9min read

The biotechnology sector is high risk, but so are the rewards. Plans for a new drug can take years to stgelop and burn a lot of cash a long the way without any guarantee of success. However, new drugs are regularly coming to market, so investors will always be tempted to take a chance on a biotech with potential.

James Georges, of Patersons Securities, says the United States and Australian biotechnology sectors have experienced a slowdown in new listings compared to the heady days of the technology boom. Since then, many biotechs across the world have failed in the absence of capital. Companies that survived the “tech wreck” have demonstrated resilience and good management, and that gives investors more confidence to lift their risk appetites amid a possibly brighter economic outlook.

The biotechnology category, consisting of 81 companies for a total market capitalisation of $25 billion, is part of the broader health care sector. Health care has 148 companies for a market capitalisation of about $51 billion, and, according to Standard and Poor’s, the sector has booked an annualised price return of 3.92 per cent for the 12 months to April 30, 2011, and 4.62 per cent over five years.

This compares favourably with the S&P/ASX 200, which delivered an annualised price return of .33 per cent for the 12 months to April 30, 2011 and a negative 1.71 per cent over five years.

Georges says his list, while not recommendations to buy, offer potentially solid capital gains on the back of recovering stronger global economies.  However higher risks associated with biotechs should be taken into account before investing.

Mesoblast (MSB)
Market capitalisation: $2.5 billion
Share price: $9.30


 Chart: Share price over the year to 20/05/2011 versus ASX200 (XJO)

Georges says stem cell treatment to treat disease or injury is creating immense interest in the global investment community. He says Mesoblast, a medical research and stgelopment company, is stgeloping therapies that clinical trial results indicate a high probability of success. Therapies are targeting heart failure, bone-marrow regeneration in cancer patients and disc repair. Georges says a possible and highly lucrative licensing deal with a US biotech company provides strong endorsement of the technology platform. Product sales are unlikely before 2015, but additional revenue from partnering deals is likely before then. Georges says the company is well funded, implying little dilution risk. He says the company’s inclusion in the S&P/ASX 200 index has helped, as index funds are compelled to accumulate in order to rebalance their portfolios. However, Georges adds: “The stock is only suited to investors comfortable with high levels of share price volatility,” he says. “Consider buying on weakness.”

Sirtex Medical (SRX)
Market capitalisation: $290 million
Share price: $5.39


Chart: Share price over the year to 20/05/2011 versus ASX200 (XJO) 

Georges says Sirtex has stgeloped an effective treatment for liver cancer. It involves infusing radioactive microspheres to selectively target tumors. Sales growth has been consistently strong despite the treatment being used mostly as a last resort. Large-scale trials in progress should significantly promote use. Gross margins are more than 80 per cent, Georges says. He says investment risks include weak intellectual property protection, Sirtex Medical’s limited resources and a single product portfolio. “The stock’s large potential upside compensates for these risks,” he says. “Current dose sales represent less than 1 per cent of the addressable global market for people diagnosed worldwide each year with liver cancer. More than 18,000 liver cancer patients have been treated with SIR-Spheres microspheres at more than 400 medical centres across the world.”

Market capitalisation: $18 billion
Share price: $34.05


Chart: Share price over the year to 20/05/2011 versus ASX200 (XJO) 

CSL stgelops, makes and markets biopharmaceutical products. Georges says the blood plasma industry has consolidated into a few fully integrated global suppliers. Scale of operations, control of supply and integration of services – from blood collection to product manufacture – gives CSL a competitive advantage that’s difficult to replicate. Industry consolidation led to favourable pricing and lifted returns. CSL’s human papillomavirus (HPV) vaccine offers another earnings stream, while it generates royalty revenue from Merck’s Gardasil and GlaxoSmithKline’s Cervarix. “A strong industry position makes it one of Australia’s best businesses and it should be a core portfolio stock at today’s price,” Georges says. He says the strong Australian dollar has been a headwind, so investors could find solid long-term value here, particularly if the currency falls.

Prana Biotechnology (PBT)
Market capitalisation: $52 million
Share price: 21 cents


Chart: Share price over the year to 20/05/2011 versus ASX200 (XJO) 

Prana stgelops therapies for a broad spectrum of age-related diseases, such as Alzheimer’s Disease. Georges says drug stgelopment is aimed at treating central disease pathways that lead to degeneration of the brain and eye. He says the company is focusing on stgeloping PBT-2, a metal protein-attenuating compound, which could potentially slow Alzheimer’s Disease. Georges says Prana has successfully raised funds in the US – one of the advantages of being dual listed. Georges says any progress will be rapidly reflected in a higher share price.

Prima Biomed (PRR)
Market capitalisation: $290 million
Share price: 34 cents


Chart: Share price over the year to 20/05/2011 versus ASX200 (XJO) 

Effectively combating ovarian cancer is an objective of this company. Georges says Prima is stgeloping Cvac, a cancer vaccine approach which stimulates the patient’s own immune system to target and hopefully destroy tumors. He says Prima is currently researching Cvac in phase II clinical trials, with a focus on using dendritic cells to fight ovarian cancer strains. “Prima’s ultimate goal is to commercialise Cvac, of which the global market for ovarian cancer therapeutics is valued at about $US3.6 billion,” he says.

Market capitalisation at May 18, 2011
Share prices at May 20, 2011

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