For every one money maker there are 100s of diasters What the doctor ordered
CRITERION is loath to dub any sector as the next big thing, but - as with global warming theorists - evidence is mounting in favour of the lab-coated boffin brigade.
It's not just that the US business bible, Forbes, has proclaimed biotechs as the next tulip boom. Cash fleeing from a tiring resources sector needs to find a new home.
According to Intersuisse, the local biotech sector gained close to 10 per cent in January and has risen 40 per cent since June 30 last year, easily outperforming the broader market's 14 per cent.
Not that every stock in the index attracted the investor wolf whistles: 65 rose in January - 24 by more than 20 per cent - but 65 fell in value.
Globally, a spate of serious deals has peaked investor interest. This includes the three-way tussle for local hero Vision Systems, won by Danaher Corp which outlayed a cool $650 million for the medical equipment maker.
According to the US publication BioCentury, the takeover activity reflects the disconnect between what average investors are willing to pay compared with strategic buyers such as big pharma outfits.
It's not unusual for an acquirer to offer a 50 per cent premium - and that's without any competitive tension from another bidder.
In part, BioCentury blames "rational panic". "Several pharma companies have new chief executives who are facing the worst of all worlds: major drugs coming off patent and a dearth of internal productivity."
The global giants have also been more willing to slip between the sheets with a local hopeful, by way of collaborative or royalty arrangements. Cynics suggest the deals are more about throttling potential rivals in their cradle than true collaboration, but a wad of cash is still a wad of cash no matter the motive.
Another compelling reason is that, after years of hard yakka, more biotechs are closer to reporting something worthwhile: in Intersuisse's words "data that is traditionally associated with revaluation of a company".
Given the biotech sector is expansive and populated by little-researched stocks, Criterion can't purport to offer the definitive guide. But here's a thought or two.
Avexa (AVX, 57c) has emerged as an early winner in 2007, having paid $12 million to secure the US and Canadian rights to the promising late-stage HIV treatment Apricitabine.
The stock has spluttered because of hiccups rounding up candidates for its crucial phase 2B trial of the drug, but all seems to be on track now. We last rated Avexa a SPECULATIVE BUY at 22.5c in late October and are inclined to stay on board.
As with most of life's purchases, investors can expect to fork out for quality assets worth BUYING.
Pharmaxis (PXS) is a case in point. Pharmaxis shares have almost doubled over the past year, but the company's asthma diagnosis drug Aridol - already approved for use in Europe - promises immediate revenues.
Pharmaxis's possible blockbuster drug Bronchitol offers long-term potential. The company is hardly cheap with a $600 million market cap, but deduct $86 million for cash reserves.
ChemGenix (CXS, 60c) on Friday won manufacturing patent protection over its Ceflatonin compound, which is intended as a leukemia treatment. The US Food & Drug Administration has awarded fast-track status and patient recruiting for phase 2 trials has begun.
Alchemia (ACL, $1.14) surged 40 per cent last week ahead of yesterday's disclosure the FDA had approved use of the anti-cholesterol drug Arixtra.
Alchemia hopes to produce a generic version with sales envisaged by mid-2008. In a case of investors buying on the rumour and selling on the fact, Alchemia shares yesterday eased 5 per cent. HOLD.
Criterion has a soft spot for medical device innovators, who face a less tortuous regulatory path than drug developers.
So we rate a SPECULATIVE BUY to Labtech (LBT, 23c), Brainz Instruments (BZI, 49.5c) and CathRx (CXD, $1.94). In each case, the companies have a tangible and innovative product to offer a definable market.
Labtech is developing a machine to automate agar sampling in labs, Brainz has a real-time brain monitor and CathRx is all about diagnosing and treating heart arrhythmia.
At the SPECULATIVE end, Xceed (XBL, 20c) is worth watching. The low-key CSIRO spin-off last week struck a deal with US titan Biomet to develop its biodegradable polymer technology for medical use.
Potential applications - of which there are many - include cartilage repair, cranial surgery and treating burns.
Xceed last year entered a joint venture with the decorated Adelaide burns specialist John Greenwood; and formed an exclusive collaboration with Medtronics, another US titan, in relation to coronary stents.
Xceed stock has been weighed down by a current rights issue and a stock overhang caused by an exiting major investor.
Bacterial slime-buster Biosignal (BOS, 15.5c) slithered on to Criterion's radar in late December. We rated the stock a SPECULATIVE BUY at 16c, mainly in its anti-bacterial application for contact lenses and corrosion-prone oil and gas pipelines.
With more than 100 stocks broadly defined as "biotech" or "life sciences", the odds are most won't be winners. They'll either run out of cash or reinvent as online travel agents or mail-order porn houses.
A reformed penny dreadful, Benitec (BLT, 11c) has provided investors with roller-coaster thrills since Criterion rated the stock a "speculative buy" at 7c in early November 7.
Benitec shares soared to a January 7 high of 48c after the company announced a deal in which Pfizer had agreed to Benitec's DNA technology.
Benitec's gene-silencing technology - which aims to switch off bad genes - is hard to fathom, as are its prospects. Given the stock was trading at 2c in September, we suggest punters take profits and SELL.
We feel Norwood Abbey (NAL, 8c) has been given ample chance to show merit in something other than burning cash (its coffers now hold a mere $900,000).
We're not sure about Clinuvel (CUV, 83c) which has morphed from developing better fake tan to skin cancer treatments. The stock has had a poor trading history but has recently improved under Clinuvel's new management, but we await more evidence to justify its $230 million market cap.
We think Biota's (BTA, $1.57) bird-flu prospects have been well factored into the stock's $280 million valuation, even though Relenza royalties are starting to flow in earnest.
Despite efforts to improve and homogenise disclosure standards, biotech reporting remains a frustrating melange of the incomprehensible and the hyperbolic. But for those willing to delve deeper, the next CSL, Cochlear or ResMed could be concealed amid the dregs.
The Australian accepts no responsibility for stock recommendations. Readers should contact a licensed financial adviser. The author does not hold shares in the companies mentioned.
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MBP Price at posting:
0.0¢ Sentiment: Buy Disclosure: Not Held
