SYB symbion health limited

in big trouble

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    Health-care sector stressed: analyst
    By Richard Salmons
    May 28 2002

    Two-thirds of Australia's listed health-care and biotechnology companies ought to be considered "distressed", according to an independent analyst.

    Melbourne-based Lincoln Indicators said it had analysed financial ratios to reach a figure that indicated 64 per cent of health-care companies were under financial stress.

    "What we are saying is that those companies are exhibiting the characteristics of failed companies," said Lincoln analyst James Gunn.

    "For example, some companies have a level of gearing which we consider to be too high, and this will cause problems in future," he said.

    Mr Gunn conceded that Lincoln research had consistently described a large percentage of the Australian stockmarket as "distressed".



    But he suggested investors instead focus on the small proportion of stocks that received a clean bill of health.

    Those in the 25 per cent of the sector classed as "strong" included Ramsay Health Care, Healthscope and OPSM.

    However, stockbroking analysts noted that the Lincoln methodology appeared to treat health-care companies harshly because they frequently had a high level of intangible assets.

    "I think the Lincoln methodology is informative, but it's worth reflecting on the actual nature of the business: you can ask yourself whether you are comfortable with that level of intangibles," said Salomon Smith Barney analyst Andrew Goodsall.

    Mr Goodsall said pathology operator Sonic Healthcare, for example, had been singled out by Lincoln because its growth strategy involved the acquisition of businesses which were then consolidated, for instance, by closing duplicate laboratories. The strategy has converted tangible assets into intangible ones such as regional market dominance.

    "In a factory, you would want to see the tangible assets, but if you had to break-up a pathology business you would want those intangible assets as well," Mr Goodsall said.

    Salomon at present has a "buy" recommendation on Sonic and expects it to meet its profit forecasts for this financial year. Sonic shares have dipped by about a quarter in the past year, but were unchanged yesterday at $5.40.

    Analysts also defended biotechnology researcher Prana Biotechnology, another target of Lincoln. One analyst noted that while Prana's cashburn rate might require it to do a deal, or go back to the market for more capital in about a year, this was something investors were already taking into account.

    Prana shares fell 15 cents to $1.98 yesterday, but they have more than doubled in the past 12 months.

    Lincoln Indicators uses an analysis system developed over about 20 years by Monash University economist Merv Lincoln.

    The latest report indicates a slight increase in pessimism by the research house, which since mid-1998 has classified at least 40 per cent of the health-care sector as "distressed
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