6 biotech sector traps

MARKET INSIGHTS

6 biotech sector traps to avoid

As with other tech stocks, the ASX-listed biotechs have had a bumpy ride. But investors who follow some simple rules stand to steer clear of road hazards over the longer term.

TIM BOREHAM

After surfing a wave of Covid-era sentiment in 2020 and the first half of 2021, the global biotech sector subsequently suffered one of its worst sell-offs in history - and ASXlisted life sciences stocks have not been immune.

Prominent biotech CEO Chris Behrenbruch, the chief executive of Telix Pharmaceuticals, sums up the conditions this way:

“It’s been pretty damned brutal. You would think the whole planet has forgotten about the fact that biotechs saved millions of people (during the pandemic).”

The good news is that investors tentatively have returned and muchneeded capital is flowing. Capital raisings include eye disease specialist Opthea’s novel and record-breaking $300 million effort.

With bargains and value traps abounding in equal measure, here are the six golden rules of what not to do when investing in the sector:

1: Hang on for regulatory approval

According to Medicine.net, there’s a one in 5000 chance of a preclinical drug being approved – and it takes an average of 12 years.

The blue sky potential tends to be valued more highly than the hard slog of bringing a drug to market. Share valuations might be higher after milestones such as clinical results, or collaborative alliances with deep-pocketed partners.

2: It’s all about drugs

Wrong. Roughly half of the ASX life sciences sector is perfecting better imaging to detect diseases or novel devices to make life easier for patients or clinicians.

Nanosonics struck global success with its novel device to sterilise surgical probes, while Telix Pharmaceuticals won US approval for its isotope to diagnose prostate cancer.

Devices and diagnostics usually offer a shorter route to market than drugs with a higher chance of success, typically with lower blockbuster potential.

3: Bet on a big pharma takeover

Most ASX biotechs fancy themselves as a takeover target for the pharma giants, who are loaded with cash and running short of new blockbuster drugs.

It won’t happen – 99 per cent of the time at least. More likely is a development deal involving an upfront cash injection and milestones. Takeovers are the exception rather than the rule.

Tim Boreham

4: Only invest in complex, cutting-edge tech

Yep – the ones with the dense, acronym-laden explanations of theoretical mechanisms of action. Usually the boffin, rather than a commercial guy, is firmly in charge.

As with other avenues in life, the ‘keep it simple’ approach typically is the winner. For instance, Rhinomed has gained global sales traction with a simple nasal device to make collecting samples for rapid antigen tests easier.

5: Play the Covid game

The pandemic worked wonders in terms of highlighting the life-saving work of biotechs and also directly helped to develop the telehealth and digital medicine sectors.

Pathology labs such as Australian Clinical Labs and Sonic Healthcare also directly benefited and sanitiser companies cleaned up for a while.

Otherwise, the market for rapid

A colourised transmission electron micrograph of monkeypox

antigen tests is hotly contested and a Covid ‘cure’ has proved elusive.

6: Bet it all on black

As with other speculative sectors, a portfolio approach is more prudent than betting it all on an individual stock.

While there are plenty of examples of shares delivering manifold gains, there are also many instances of companies going from hero to zero overnight after unfavourable trial results.

In a basket of, say, a dozen stocks, two or three winners can more than compensate for the inevitable plodders.