20 February 2013
3 min read

2013 was a vibrant year for biotechnology stocks listed on the Australian Securities Exchange.

The sector enjoyed strong returns buoyed by renewed appetite for company shares, asset allocation shifts away from local fossil fuel companies and a booming US biotech market (the US Biotechnology Index rose by 50 percent in 2013). Given this we thought we would give our clients an insight into how we invest in biotech and where we think the sector is headed.

There are numerous ways to define biotech, but in the context of the share market, it usually refers to emerging companies developing new drugs or devices for the treatment or diagnosis of a disease.

An example of a well known ASX biotech company is Sirtex. The company is developing the use of tiny beads of radiation called SIR-Spheres that are injected into the tumour site of cancer patients where radioactivity can directly destroy the tumour cells.  SIR-Spheres are currently being used on metastatic colorectal cancer patients whom have exhausted all other treatment options. More than 20,000 people have been treated in over 30 countries to date.  Interestingly, the use of SIR-Spheres could grow enormously should clinical trials currently underway yield successful results.

Australia punches above its weight as a leading biotechnology hub, recently ranking 7th in the prestigious 2013 global ‘Scientific American Worldview’ scorecard out of 54 biotech nations. Australia’s comparative advantage comes from a highly skilled workforce, world-class research facilities, a transparent regulatory system and an increasingly favourable tax regime.

Bolstered by major success stories such as CSL, Resmed and Cochlear, there are now more than 900 biotechnology companies in Australia, with around 100 listed on the ASX. They are valued at a combined market capitalisation of more than $50 billion.

Why do we invest in biotech?

Investing in biotech supports our ethical philosophy as the emerging therapies we take an interest in are for the treatment of serious conditions with few medical options available. This means the sector lends itself to meeting multiple aspects of our Australian Ethical Charter, such as ‘activities which contribute to happiness, dignity and education’.  For example, we recently invested in the Initial Public Offering (IPO) of Innate Immunotherapeutics, which is developing a drug to treat Secondary Progressive Multiple Sclerosis. Early clinical data suggests the drug may reverse some of the disabilities patients have recently acquired. Given this disease currently has no approved effective therapy, if Innate could bring this drug to market, it would be of enormous benefit to the hundreds of thousands of MS sufferers.

From an investor’s perspective, however, biotech is not for the faint-hearted given the high risk, high reward nature of the sector. Not only can it be difficult to understand the technology but it can also be extremely challenging to determine the value of a company often years away from being able to sell its product, let alone being able to generate a profit.  This means traditional valuation methodologies are often less applicable.

Instead, one needs to assess a range of issues such as what stage of clinical development an asset is at, the market potential of the drug or device, timing of possible key milestones, regulatory hurdles, intellectual property and cash reserves.  Consequently these hurdles deter many potential investors. Australian Ethical, however, believes this leads to an under-researched market segment and, ultimately, attractive investment opportunities.

What is the outlook for biotech ?

Looking forward, we expect 2014 to be another strong year for the sector driven by the anticipated announcement of significant news for several mid-tier names. For instance, there will be many eyes looking at the results of Alchemia’s Phase III clinical trial into the use of its drug HA-Irinotecan for treating metastatic colorectal cancer, expected by June. While it has been a frustrating time for shareholders, we still keenly await the first sales of Universal Biosensor’s blood coagulation test strips to Siemens now expected within this half.

We also anticipate higher sales of its blood glucose monitoring strips. Finally, the prospect of Sirtex’s internal radiation therapy ‘SIR-Spheres’ moving up from salvage to first line treatment for metastatic colorectal cancer will have many investors focused on the results of the SIRFLOX clinical study due to report in the December quarter 2014.

Longer term, development areas we expect will perform strongly include the growth of immunotherapies, which look to charge the body’s own immune system, treatments for lifestyle diseases, personalised medicine based on a patient’s genotype, finding better ways to deliver old drugs as well as any technology that can take costs out of the healthcare system.

Overall, the Australian biotech industry should continue to prosper due to the additional demand generated from an aging population, greater life expectancies and improving healthcare infrastructure in emerging Asian markets. In short, Australian biotech is in for an exciting ride!