How to spot a healthy biotech investment

How to spot a healthy biotech investment


MICHAEL BAILEY, The Australian Financial Review

The equity analysts call them “pre-cash flow” companies. All investors really have to go on are the promises. Such companies provide a rare opportunity for ordinary investors to get in on the ground floor of potentially huge, global businesses. There are two main types of pre-cash flow companies in Australia. One type – junior resources explorers – is on the nose as commodity prices wane. As a result, there’s more interest in the other type: biotechnology companies, or “biopharma” as the sector is sometimes known. The success stories out of this sector are well known, but be warned. For every “ten bagger” like a Mesoblast or Sirtex, there are dozens of others that have wiped out their investors or perhaps struggled to break even. More dauntingly, success relies heavily on approval from the only regulator that big pharmaceutical companies care about – the US Food & Drug Administration (FDA).The pathway to commercialisation for the drugs and medical devices offered by Australian biotechs involves three phases of clinical tests which routinely take years, and woe betide the owner of a drug which the FDA knocks back. In January, ASX-listed Pharmaxis got an FDA thumbs-down for its cystic fibrosis drug, Bronchitol, and its shares fell 45 per cent in a day.

Considering the huge rewards on offer, it makes sense that buying biotech companies requires more homework than investing in a blue chip, where analyst coverage is plentiful and there’s a track record on which to base decisions.


“But you don’t need a deep understanding of the science,” says Tim Morris, a partner at advisory, which specialises in research on pre-cashflow companies. Morris has a science degree from the University of NSW but he insists the five principles his firm uses to pick biotechs are common sense. The first three principles on’s five-point checklist are:

1. Management – “We look for people on the executive or board with a history of generating shareholder value growth, because the people running the research and development at these companies tend to be good at spending money and not so great at making it,” Morris says.

2. Financial position – “We like companies with a good capital base,” Morris says. “They’ve raised capital in recent months and won’t be going back to the market any time soon.”

3. Catalysts – “We look for a factor that will make the share price go up in the next 12 months,” Morris says. “Some R&D programs can run 10 years in total, so we like to pick points in that development curve where we think the best risk-adjusted return profile is. The price jump you get around a successful phase completion often is not sustained, so we try to jump in 12 months before. I look for risk-mitigating factors, like the size of the potential market for the drug or device being tested, and whether there are any competing products already filling a need in the area.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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