Healthcare Sector Shaken

  Australia's healthcare sector was hit hard last week with two major earnings downgrades, and possible takeovers & #160;for two other struggling groups.Offers for Healthscope from a private equity group led by TPG, and a mooted cheap offer for stricken Sigma Pharmaceuticals grabbed the headlines.But more damaging were & #160;earnings downgrades from Sonic Healthcare, long regarded as the best run group in the sector, and Primary Healthcare, the Sydney-based group that has been struggling to integrate its Symbian takeover.Primary warned & #160;after trading on Friday that earnings could fall by 7% in the year to June 30, thanks to falling & #160;demand for medical tests, a day after its larger rival Sonic issued a similar, but & #160;very surprising warning.Sonic's warning saw its shares drop 25% at one stage on Friday.They ended down 20%, or & #36;2.55, at & #36;10.07, the lowest since late 1993.Sonic's market cap fell & #36;1 billion after it warned that earnings will be flat to & #160;lower in the year to June, mostly because of & #160;the impact of federal government health policy and pricing.Primary's shares will get a reassessment today, even as the overall market rises after Wall Street's turnaround on Friday.They fell 17c on Friday, or more than 4.2%, to end at & #36;3.82.The company said earnings before interest, taxes, depreciation and amortization (EBITDA) for the financial year ending June 30 will be between & #36;330 million & #160;and & #36;340 million, compared with & #36;355 million in 2009.And there isn't much improvement expected next year with & #160;primary forecasting EBITDA of between & #36;360 million and & #36;380 million in the financial year ending June 2011. & quot;The forecasts for FY2010 and FY2011 reflect continuing trading conditions, within the Pathology divisions in particular. & quot;Since our announcement of the half year results in February 2010, Pathology volumes have continued flat and have not returned to a long term growth trend. & quot;This is consistent with industry data, which continues to show year on year Pathology demand reducing from previous levels. & quot;In addition to the Federal Budget Pathology funding cuts, which came into effect 1 November 2009, competition and the deregulation of collection centre licences from 1 July 2010 is placing additional pressure on costs within the Pathology industry as participants prepare for these changes on 1 July 2010. & quot;Primary's forecast EBITDA growth in FY2011 is driven by the current positive recruitment trend of doctors within the Medical Centre practices. In making its projections, Primary has assumed no Federal Funding changes from those that are in place at the present time. & quot; & #160;In its February interim profit release, Primary wasn't exactly optimistic about the outlook for the current year, saying; & quot;The current changes in healthcare funding with the different responses of industry players, and in particular, the timing of the market workout to these responses, makes predictions of growth, and revenues in particular, in FY2010 less definite than usual. & quot;However, we have reasonable expectations that in FY2011 and FY2012 the Group should be looking to an EBITDA growth rate of 15% per annum, & quot; the company said.The latter forecast is obviously out the window now, judging by the forecast earnings for 2011 given out on Friday afternoon.The company will pay a final dividend of 10c a share (7c last year), making a total for the year of 25c a share.That's up from the 14c a share in 2009. Interim dividend for 2010 was 15c.Sonic, which has 41% of Australia's pathology market according to Deutsche Bank research, while Primary has around a third.In its statement, Sonic said & #160;the revenue shortfall resulted from the government's cuts in Medicare fees for pathology services, effective from November 1 last year.The company also lost market share in Queensland and suffered from a nationwide fall in pathology volumes.Sonic said that with two months' trading still to go, net profit for 2009-10 was now estimated to be & #36;290-295 million, flat against last year's profit on a constant-currency basis. & quot;Excluding future business acquisitions and on a constant (FY 2010) currency basis, it is expected that net earnings growth of 10-15% will be achieved for FY 2011, & quot; Sonic forecast for the next financial year.  

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