Why picking ASX biotechs is (mostly) for the crazy brave (copyright link)Why picking ASX biotechs is mostly for the crazy brave
It’s a space with a reputation for rollercoaster returns and outlandish sales pitches, but some investors get lucky.
Tom RichardsonJournalistApr 3, 2024 – 6.00amThe Australian biotechnology sector has produced massive winners such as the $140 billion blood products giant, CSL, but is also notorious for its unnerving volatility and costly clinical trials.
Hugh Dive says speculative biotechs are risky. Louie Douvis
The ASX has 171 companies in the healthcare sub-sector, 85 in the pharmaceuticals sub-sector and 39 in a biotech sub-sector. Aside from gems like CSL, it is a space with a reputation for rollercoaster returns and outlandish claims about “breakthroughs” that never materialise.
Hugh Dive, the chief investment officer at Atlas Funds Management, says picking biotech winners is tricky because each company is underpinned by inherently complex science.
“So much rests on understanding the science, so you get a very binary outcome – either it works fabulously, or it goes to zero,” he says. “Unless you have extreme specialisation in an area, it’s hard.”
Dive points to CSL’s recent setback with a drug known as CSL112 to treat heart attacks, as an example of how failure can occur despite positive market expectations and a $1 billion investment by an already wildly successful company.
On the other hand, one of the sector’s biggest recent winners is $4.1 billion cancer diagnostic radiotherapy group Telix Pharmaceuticals. The stock is up 1453 per cent over the past five years and has added 1880 per cent since its November 2017 initial public offer price of 65¢. It was trading at around $12 on Tuesday.
Biotech investor David Williams, who runs corporate advisory firm Kidder Williams, says Telix’s success shows Australia’s radio pharmaceuticals sector is “hot as Hades” in producing huge winners like Telix and Sirtex. Sirtex, which is best known for its technology to fight last-stage colorectal liver cancer, soared on the ASX before snaring a $1.9 billion takeover bid in 2018.
David Williams Arsineh Houspian
“I got China Grande [China Grand Pharmaceutica] to take 8 per cent of Telix about a year-and-a-half ago when it was worth $300 million, and now it’s worth more than $3.5 billion,” says Williams.
“Now I’m an investor in [ASX-listed] Clarity Pharma. It has a radiotherapy product for pancreatic and prostate cancer. The testing in humans is unbelievable, so it’s gone from almost nothing to $800 million and [I think it] will be $5 billion someday soon.”
Since listing on the ASX in August 2021 at $1.40 a share, Clarity’s value has climbed 96.4 per cent to $2.75 a share, with backers including Mr Williams, former Cochlear chief executive and Clarity director Chris Roberts, fund manager Firetrail Investments and KKR-backed cancer care provider GenesisCare.
“It may sound funny, but third-party endorsement adds to a biotech’s credibility,” says Dive.
“The presence of large corporates or well-known fund managers on a company’s share register is one form of endorsement we look for, especially the multinational fund managers with vast teams of analysts. An added benefit is large investors are likely to have deep pockets to subscribe to new equity issues if a company requires more capital.”
Williams says he targets biotechs with a disruptive product that could work as a platform technology across multiple applications. He says burns treatment specialist PolyNovo, a company in which he is both investor and chairman, is an example of a rare platform technology success as the product is now used by surgeons for applications other than treating burns.
“In Australia, there’s about 150 pure biotech companies listed, but 95 per cent of them have never done anything, I guess 20 per cent will fail before June,” he warns.
“Lots have just spent 10 years testing on mice, recycling themselves, and paying themselves.
“So you better make damn sure a company has a viable product, you’ve also got to raise money, there’s plenty about, but you need someone who knows what they’re doing, and you need great executives to run it.”
The entrepreneur adds that some biotechs may get lucky if they invent a product that becomes popular for an off-label purpose. “Take botox,” he says, “people take that now and go, holy s---, this is great, and Ozempic was supposed to treat diabetes but is taken for weight loss.”
The S&P/ASX 200 Health Care Index, which comprises leading medical and biotechnology businesses, has gained 1 per cent over the past 12 months, versus a return of 9.3 per cent for Australia’s flagship S&P/ASX 200 Index over the same period.
However, one speculative biotech that has thumped its peers and the broader market is Opthea. The biotech is running two large clinical trials in patients to develop a therapy to treat common eye diseases.
10-baggers or bust
The stock has swung wildly over the past five years, with the company boasting around $150 million cash on hand as at December 31.
Gerard Satur, the chief executive of investment research firm, stockbroker and asset manager MST Financial, says Opthea is among his top picks for success, alongside neuroscience success story Neuren and neurodegenerative researcher Alterity Therapeutics.
“You have to be very selective to invest in biotech stocks on the ASX, there are too many stocks we believe do not offer attractive risk-return as an investment,” says Satur.
“We have the largest healthcare research team in the market, we do thorough due diligence on companies like Opthea, which we like because it has the potential to be the first drug for wet AMD [age-related macular degeneration disease] in more than 15 years.
“The divergence between good and bad is massive in biotech. We turn away a lot more companies than we cover for research as we just don’t feel like they should take investors, and we hate it when companies spruik too much.”
Satur says the returns are lucrative if an investor manages to unearth a winner and a successful company can raise a lot of capital if necessary in Australia. “Regularly there can be five or 10-baggers,” he says. “And there needs to be, as there’s risk with biotech.” A 10-bagger is an investment that appreciates in value 10 times its initial purchase price.
Ultimately, the speculative nature of the sector means it is an “avoid” for Dive as the risk of permanent capital loss is too great. The stock picker says he prefers to focus on established, profitable players such as CSL or Sonic Healthcare, but that should not preclude others prepared to take more risk.
“Often with small biotechs you hope they get taken out by big pharma companies that write a cheque if the tech is good, so sometimes you get takeovers and the rewards,” says Dive.
“But it takes vast amounts of time and money to get a biotech through the hoops. And probably the most crucial thing is how much cash runway a company has, so if it’s burning tonnes of cash and doesn’t have much in the bank, you’re probably facing a highly dilutive capital raising or worse.
“If the capital markets are unfriendly, the company may run out of cash prior to their therapies being approved, or may be unable to fund the next stage in the testing process.”
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