The five pharma stocks exciting investors Michael SmithHealth editor
Sep 20, 2024 – 3.33pm
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Australia is punching above its weight in the global pharmaceutical sector, but the risks often outweigh the rewards for investors inclined to take a punt on business models largely misunderstood by the broader market.
A string of blunders in the sector a decade ago alerted fund managers to the risks of investing in an industry where it can take years to generate revenue, and survival hinges on the outcome of clinical trials rather than the laws of demand.
Jon Pilcher, the chief executive of Neuren, which is a top biotech pick for investors on the ASX. Eamon Gallagher
However, the success of giants such as CSL has cemented Australia’s reputation as a breeding ground for successful biotechnology companies. The challenge is sorting the winners from the losers.
Carving out a niche developing applications used to treat rare diseases is a credible starting point, fund managers say.
One example is Neuren Pharmaceuticals, which has increased its market value by almost six times in five years after successfully bringing to market a drug called Daybue to treat the cognitive disorder Rett syndrome, a genetic brain disorder. It has also recorded positive Phase 2 clinical trial results for its drug to treat the cognitive disorder Phelan-McDermid syndrome in children.
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“Neuren has been successful as a rare disease company. The benefits for Australian companies is their clinical trials are far less expensive, and you can expedite clinical trials to get the assets to market,” says Rory Hunter, a portfolio manager of SG Hiscock’s Medical Technology Fund.
“It is very hard for an Australian company listed on the ASX to go after a blockbuster application because they need hundreds of millions if not billions invested in clinical trials.”
However, the stock has fallen out of favour this year, slipping 43 per cent, after a strong run in 2022 and 2023. Many see it as a buying opportunity.
Hashan De Silva, the managing partner of biotech investment fund KP Rx, says: “In the short term, the share price might continue to struggle if sales growth in the US slows and if Acadia, Neuren’s commercial partner, is slow to launch in other markets.
“That said, the real driver of value longer term is going to be Neuren’s pipeline drug, NNZ-2591, which has generated very strong data in early Phase 2a trials.”
Fund managers still rate cancer diagnostics specialist Telix Pharmaceuticals, which in August upgraded its full-year revenue forecast following a strong second quarter. Shares in Telix, which floated in 2017 at 65¢ each, are now trading at $18.76. Despite almost doubling its share price this year, investors remain excited as potential US approval for its renal diagnostics application looms.“There is a huge amount of catalyst coming up in the stock,” Hunter says.
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A lesser known ASX-listed pharmaceutical player with potential is Syntara, which makes drugs to treat extracellular matrix dysfunction, which can cause cancer, muscular dystrophy and other conditions. It is currently undertaking five separate Phase 2 trials.
“The most advanced trial is in myelofibrosis, which is a rare haematological cancer, with results expected before the end of the year,” says De Silva, who sits on the company’s board. With a relatively small market capitalisation of $41 million, the company is also seen as a potential takeover target. The stock has risen 60 per cent this year, but is trading well off a record high set in July.
You have to accept and embrace the fact you are going to step on land mines now and again, otherwise you miss the good ones.
— Rory Hunter, SG Hiscock
Botanix Pharmaceuticals, which develops treatments for skin infections and diseases, is one example of a company with assets in late-stage development which investors view as less risky than more novel therapies.
“You have to accept and embrace the fact you are going to step on land mines now and again, otherwise you miss the good ones,” says Hunter. “It requires a diversified approach to the sector. Once the IP is validated, you are moving into commercialisation and past regulatory approvals.”
He likes Botanix for this reason. Its treatment for hyperhidrosis, or severe underarm sweating, affects a large part of the population, and its Japanese partner has already commercialised its treatment. “They will accelerate revenues and profitability. While their IP isn’t quite as exciting, the market they are addressing is significant,” he says.
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Clarity Pharmaceuticals, a radiopharmaceuticals medical group which uses radiation to target cancers for diagnostic and treatment purposes, has been one of the sector’s star performers this year. The company’s share price has tripled since the start of the year.
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