The Sonic Healthcare Ltd (ASX: SHL) share price is down after the company gave a trading update and announced an acquisition.
Sonic Healthcare is a major pathology business in Australia as well as other countries like the US and Germany.
FY24 trading update
The company said that its EBITDA (EBITDA explained) guidance, of between $1.7 billion to $1.8 billion, was being maintained after four months of trading in FY24.
Total base business revenue, which excludes COVID testing revenue, has seen FY24 to date growth of 17% – including acquisitions.
Excluding acquisitions, the business said that its organic revenue growth was 7% in the financial year to date. This is a helpful driver for the Sonic Healthcare share price because it shows the underlying business is doing well.
Sonic Healthcare said there has been a large reduction in COVID testing revenue, as expected. But, the budgeted PAMA fee reductions in the USA are “likely to be deferred”.
Pathology Watch acquisition
Sonic Healthcare also revealed that it was acquiring a US business called Pathology Watch in the US for US$130 million.
It’s a medical technology and dermatopathology company, with “proprietary IP used to create [an] end to end digital platform.” This platform includes a laboratory information system, digital pathology and AI algorithms.
Sonic says this creates “significant value-creating opportunities”. The US company currently has annualised revenue of US$15 million, and the acquisition will accelerate its transition to digital pathology.
The ASX healthcare share said that it will create efficiencies at the pathologist level and from caseload distribution across anatomical pathology networks. It will also support “recruitment, retention, second opinions, remote reporting”.
Sonic also claimed that it’s a market-leading product providing a “competitive advantage” to drive sales.
The business also has a prognostic AI algorithm for melanoma in the development pipeline.
Sonic also pointed to synergies with Franklin.ai – its other AI initiative – where it could accelerate Franklin AI applications into Sonic’s AP practices and there’s the potential to accelerate adoption of Franklin’s AI products in global markets.
Final thoughts on the Sonic Healthcare share price
There are a number of tailwinds for earnings including the acquisitions, fee indexation in various markets and contracts, some labs in Europe are being combined (to reduce costs), there’s the potential for more acquisitions and contract wins, the tailwind of ageing populations and so on.
I believe Sonic Healthcare is one of the best ASX healthcare shares. I like its defensive base revenue and earnings, the growing dividend and the acquisitions it’s making. I’d call it a long-term buy at this level.
