26 THE AUSTRALIAN, MONDAY, AUGUST 29, 2016theaustralian.com.au/businessreview COMMENTARY

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In contrast to the tortuous path ofdrug development, the medicaldevice sector is booming and itmay not be too long before an-other homegrown global champi-on like ResMed (RMD) andCochlear (COH) emerges fromour local labs.

While the $12bn market capsleep-disorders house ResMedand the $8bn hearing-implantpioneer Cochlear reported solidresults, a cluster of small to midplays is garnering investor atten-tion on the back of approved orhighly promising products.

Device approvals usually take afraction of the time — and cost —of a new drug, with most putativedrug developers having stumbled(some fatally) at one time or an-other.

The key is to have an offeringthat will be accepted by the con-servative medical establishmentas the standard of care, as well asbeing eligible for government orprivate insurance reimbursement.

According to data provided byindustry newsletter Biotech Daily,19 of the 20 most substantive de-vice plays have surged between 11per cent and 5600 per cent overthe last two years, with 12 register-ing triple-digit gains.

Only one, surgical dye recov-ery play Osprey Medical (OSP),has gone backwards.

Analyst Stuart Roberts (of in-dependent life sciences researchhouse NDF Research) says ithelps that Australia has a provenrecord in devices, with the cochle-ar device developed by ProfessorGraeme Clark and his team atMelbourne University.

ResMed’s continuous pressureair pump for sleep apnoeaemerged from the University ofSydney.

“Then there’s the relative easewith which a device can get to

Why China’s investment tide will continue to land offshore that “as soon as Chinese entre-preneurs saw the government po-sitioning itself for ‘mixedownership’, consolidating state-owned with private business, theystarted investing overseas in greatnumbers.

“If you’re a private companywith high efficiency and goodmarket prospects, the SOEs willcome right in … there will be no-where to hide. As the saying (ofmilitary philosopher Sun Tzu)goes: ‘Of the 36 stratagems, fleeingis best’.”

But SOEs inevitably dominatethe largest-scale investments off-shore, as they do within China.The market capitalisation of thetop 300 stocks in China — in theCSI Index — is 56 per cent com-prised of SOEs.

Under President Xi Jinping,the government is committed tothe consolidation of SOEs to cre-ate “national champions”, whichare encouraged to invest offshore

Continued from Page 17 in order to bulk up so they can be-come global leaders — “having adominant role in important sec-tors and crucial areas that affectnational security and the com-manding heights of the economy”.

Beijing-based Arthur Kroeber,founding partner at GavekalDragonomics and author of a newbook China’s Economy: WhatEveryone Needs To Know, told TheAustralian that “as usual, there is acombination of state policy factorsand individual company-level fac-tors” pushing China’s capital intothe world. He highlights three fac-tors:

●A desire to upgrade the na-tion’s technological base viamergers and acquisitions. “Thismotivation is clear in some of thesemiconductor deals, and ofcourse in the proposed $56bn ac-quisition” of Swiss-based agri-business Syngenta by state-ownedChina National Chemical Corp.

●A clear desire to diversifyChina’s international investmentportfolio beyond US treasuries.

“At the macro level, policymakerswould generally like to see higherreturns than are generally avail-able on T-bonds.”

●And President Xi’s ‘One BeltOne Road’ initiative. “It’s hard totease out how this works,” saidKroeber. “Basically, flying the flagof OBOR is now the way for SOEsto get approval for any deal theywant to do for whatever reason inwhatever country.”

There’s a further, newer, dark-er element: “Another thing that’sgoing on, more particularly on theprivate side but perhaps on thestate side as well,” said Kroeber, “isthat people are generally prettypessimistic about the growth out-look in China and the potential forinvestment returns.

“So at the margin they are put-ting more money abroad in mar-kets where they think the returnswill be higher” — as well as provid-ing a “safe haven”.

His colleague Andrew Batson,China research director at Gavek-al, has written in China Economic

Quarterly that formerly SOEsserved the government by maxi-mising profits. Now they do so “bykeeping up investment, with profi-tability a secondary consider-ation”.

Zha Daojiong, professor ofinternational studies at BeijingUniversity and a leading Chineseeconomist, said “many Chinesewho have not had the experienceof extensive study abroad are puz-zled by endless questioning aboutSOEs going to invest in Australiaor other Western markets”.

“Why? Each company has ahistory that is unique to its ownhome country’s history and cul-ture. The origin of many Westerncompanies can be traced to colon-isation. But they don’t seem tohave a problem coming to investin China.”

Michael Komesaroff, an Aus-tralian analyst frequently consult-ed on Chinese SOEs, listed threekey issues for holding back furtherreforms of SOEs. First, “with theconcentration of power and the

corruption clampdown, corporateleaders are keeping their headsdown, not offering any sugges-tions. They are waiting to be toldwhat to do. This explains the gen-eral malaise in China”.

