Sonic Healthcare (SHL) – German future fee focus

Sonic Healthcare offers medical diagnostic and administrative services to medical practitioners, hospitals, community health services, and patients in Australia, the US, Germany and elsewhere. Sonic Healthcare is headquartered in Sydney. Ord Minnett has reviewed the medium-term outlook for Sonic Healthcare (SHL) given the increasing likelihood of reforms to Germany’s Gebührenordnung für Ärzte (GOÄ), the medical fee schedule for patients with private health insurance that covers a wide range of consultation fees and outpatient services, including, in Sonic’s case, laboratory fees.

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These reforms pose a risk to Sonic given GOÄ reimbursements account for almost 1/3 of its German division’s revenue, and equate to nearly 8% of group revenue, with drafts of the reforms aiming for a cut in laboratory fee reimbursements, on average, of 29% (although we expect this will be negotiated down as the legislation is developed and we model 20% in our numbers). The timing and details of mooted changes to the GOÄ are uncertain, although our talks with the industry indicate likely implementation from January 2028. The long-flagged but to-date unsuccessful changes to the funding schedule have previously faced political opposition – the legislation not only has to go through the Bundeskabinett, the federal government cabinet, but also the Bundesrat, Germany’s equivalent of Australia’s Senate.

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That opposition looks to have turned, however, with most doctors now appearing to back the reforms, somewhat unsurprisingly given the expected 13% increase in total GOÄ funding will lift physicians’ fees albeit at the expense of laboratory fee reimbursements. Our analysis suggests the GOÄ cuts could hurt Sonic’s net profit in FY29 (allowing for a full-year impact), by 4–27% depending on the final shape of the legislation, using the following assumptions: price cuts of 5–30%; no savings from cost cuts, implying lost revenue falls straight down the P&L statement; and GOÄ-funded work accounting for 30% of the German division’s revenue. We note the changes are more likely to affect the smaller laboratory groups in Germany, so there may be M&A opportunities for Sonic that could compensate for its own revenue reductions.

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Post our review, we have made very minor changes to our near-term EPS forecasts and our target price remains at $24.00. Ord Minnett finds it difficult to be constructive on Sonic given its inability to generate meaningful organic growth even after $3.3 billion of acquisitions over the past seven years. There are undoubtedly some benefits from M&A, but other factors, such as price cuts and customer quotas specific to heathcare in its various markets, along with run-of-the mill costs such as wages and rents, appear to have constrained any meaningful earnings growth. This view leads us to maintain our Hold recommendation despite the apparent value on offer.

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