Two Sides of the Coins; How has biotech finally boomed.

How biotech finally boomed

January 4, 2014

Test results: Sirtex, which is carrying out trials of a cancer treatment, has been a strong sharemarket performer and the focus of much investor interest.

Investing in biotech stocks is not for the faint-hearted – so much so that a lack of analyst depth and knowledge of the sector means that many professional fund managers try to avoid the sector altogether. But the collapse of the gold price and the ongoing implosion of the mining sector during the past year have prompted a steady flow of funds into the sector for the first time.IPOs, a surge in capital raisings and even an offshore acquisition were all part of the mix.

And some of the share price rises can’t be ignored. While only small, Admedus, formerly known as Allied Healthcare, put in one of the top performances on the sharemarket in 2013, with a sixfold rise in its share price to 15¢, giving it a handy market capitalisation of close to $200 million.

Not far behind was a fourfold increase for Prana Biotechnology, while the Mark Bouris-backed Anteo Diagnostics rose threefold before it banked some of the gains with a share placement.

Others such as iSonea rallied hard, from less than 10¢ to more than 9¢ by midyear, only to surrender a large chunk of those gains as early investors took money off the table. Still, from an IPO by regenerative medicine group Regeneus (raising $12 million), to a $23.5 million raising by Neuren Pharmaceuticals, cash was available for the right story – especially as the sharemarket was pushed to the year’s highs in the final quarter.

And the rise in valuations was coupled with the return of some of the veteran stars of the industry.

At Neuren, Richard Treagus took over as executive chairman at the beginning of the year after a stellar performance at Acrux, where he oversaw a sevenfold rise in its worth before he left in 2012.

Similarly at Invion, Greg Collier has taken over as chief executive, returning to the public company sphere after US company Cephalon paid $220 million for ChemGenex, which he had built up a few years back. And over at Admedus, mid-2013 saw it take control of the vehicle through which researcher Ian Frazer is working on a herpes vaccine, which helped trigger a rerating.

Not all the fund-raising has been in the public company space, with a rise in venture-capital funds as well. Hatchtech, developing a treatment for head lice, raised $12.6 million. Run by Hugh Alsop, formerly with Acrux, it has raised $23 million in a series of funding rounds since 2001. Similarly, Nexvet raised $7 million in a venture-capital round.

The venture-capital funding was partly from maturing investments, along with rising valuations attracting interest.

”Over 2013, several companies had programs that matured or had their technology/IP positions sufficiently validated to attract further investment,” Alsop says. ”The interest shown by VCs has been in line with the general investment sentiment. The story in the US is, of course, very different, with the Nasdaq performing extremely well, with a large number of life science/biotech IPOs and solid activity in the VC space.

”The Australian market has been riding a little behind that positive sentiment.”

The rise in biotech stocks in the US comes after several years of poor performance, which pushed US outfits such as Reva Medical and GI Dynamics to list on the ASX due to the better valuation metrics.

”There’s been a cooling off in resources, with funds flowing from resources to biotechnology,” says Geoff Cumming, who runs Anteo Diagnostics.

Like a resources explorer, the sheer length of time it can take to go from proof of concept to establishing a viable operation can be frustrating for biotechs, in particular given the cost of getting a drug to proof-of-concept stage and then through the multiple research trials needed over many years before a product can make it to market.

And even after a product is launched, there can be ongoing trials to fully win over support from the health industry.

One of the sector’s recent stars, Sirtex, has a sharemarket worth of $660 million.

It is carrying out additional research trials of its cancer treatment, which one of its large shareholders, Hunter Hall, reckons could push the shares ahead another eight or ninefold if it succeeds and is able to take a 10 per cent share of its end markets. It will take several months before its research progresses. Then there will be years of expansion and development for the profits to follow.

Still, Sirtex is able to fund its research out of earnings, which is why investors often hunt for companies with products or treatments close to launch, or approaching research events.

This fired up interest in Prana, for example, which has been bought on optimism its Alzheimer’s agent might move successfully to phase III trials, which will reduce its risk profile, and take it a big step closer to getting a successful product to market. The first half of this year could be important in that regard.

Prana is one of a growing number of local biotechs with an international following, which may lift its funding options in the future.

In all, five local companies – Neuren and Prana (both for neuroscience), CSL in the cardiovascular area, Biota in infectious diseases and Mesoblast for advanced therapies – were included in the 2013 annual list of ”projects to watch” that is compiled among global biotech companies late every year.

Along with a lift in analyst coverage, rising offshore investor interest might trigger listings on foreign exchanges, which might provide a further rise in valuations as research programs mature.

”I’ve been knocking on brokers’ doors for four or five years,” says Dr Cumming at Anteo Diagnostic, who points out there has been a slight change in sentiment, with increased analyst coverage of some stocks in the sector.

Mesoblast’s commitment to spend up to $US100 million ($113 million) to buy a suite of stem cell patents, giving it dominance of its part of the regenerative medicine sector, also helped lift its offshore profile.

Additionally, the ASX is planning to sponsor a roadshow early this year of several local technology stocks, taking them to North America and on to Europe, which might help sustain offshore investor interest.

But research progress does not always run smoothly.

While some agencies, such as in Japan and Korea, have opened the door for early launch of products in stem cell therapy, for some traditional drugs the wait to get approvals can be frustrating.

In this category, Clinuvel and Brain Resource have both experienced extensive delays as data is reviewed, which can help to sap investor confidence.

Still, with annual research spending now running at well more than an estimated $800 million – although a large chunk is spent by CSL ($430 million), with Resmed and Cochlear accounting for another $250 million between them – the returns are starting to flow.

The rise in research spending in this sector might be one reason the chronic gap between research spending in Australia and other OECD countries has almost closed. In the past, Australian companies spent only about two-thirds that of other advanced countries. But as they move further onto the global stage, spending is rising apace.

And with more than 13,000 employees – about three times that of the Canadian sector, for example – the local biotech industry is no longer a minnow.

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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