What a difference a year makes. The downturn in mining stocks from 2013 saw hot money flow into the biotech sector. But after some spectacular research failures, sentiment soured, leaving the sector firmly in the shadows for much of 2014 so that even the surge in biotech stocks globally bypassed the local players.
Alchemia, QRx Pharma and Prana were all punished on poor research results with others such as Bionomics dumped for a time on results which failed to meet expectations. Then there were the likes of Starpharma and the Mark Bouris-backed Anteo Diagnostic, where delays in bringing product to market kept investors on the back foot.
"Very few Australian biotech stocks would be at 12-month highs," the managing director of Anteo, Dr Geoff Cumming, said of the sector at year's end. "Many funds flowed from resources into biotech – speculative money, risk money.
"There were some really spectacular upsets – as research results failed to meet research trial end points, and they were treated harshly. Investors want to see results coming through."
Adjusting to the different risk profile of biotechs when compared with resource explorers has been a challenge for many investors as well.
"It is a risky area of investment – you have to look at the management, the board and its history and you look to see if there is a way to diversify the risk factor – is it a one-show pony with a binary research outcome," Anteo's Cumming said. "We have a platform for technology."
Others such as Bionomics do as well, which helps to reduce the risk profile.
As a former government monopoly, CSL, the sector leader, benefits from its global presence, although the big winner in terms of the sharemarket performance was Sirtex, whose share price more than doubled from a touch below $12 to trade around $29 heading into the year's close as investors looked increasingly optimistically at prospects for a key research trial outcome, which is due in the first half of 2015.
At the same time, Clinuvel saw its share price treble as Psivida's doubled, both thanks to market launch approvals.
These gains overshadowed another sector heavyweight, Mesoblast, which has suffered from sour sentiment due to delays in starting a key heart trial, which is now under way. That and the near term launch of sales of its first product, in Japan, may help revive sentiment here.
The likes of Sirtex, which is already profitable and paying a dividend, can be valued on their fundamentals. Most other biotechs have a great deal of "blue sky" that investors must discount for the ever present risk of research failure, while also seeking to avoid stocks which have only a single product, which ratchets up the risk profile, or that have encountered ongoing research difficulties, such as the Fiona Wood-backed Avita. The latter has spent over $100 million, but success for its spray-on skin treatment for burns remains elusive.
The poor investor sentiment towards the sector saw a slew of biotech IPOs fail to get away at the end of the year, which underscored the sector's near-term difficulties.
"Risk appetite has dissipated. That's not helped," said Shaw Stockbroking analyst Darren Vincent. He favours stocks such as Nanosonics, Osprey and Sinovita, which are all involved in the medical devices field.
"It's all about sales traction," he said of these stocks, with Nanosonics now picking up speed, while Osprey and Sinovita are a little further back.
For biotech stocks, he prefers the likes of Bionomics and Orthocell.
Bell Potter analyst John Hester likes Sirtex, although "it's gone way past my valuation point", he said, following its share price surge in 2014. Then there is Viralytics, which is trading well below his estimate of 75¢ for its "fair value", despite ongoing research progress.
Others point to Neuren, now headed by executive chairman Dr Richard Treagus, who built up Acrux between 2007 and 2012.
"It's the dream team," one fund manager said of Dr Treagus, who "did a great job for investors" when he ran Acrux.
Neuren has research programs under way which are being funded by the US Department of Defence.
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