Biotech stocks waiting for a blockbuster Author: Eli Greenblat Date: 01/09/2005 Words: 627 Source: AFR Publication: The Financial Review Section: Supplement Page: 13 Without the healing power of a medical breakthrough, this sector has been feeling pretty flat, says Eli Greenblat.
The biotech industry, like many other niche innovative sectors, tends to become captive to the success or failure of its most high-profile participants.
Such is especially the case with the Australian biotechnology and medical device industry, which last year put in a poor stockmarket performance and was characterised by a number of much publicised blow-ups.
When fat pill maker Metabolic released the results of its crucial 2b trial in December, it was the clinical test the entire biotech industry had been waiting for.
The potential of a billion-dollar blockbuster drug coming out of Australia's biotech landscape which is still small in the global scheme of things would have lifted the entire sector and probably encouraged a new flow of funds to small companies.
But the results of Metabolic's trial were neutral at best (some analysts said they were a disaster), and the entire sector felt the pain.
A report by broking firm Intersuisse shows biotech stocks fell by 20 per cent in 2004-05, against a 20 per cent gain by the All Ordinaries Index over the same period.
The Nasdaq Biotechnology Index fell 8.5 per cent .
The failure of an Aussie biotech company to rise above the pack over the past year and unveil a globally significant discovery is also disappointing, given the hundreds of millions of dollars poured into the sector by investors and governments.
An Australian delegation in excess of 400 attended the industry's most important biotech conference in America, BIO 2005, which attracted more than 16,000 delegates worldwide.
A number of federal ministers and no fewer than three premiers attended the conference, reflecting the importance governments place on the sector.
Since 2003, the Australian government has invested about $1.29 billion in biotech-related research and development. But when will this furious activity translate into results on the stockmarket?
Jonathan Buckley, director of Intersuisse Corporate, says the two biggest factors in the drop were the negative lead from the US and the flight of risk capital into resources. "The 20 per cent drop in biotechnology and medical device stocks is part of the shake-up of the biotech sector.
"Green investors have tended to bail out of biotech stocks while the more experienced have started to buy with a nose for the inevitable recovery," Buckley says.
But he says that in the long term, the biotech sector represents a happy hunting ground, delivering average annual compound growth of 21 per cent.
"The volatility is traditionally more extreme than Nasdaq biotech stocks because the companies are much smaller and much less liquid.
"This heightens those extremes and some people will lose a lot of money and some will make a lot of money. We believe the sector fundamentals are firm and that the better stocks will outperform in the short to medium term.
" Sentiment would be helped with some high-profile successful progress in commercialisation.
"A number of companies now have the key attributes of a commercial focus, a good pipeline including later stage products, experienced management and adequate cash."
Scott Power, an analyst at ABN Amro Morgans, says he is starting to notice signs that investor interest is returning to the smaller end of the health-care and biotech sector.
"After 18 months of disappointing performance, it may be time for investors to revisit the space . . . we note the Nasdaq Biotech Index is looking constructive," Power says.
He says catalysts for an upturn in the fortunes of the Australian biotech sector might include merger and acquisition activity, and fresh money coming into the sector.
Intensive care
? Biotechnology stocks fell 20pc in 2004-05 against a 20pc rise in the broad index.
? One factor in the downturn was the flight of risk capital into resources.
? Investor interest is returning to the smaller end of the sector.
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