Second, the objectives seem toconflict with each other. For ex-ample, “how can an SOE, whichhas traditionally been a tool forimplementing government policy,at the same time as retaining thiscore attribute also become subjectto market forces?”

Third, “serious reform willmean the closure of vast amountsof high-cost capacity in sectorswhich are in gross oversupply.Chinalco — Rio Tinto’s biggestshareholder — is a good exampleof this.

“At one time it was the largestand most efficient of China’s alu-minium producers, but today it isno longer the largest Chinese pro-ducer. What’s more, it is a high-cost producer. Yet closure wouldcreate mass unemployment anddamage people’s faith in the

government.” Because of this“general economic and politicalmalaise,” he said, “I am not detect-ing any urge by SOEs to invest offshore — or indeed within China.Cadres are afraid of making a mis-take, especially as the party/gov-ernment has made it known thatvery few of the offshore invest-ments have been successful.

“It was for this reason thatsome time back the approval pro-cess was strengthened, and thereis greater accountability requiredof enterprise leadership for theperformance of overseas invest-ments.”

Komesaroff believes that StateGrid’s proposed investment inNSW — its bid is said to be more30 per cent above others — couldhave been at the initiative of theChinese government, or at leastreceived very high level support.“Either way, there was an expec-tation that the investment wouldbe highly profitable or else supportother government policies, or acombination of both.”

In uncertain times, medical device companies can be very attractive.ANDREW MITCHELL, OPHIR ASSET MANAGEMENT

At MOD, all that glitters is not gold but copper

In the current hot market for gold stocks, ownership of a one million ounce gold resource in New Zealand would be more than enough to encourage interest in an ASX-listed junior exploration company.

But if the same company haswhat the mining smarties in the market think is a hotter than hot copper project on its books, the NZ gold asset very quickly becomes marginalised. And so it is with Julian Hanna’s MOD Resources (MOD).

For many years it was the company’s 80 per cent-owned 1.02 million ounce Sams Creek gold project in New Zealand’s South Island that drove interest in the stock. Now it is up for sale because in the last year or so, MOD has fast become one of the best emerging copper stock stories on the strength of its Kalahari project in sunny Botswana.

First up it can be said that ifyou have to have a project in Africa, Botswana would be one of the preferred locations. It’s friendly, safe and flat. And just as important, the sort of cost escalation that wracked the global industry during the mining boom never really arrived in the country.

Interest in MOD’s Botswanacopper adventure picked up late last year when along with the AIM-listed Metal Tiger plc, it picked up a chunk of prospective ground in the central and western part of the Kalahari copper belt on a 70:30 per cent basis.

The land package was pickedup for a song from the administrator of Discovery Mines, which went bust for reasons that are no reflection on the big-time copper appeal of the Kalahari belt (its mining assets to the northeast now sit in a Barclays-backed private equity resources fund, Cupric Canyon Capital).

Cutting to the chase, MOD’sfoothold on a 20km wide by 50km long structural zone that has yielded three discoveries to date — the T1 deposit (which predates the pick-up from Discovery) and the T2 West and T3 finds.

It was the 52m intersection grading 2 per cent copper earlier this year at T3, which saw interest in MOD step up in a big way. What was a 1c stock back in March is now a 5.4c stock, valuing the company at $80 million.

MOD has six drill rigs whirring away at the location and it is waiting on some final assays before getting out a maiden resource estimate by the end of next month.

One of the analysts followingthe stock has had a stab at an initial resource estimate of more than 200,000 tonnes of copper.

That would be a good start atT3 and alone explains the interest in the stock.

However, last week MOD putout some preliminary drill resultson T2 West, the second of the multiple targets to be tested by MOD/Metal Tiger joint venture.

The results included widespread and visible copper mineralisation over 20m widths

with assays eagerly awaited.Hopefully the assays should

hit the market in a couple of weeks. And the story won’t end there with the joint venture as keen as mustard to get some drill holes in to the T9, T5, T7 and T4 prospects.

So news flow from MOD willbe extreme in the coming weeks and months. The unfolding story is independent of the current weakness in copper prices. But most suspect that at $US2.08 a pound, the red metal is bouncing along the bottom.

The idea is that falling gradesat the world’s big existing producers, and robust long-term demand as the developing goes about its electrification in its many forms, will see copper strengthen towards the end of the decade. That would suit MOD just fine.

BARRY FITZGERALD

care system. “In uncertain times,medical device companies can bevery attractive,’’ says Ophir AssetManagement’s portfolio managerAndrew Mitchell.

“They are similar to tech com-panies in that they are disruptivebusinesses, but we see the cashflow much earlier.

