Under The Microscope: Is Biotech Just A Bubble?
Sun Herald
Sunday October 5, 2003
In an under-researched market, stockbrokers are divided on a soaring sector, writes John Synnott.
AUSTRALIA'S promising biotechnology sector has come out of its winter of disinterest from investors at a cracking pace.
Share prices rose 86 per cent since their March trough, according to the Intersuisse index of Australia's 62 biotech companies listed on the stock exchange.
Big brave figures like these are what investors love to hear from growth stocks. It's enough to bring a tear of nostalgia to the eye of many a burnt technology investor.
There are plenty of high hopes and hype: pharmaceutical companies are crying out to researchers for new drugs to treat cancer and obesity because the patent protection for $US50 billion ($73 billion) of drugs ends over the next five or six years. This is a good slice of the total $US130 billion market.
But is the share price hike a bubble? Is the current correction the start of a bust?
People in the sector, who are given to talking its prospects up, say no. It is simply a lot of pent-up demand from investors breaking free, and finance-starved biotechs will be happy to oblige with a string of private companies floating after Christmas.
Australia now has 500 biotech companies beavering away in an area where it has a good track record of research four of our five Nobel prizes were won in the sector.
We have never had a blockbuster drug the closest was Biota 's flu cure Relenza , but it was pipped at the post because it required a spray applicator and a competitor produced a pill.
Then there were Colonly Stimulating Factors (CSFs) to help cancer patients restore their immune system after chemotherapy, which were first developed in Australia. Researchers here, however, missed commercial opportunities and we now pay to import CSFs.
But we have developed some world-beating devices such as Cochlear hearing implants and the successful Ventracor heart pump.
Unlike the hype and blue-sky projections of the dotcom boom, Australian biotechnology is maturing with a string of products in the pipeline that should project us into the global big time.
``Australia is in the forefront of cancer treatments and anti-inflammatory treatments," said Mel Bridges , chairman of veterinary biotech company Peptech , and a 30-year veteran of the sector.
He puts Australia in the top six ``life sciences" nations in the world.
The sector may have excellent long-term prospects, but it's tricky for small investors to handle. Shares can go to sleep for long periods but then wake up in a frenzy, as at present, said Mark Dutton of IPAC .
``Remember there's a lot of good opportunities outside Australia [available through international managed funds]," he said.
Far from a bubble, the recent growth spurt in the business cycle is just starting, according to Tolhurst Noall biotech and healthcare analyst Martin Ashdown .
His bullish view is that the sharemarket works in five-year cycles (with 80 per cent of the money made in 20 per cent of the time) and the consensus now is that risk capital is coming out of hibernation and lifting biotech share prices.
Australia follows the US where the technology-laden Nasdaq index has risen 60 to 70 per cent over the past year.
The larger geopolitical picture is of China turning out to be a major engine of growth in the global economy. Australia is benefitting through the supply of steel, coal and minerals in a cycle that should peak in 2006-07.
Ashdown sees the current ``correction" in biotech share prices as simply the ``lemming festival" of October, when shares usually fall back temporarily.
Driving biotechnology is the advance in molecular biology and computer science, major tools of discovery that have converged in the past decade. The sector is a growth engine, improving the quality of life and agriculture, and boosting economic development. It's also a potential export earner for Australia.
Ashdown's five picks in the sector are:
* Chemeq , which is about to produce a substitute for antibiotics in animal feed.
* Epitan , which is commercialising Melanotan as an agent in the prevention of skin cancer and for cosmetic use.
* Agenics, which makes diagnostic kits as well as research and development into blood clot diagnostics and imaging.
* Metabolic Pharmaceuticals , which develops treatments for conditions including obesity.
* Medical Monitors Limited (formerly Defiance Mining Limited ), which is Australia's sole provider of home-based cardiac and blood-pressure monitoring services.
Ashdown's advice to investors is to do some research on the companies, look at the fundamentals and check out the four Ps: people behind it, what patents they hold, what potential they have and how persistent they have been in recent cycles. Also take advice.
Australian biotech companies are leaner and meaner because of a tough couple of years, said Peter Russell of stockbrokers Intersuisse .
``Companies cut costs, reduced cash burn, hired commercially experienced leaders with offshore backgrounds who drove this process and also focused on the more immediately prospective work," he said.
``From a broad vision, companies focused on just one product or application, putting all distractions on the back burner."
Analyst Stuart Roberts of Southern Cross Equities agrees biotechnology is maturing in Australia, that managers are more savvy and companies are growing. The typical company is capitalised at $60 million.
Roberts said biotechnology first became an asset class in 1986 but now is a good time to invest.
``It takes about 12 years to get a drug approved, so we are only just getting to the stage where companies can have a shot at the big time," he said.
Shares have reached and exceeded his target prices but he believes there is still value in the sector. Southern Cross follows Imugene , AGT Biosciences , Epitan , Meditech , Optiscan , Prana Biotechnology and listed investment company (LIC) Starpharma .
LICs are a short cut to the sector for investors, and Southern Cross said Circadian , an incubator of small biotechs, is still trading at a discount to the value of its listed investments plus its cash.
At these prices the investor picks up programs in cancer diagnostics, Alzheimer's disease, memory enhancement and analgesics for nothing.
