In the current climate, biotechnology is a hot and tricky market where it is easy to get burned. Yet the rewards are so tempting. The Intersuisse Biotechnology Index (as at September 30, 2003) is 86.8 per cent up on its trough just before the Iraq war in March, 91.3 per cent ahead of a low point in September 2001 and even 11 per cent above its February 2002 peak.
Of the 62 companies in the Intersuisse Biotechnology Index, 50 have risen since the beginning of the year. The best performers are Epitan (up 315 per cent over the year to date), pSivida (up 282 per cent), Unitract (up 256 per cent) and Benitec (up183 per cent).
Jonathan Buckley, a director at Intersuisse Corporate, notes that after its recent rapid gains, the index and sector is taking a breather. “Some companies have taken the opportunity to cash up with capital raisings. This has maybe created an opportunity for investors to acquire some of the more interesting stocks.”
But investors could also have lost heavily in the sector. The heaviest losses have come from Ambri (down 75 per cent over the year to date), Virax (- 61 per cent), VRI Biomedical (-57 per cent) and Prana Biotechnology (-51 per cent).
Buckley cautions that “this is not the first time we have seen such a rise and short-term outperformance by Australian biotechnology companies”.
“Since we started monitoring the sector in 1996, there have been three comparable major upswings,” he says.
Since the Intersuisse Biotechnology Index started at 1000 on January 1, 1996, it has added 711 per cent, while the Nasdaq Biotechnology Index has risen by 135 per cent (from 303 to 710) and the All Ordinaries by 44.6 per cent (from 2188 to 3165).
Among the better known outperformers since 1996 are Cochlear, CSL, Ventracor (Micro Medical), Peptech and Novogen. Others such as Biota, Meditech and Progen have merely added to the volatility.
More colourfully, Julian Mitchell, investment director at JM Financial Group, describes the biotech sector as being “like shooting stars that burn brightly for a short time”.
He believes that the market is driven by two factors — the quality of the science being offered and the risk appetite of investors. “Some stocks are clearly overvalued at the moment,” he says. “The best time to invest in a biotech stock is precisely when nobody wants to know. Now there is an avalanche of biotech companies on the investor road-show circuit. There is a high degree of investor interest.”
To many analysts the biotech sector reminds them of the dot-com bubble that caused so much euphoria only to be followed by grief. Says one: “The recent surge in the sector is being driven by day traders rather than institutional support. It is thus more punted than invested.”
With profits virtually unheard of, the overvaluation of biotech stocks is largely driven by their management promises.
One analyst comments: “Management tends to over-promise to keep their share price up so that they can sustain momentum to attract the investment needed to provide their capital. Going public so early is understandable given that Australia lacks the venture capital infrastructure to support them. Biotech companies have to survive a marathon that lasts years and incurs massive development costs before products even go into trials and negotiations commence. At the same time, investors are poorly informed about a difficult and technical sector so they are heavily reliant on management.”
Says another analyst: “Given the early stage of their development, it is easy to get burned. There is no earnings record, leaving the valuations based on expectations. Most will fall apart. The survival of biotech companies is heavily dependant on placing multiple bets on risky ideas and hoping that a few pay off.”
A study by David Sparling and Michael Vitale of the Australian Graduate School of Management found that of the 24 biotech companies that went public on the ASX from 1998 to 2002, seven had insufficient cash to survive beyond a year and another nine did not have enough to last beyond two years.
The message is clear: Be warned about investing in the biotech sector. Many believe there are too many companies in the sector without the backing to carry new products to market.
PricewaterhouseCoopers estimates that the 76 listed companies in life sciences have a combined market value of $14 billion on the ASX in mid-September. The category includes biotech, medical devices and pharmaceutical businesses.
When privately held companies are included, Australia’s biotech sector grows to about 300 companies, many of which are tied to university research and some of them backed by venture capital.
