose diseases earlier on, it can save you a lot of money so if it is something that has been new tests are always, there is a lot of result done to develop new tests to diagnose diseases earlier and Sonic is a beneficiary of that so you can see new tests are always being develop, that’s one, and then with an aging population, obviously you have a higher prevalence of disease as you age so they are also a beneficiary of that so volume growth of pathology tests, you know, through a long period of time has grown at five to seven percent compound for a very long period of time and Sonic’s revenue should have approximated that before any acquisitions with some year to year volatility if there are funding cuts.

Mark Draper: So it is a nice space to be, you just have to be careful of government funding risks that we mentioned before. Dan thanks for that. Thanks for the helicopter view of Sonic and I appreciate your time.

Dan Moore: Thank you.


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