Other LICs are Biotech Capital and Medica .
Analyst Alison Coutts of biotech specialist stockbroker Emerging Growth Capital (eG Capital ), said there are some very interesting drug developments under way but these private companies do not have to keep the market informed.
``Traditionally the market has marked them down below asset values not a popular way to get into biotech stocks, because they don't have a lot of liquidity to drive the price forward," said Coutts, who confirms eG Capital will offer a managed fund for retail investors next year.
``You can be in them for a long time before anything happens and while the underlying value is there, the market has a short-term focus."
Coutts said blood plasma company CSL has a cervical cancer vaccine (HPV ) that looks extremely good. It is at stage three of the gruelling approvals process but could be ready by 2005-06.
There is big money to be made in the volatile sector, but it's risky.
``Investors have to be careful trying to cherry pick the best of the sector and stay away from the land mines."
The positive sentiment to biotech has lifted even junior stocks, despite their higher risk levels, said Duncan Gordon of stockbrokers Baker Young , which covers the small end of the market.
``Australian drug companies are small fish in a big sea, competing in a global market with strong competition from major pharmaceutical companies so the risks are high," he said.
He sees a success story in Sirtex , which makes a delivery system for treating liver cancer which has approval to sell to the US hospital market.
Foster Stockbroking rates Sirtex a strong buy for the novel liver treatment which has a lack of competitors. It also has high hopes for its trials at Yale University on a treatment for ovarian cancer.
``For investors with an appetite for high risk, we recommend to switch out of Peptech and into Novogen ," it said in a recent note to its investor clients.
``Both companies have very promising drugs, however Novogen's drugs are more advanced in their stages of development."
Coutts denies the dramatic hike in share prices signals the party is over.
``The market is under-researched," she said.
``Investors do not have all the right information to make proper investment decisions.
``There are still some companies which are under-valued and some which are over-valued. There will be companies that will make it to the market and be more successful than Biota was.
``The question is, which ones?"
Healthy, wealthy and wise
1 There are about 350 biotechnology drug products and vaccines currently being trialled on humans in the United States.
2 There are about 500 companies that make up the Australian biotech industry. Almost 70 of these are listed on the stock exchange.
3 Australian biotechs have not been good at attracting investment money they received only 5 per cent of the nation's $2.86 billion venture capital in 2000.
4 ``Australia is set to transform itself into an important player in the global biotech arena through cutting edge research and development," say consultants Frost and Sullivan.
5 Biotechnology companies have evolved from the 1980s blockbuster drug companies to tool companies that improved the oral, intravenous or other delivery of drugs in the 1990s.
6 Hundreds of products are in early stages of trying to find treatments for cancer, Alzheimer's, heart disease, diabetes, multiple sclerosis, AIDS and obesity.
7 Frost and Sullivan say local biotech companies have become ``post-genomic", where ``the future of biotechnology is all about understanding gene function".
As biotechnology targets disease, market players can back a success story
THE share price bonanza since June has been just the sign that cash-starved biotech companies such as Proteome Systems of North Ryde, Sydney, have been waiting for.
Australia's largest private biotech company an offspring of Macquarie University employing 120 people it has seized on the new-found investor interest in the sector to float some of the company.
About a sixth of the business will be offered to investors to raise $40 million to $50 million for the company, valuing the whole enterprise at up to $300 million. The float was going to be before Christmas but now looks unlikely to happen until February.
The company has a great story to tell about how the esoteric field of proteomics is the new wave in treating disease.
And, says deputy CEO John Martin, Australia is at the forefront of discoveries. The first protein sequencer was developed in Australia.
Proteome Systems has both a tool side it makes money producing analytical systems for protein research and a drug development side.
The technology follows on the DNA revolution and the mapping of the human genome, fields dominated by America that identified gene abnormalities that caused disease.
Then researchers realised that 30,000 human genes can yield hundreds of thousands of proteins where illness and drugs attack.
Proteomics is speeding up the process of developing a wide range of drug candidates for each target gene.
``Unlike previous blockbuster drugs like Viagra which were one-size-fits-all and came with side effects the new drugs can directly target the problem, effectively switching them on and off," Martin said.
Mid-size companies can be viable tailoring these technologies to specific diseases in small drug research.
Health care is becoming complex because while before we could treat the symptoms of disease, now we have the potential to treat the cause at the genetic and protein level.
Blinded by science
INVESTING in biotechs is loaded with risk. How can you judge the success of a barely understood product even before you put your faith in a company's business strategy, management and business development?
EG Capital analyst Alison Coutts (left) said the best investment strategy is to have a spread of stocks, unless you are extremely well researched and know what you are doing. These are high beta, high volatility stocks. They are subject to unpredictable price moves when something hits in the US which does not have any reference to local companies.
``If you want a quiet life, stick to bonds and banks, but if you want much higher returns, pick carefully and watch them like a hawk," she said.
EG Capital says interesting companies with potential upside include:
* Peptech ,
* Clinical Cell Culture ,
* Genetic Technologies ,
* CSL ,
* Progen ,
* Sirtex ,
* Norwood Abbey .
Coutts also has a few company floats that she expects will be winners:
* Pharmaxis ,
* Biodiem ,
* Proteome .
© 2003 Sun Herald
