A biotech boom for the ASX? This fundie thinks so

Alex GluyasMarkets reporter

Jun 6, 2024 – 2.04pm

Rory Hunter is portfolio manager of SG Hiscock’s Medical Technology Fund.
The Melbourne-based investment firm oversees $4.2 billion in assets.

Some analysts have suggested CSL could get to $500, do you think that’s plausible?

Absolutely, I think it’s a fool’s errand to bet against the ongoing success of a company like CSL. Its core plasma business looks set to deliver strong growth and margin expansion over the next few years. However, the FY24 result will be an important determinant of whether the share price hits $500 within a three-year time frame.

The market is getting somewhat impatient and questions will start to be asked about whether the company has entered a phase of structurally lower growth, in which case you will see some valuation headwinds. The stock needs to see valuation multiple expansion to reach this target, and it will only be rewarded by the market if you see an acceleration of growth and margin expansion.

Rory Hunter believes the best parma in Melbourne can be found at the Royston Hotel in Richmond. AFR

Does the rally in Telix shares to record highs have further to run?

We think so, but investors will need to stomach some volatility. The easy money has been made. Market participants are now pricing in further success from assets in development and successful execution will be key.

The recent data for the TLX591 drug was an important milestone for the company given the ongoing investment in R&D. The market is hungry to see evidence that this is a good capital allocation decision and that the therapeutic assets, while early in their development, are showing promise in delivering medium to long-term growth. Alongside a second diagnostic asset, continued execution in therapeutics, if successful, will drive valuation multiple expansion.

We originally took a position back in 2019 and chief executive Christian Behrenbruch has delivered on all stated commercial milestones in a timely manner, which is a feat not often achieved among early-stage biotechs. Usually, we build in an extension of communicated time frames in our forecasting.

What’s a stock you like that (most) investors wouldn’t have heard of?

We think Argenica Therapeutics, while still at an early stage, has IP which is showing huge promise. Their lead asset, ARG-007, is a neuroprotective peptide designed to protect brain cells and reduce cell death following strokes and other acute brain injuries.

The company is currently conducting a phase two clinical trial of ARG-007 for acute ischemic stroke in multiple hospitals across Australia. The trial will evaluate the safety and efficacy of the asset in reducing brain cell death and improving patient outcomes.

What stock in your fund has the potential to be the next Telix or Neuren Pharmaceuticals?

There are many stocks that can be the next Telix or Neuren, including Clarity Pharmaceuticals replicating Telix’s success in radiotheranostics and Dimerix replicating Neuren’s success in rare diseases.

There is also good reason that CSL is the only true “biotech” in the ASX 100. Big pharma companies are hungry for growth and are too cumbersome to be consistently good innovators. There are substantial synergies on offer via the successful integration of assets into distribution networks and manufacturing capabilities.

Which stocks in the fund could be M&A targets and why?

It’s hard to single out any one stock. Any of the more established biotechs like Telix or Neuren, those with assets in late-stage development such as Botanix and Dimerix, or those with exciting and compelling early-stage data like Clarity, Immutep, PYC Therapeutics, Arovella or Argenica.

Immutep is an obvious target for Merck if they can successfully navigate their phase three trial. Keytruda contributed 42 per cent of Merck’s overall revenue in 2023 and is fast approaching a patent cliff in 2028. Merck is driven to maintain an 80 per cent market share in the treatment of non-small cell lung cancer and Efti provides them the best avenue to do this.

This is an incredibly exciting period for the Australian biotech sector and a lot is going to happen over the next 12 months. We have seen some strong performance following a year in the US in which 2023 saw record levels of capital raised in the sector and record-setting new product registrations, but it is still only the early stages of a new bull market.

What’s your favourite local restaurant/bar and what’s your go-to order?

I’m a big fan of the Royston Hotel in Richmond. A game of backgammon with a Mountain Goat pale ale, freshly brewed next door, and, in my opinion, the best parma in Melbourne.

Any TV shows or podcasts you’d recommend?

I do enjoy a podcast. Macro Voices provides some of my favourite market-related content. Econtalk is also fascinating and highly thought-provoking.