“The right medical device com-pany can provide US-dollargrowth no matter what the econ-omic environment.’’

A poster child example is Na-nosonics (NAN), which is alreadyselling its Trophon units to steril-ise ultrasound probes.

This hardly sounds revolution-ary, but the current method in-volves handling a tub full ofdangerous chemicals and is notguaranteed to kill bugs such asHPV.

Nanosonics last week reporteda maiden full-year profit of$122,000, with a second-half sur-plus of $3.4m more than negatingthe first-half loss. Sales almostdoubled to $27m.

Mitchell says the units couldn’tcome at a better time because,under Obamacare, US hospitalsare under pressure to preventcross-infections.

“They are already in 48 of thetop 50 hospitals and have 10,000units installed globally,’’ he says.“That’s a cracking achievement.’’

Shares in Impedimed (IPD)have romped on the back of itstechnology to detect lymph-edema, a side-effect from cancertherapies resulting in fluid build-up in the patient’s limbs.

Once again, the device replaces

an archaic method based on meas-uring the body parts with a tapemeasure.

Mitchell says investors morerecently have got excited aboutthe potential to use the techno-logy for early detection of heartdisease. This extension of use issubject to clinical trials in 2017, butwill be closely watched given therole of heart disease in blowing outhealth budgets globally.

Undeterred by the disappoint-ment of a well-backed asthmaplay called Invion, the wheezingdisorder is the centre of attentionfor at least three listed plays: Res-App (RAP), the recently-listedAdherium (ADR) and MedicalDevelopments (MVP).

ResApp has developed an app-based algorithm to detect respirat-ory disorders, which allows forremote or face-to-face diagnosiswith a higher accuracy than astethoscope.

The ASX’s best performer inthe last 12 months, ResApp shareshave surged 1500 per cent sincelisting in July last year, despite thewheeze-o-meters yet to win ap-proval.

CURE YOUR FINANCIAL ILLS

market,’’ he says. “With drugs youhave stuff going into the blood-stream that can be potentiallytoxic, so you have to do multiplephases of clinical testing.

“With devices all you need is apilot trial and a pivotal trial.’’

Then there’s the ability to link adevice for analytics and upgrades.For example, the latest generationcochlear implants can be remotelymapped using the internet, result-ing in added benefit for the health-

Another star performer, Medi-cal Developments has run hard onthe company’s successful quest tointroduce its Penthrox emergencypain relief tool to global markets.

The so-called green whistle stillawaits approval from the fussyFDA. But in the meantime, theauthority has already approvedthe company’s suite of devices tohelp patients manage asthma andchronic obstructive pulmonarydisease.

“The path to approval for devi-ces is far better understood,’’Medical Developments CEOJohn Sharman says.

He says the US approval pro-cess is still costlier than elsewhere:getting FDA assent for the SpaceChambers (the asthma product)cost $US1m, compared with a typi-cal $US50,000 elsewhere.

Another one to keep abreast ofis AirXpanders (AXP), which cre-ated a device enabling easierbreast augmentation surgery aftera mastectomy.

The tool, based on an implant-ed sack expanded by a carbon-di-oxide canister, replaces the needfor a doctor to inject saline everymonth.

AirXpanders is approved here,with US approval targeted forlater next year.

According to Mitchell, USmastectomy patients are eligiblefor $US20,000 ($26,000) of gov-ernment funding and a recent re-form means doctors must informthem they can access this benefit.

Despite the red-hot marketthere are no guarantees and eventhe large-cap leaders have hadtheir quota of wobbles, such asCochlear’s expensive recall offaulty implants in 2011.

The $1.9bn market cap Sirtex(SRX), which makes spherical de-vices to deliver targeted chemo-therapy to liver cancer sufferers,spent time in the dog box last yearafter an extension trial deliveredambiguous results.

Some valuations factor in notjust blue sky but also the outerstratosphere. Nanosonics is val-ued at a heady $830m, while thepre-revenue ResApp commands a$200m market cap.

The Australian accepts no responsibility for stock recommendations. Readers should contact a licensed financial adviser. The author does not own shares in the stocks mentioned.

There are many promising medical devices makers

TIM BOREHAM

BRITTA KASHOLM-TENGVE

Australian-designed Cochlear implants have been a great success around the world

Company On Aug 1, On Aug 1, % change % change 2014 ($m) 2016 ($m) 12 mnths 24 mnths

Resapp (Narhex) 4 228 2433 5600Reva 54 542 243 904Pro Medicus 93 540 116 481Medical developments 69 347 120 403Nanosonics 221 811 63 267Ellex 39 129 258 231Polynovo 50 156 281 212Sirtex 1067 1814 5 70OBJ 124 138 27 11Cochlear 3632 7593 47 109Resmed 7730 12,914 22 67

Market capitalisation

Source: Biotech Daily

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