The biotech bounce back

How to catch the biotech bounce back

A re-capitalisation cycle is imminent, says Bell Potter healthcare analyst John Hester, and health and biotech stocks with cash in the bank will sit ahead of the pack

Emma Davies

EMMA DAVIES

The biotechnology sector has been hit hard this year. A market correction saw stock valuations decimated despite making progress in the clinic or commercialisation – but things are looking up.

Bell Potter healthcare analyst John Hester says regardless of whether it’s the start of a recovery, or just a bounce off the bottom, now is the time to focus on companies who’ve got cash in the bank.

Normally, in the absence of adverse macroeconomic conditions, biotechnology companies can raise money if they’ve got good management and some strong earlystage clinical data from phase one or phase two trial.

“I absolutely see the biotech market returning from the last quarter of this year, as the dust settles on interest rate rises, and we get back to normal business conditions,” Hester said.

“In fact, we’re already seeing strong signs of that, the Paradigm Biopharmaceuticals (PAR) ~$60 million raise from a few weeks ago is one example, and Mesoblast (MSB) recorded a $45 million raising recently as well.

“Both these companies have outstanding drug candidates in areas of high unmet need, and both are in relatively late-stage trials, so that market is absolutely beginning to re-open.”

Hester says companies that raised money in 2020-2021 are sitting pretty, pointing to Avita Medical (AVH) and Polynovo (PNV) as examples.

“Avita is still burning cash at quite a rate, but it’s held up really well because it’s got plenty of cash in the bank, and also a bit of revenue,” he said.

“Polynovo doesn’t have a lot of cash in the bank but, similarly, it does have strong revenue growth.

“In contrast, a stock like Aroa Biosurgery (ARX) which has ~$50 million in the bank, is not yet cashflow positive, but has held up really well.

“Cash is at a premium and you just want to avoid a situation where the market perceives that you need to raise money in this environment.”

Cash is king, Hester reiterates, because while good results go a long way in maintaining a company’s market capitalisation, in the absence of that, what is needed most is a strong balance sheet.

“I absolutely see the biotech market returning from the last quarter of this year, as the dust settles on interest rate rises ”