38min read
PREVIOUS ARTICLE Takeover Targets - 7 Gold Mine... NEXT ARTICLE How the Syrian unrest affects ...

High risk tolerant investors with a penchant for a heart-pumping adrenalin rush have gravitated to biotech stocks in share markets of developed countries everywhere.  The following one year price movement chart for two red-hot ASX Biotechs shows why:

New Zealand-based Neuren Pharmaceuticals Limited (NEU) has seen its share price rise 300% year over year.  The Company’s focus is on developing drugs to treat neurological disorders and cancer.  The company has a drug to treat Traumatic Brain Injury investors appear to be betting could be the first drug of its type to get US FDA approval.

Australia-based Prana Biotechnology Limited (PBT) focuses on developing drugs to treat degenerative processes associate with aging, including Parkinson’s and Huntington’s disease and Alzheimer’s, with a clinical trial of a treatment for Alzheimer’s underway.

While a one year chart for these two Biotechs shows the reward potential, a five year chart shows the risk:

These two companies are classic “story stocks”.  Both are working on exciting things but neither has yet to generate significant operating revenue and when they will is unclear.  However, both these high risk speculative plays have high potential drugs in Phase 2 clinical trials.  

While punting on stocks like these is enticing to many investors, there are less speculative ASX Biotechs that have handsomely rewarded investors over time.  The resources boom shielded the outstanding performance of some Biotechs from Australian investors.

Did you know a 2011 global biotechnology report from Ernst & Young states our Biotech Sector is the largest on the planet as a proportion of GDP?  Did you know a Pricewaterhouse Cooper 2012 BioForum report states the Australian Life Sciences Index has seen consistently better returns that both the US NASDAQ Composite Index and our own All Ordinaries Index since mid-2006?

The following table lists arguably the three best Biotech plays on the ASX over the last decade.  We included one year share price change and ROE along with total shareholder return over time and a 2 year earnings growth forecast.  Here is the table:

Company (CODE)

Mkt Cp

Share Price

52 Wk % Change

ROE

1 Yr Total Share-holder Return

3 Yr Total Share-holder Return

5 Yr Total Share-holder Return

10 Yr Total Share-holder Return

2 Yr Earnings Growth Forecast

CSL Ltd (CSL)

$32.7b

$67.02

+52%

40.4%

53.6%

29.5%

12.6%

30.5%

6.8%

Mesoblast Ltd (MSB)

$1.7b

$5.47

-15%

-9.8%

-13.9%

44%

33.9%

68.3%

Sirtex Medical  (SRX)

$720m

$12.83

+66%

20.7%

68.1%

40.1%

41.2%

10.2%

52.6%

 

CSL Limited (CSL) is the crown jewel of the sector with an outstanding 10 year track record of rewarding its shareholders.  It is the only one of the three to pay dividends, although a modest 1.5% and its growth forecast is also modest.  The company operates globally and its principal claims to fame are its blood plasma products and vaccines used to treat and prevent a wide range of diseases and disorders.

Mesoblast Limited (MSB) has had a tough year but its 2 year earnings growth forecast shows better days ahead.  The company describes itself as a “world leader in novel adult stem cell therapies.”  If you take the maxim of investing only in companies you can understand, Mesoblast is not for you.  However the same could be said of almost any Biotech.  What you need to know is the potential market size of the drugs/treatments/ or devices under development, the funding situation, and pipeline progress through the regulatory approval process.  Mesoblast has a proprietary cell technology and currently has six products in Phase 2 trials.  These products, if successful, will treat diabetes (type 2), heart disease, and certain orthopaedic disorders.  The company had a successful capital raise earlier in the year which analysts predict can safely fund the company for another 4 years.  

Sirtex Pharmaceuticals (SRX) is another company with a healthy earnings forecast.  The company’s principal efforts are focused on liver cancer and its Sir-Spheres radiation treatment has approval in multiple markets.  This company is generating revenue, growing from $70.5 million in FY2011 to $96.8 million in FY2012.  Net profit has increased from $11.5 million in FY2011 to $18.5 million in FY2012.  The company has shown 36 consecutive quarters of sales growth with this treatment.  Sirtex is sponsoring an international study (SIRFLOX) to evaluate use of its Sir-Spheres as a treatment for metastatic colorectal cancer.

There are undoubtedly small cap Biotechs out there with the potential to follow in the footsteps of star performers like CSL, MSB, and SRX.  Finding them is not always a matter of blindly punting on the hottest stock of the moment.  There are some indicators of potential success although there are no guarantees of certainty.  But then there never is in share market investing.  Buying Fortescue Metals or Rio Tinto right now is, in effect, placing a bet on pricing and demand for iron ore.  

With that in mind, here are nine Biotech stocks with stories to tell that deserve a look.  Some have been around for awhile and a few have shorter histories.  Here is our table; including the two outperformers we discussed earlier, NEU and PBT:

Company (CODE)

Mkt Cap

Share Price

52 Wk % Change

1 Yr Total Share-holder Return

3 Yr Total Share-holder Return

5 Yr Total Share-holder Return

10 Yr Total Share-holder Return

2 Yr Earnings Growth Forecast

StarPharma Limited

(SPL)

$278mb

$0.98

-30%

%

%

%

%

%

Bionomics Limited

(BNO)

$243m

$0.62

+88%

88.9%

32.2%

12.6%

5.9%

223.1%

Nanosonics Limited (NAN)

$231m

$0.885

+77%

80.6%

12.6%

29.8%

Prana Biotech (PBT)

$177m

$0.52

+190%

205.8%

60.8%

4.4%

-4.9%

QRx Pharma (QRX)

$122m

$0.84

+24%

24.2%

-1.5%

5.2%

56.8%

Universal Biosensors (UBI)

$118m

$0.68

+17

16.2%

-23.5%

-3.9%

Neuren Pharmaceuticals

(NEU)

$111m

$0.09

+291%

308.7%

79.2%

5.6%

6.8%

Tissue Therapies Ltd (TIS)

$68m

$0.34

-21%

-21.8%

21.9%

34.5%

170.1%

Osprey Medical Inc. (OSP)

$66m

$0.66

+80%

78.4%

 

With the exception of Osprey Medical (OSP) which has only been on the ASX since April of 2012, all these companies have rewarded shareholders to varying degrees depending on the timing of the investment.  Without knowledge of the story behind any of these stocks it seems reasonable to look first at the ones with a positive earnings growth forecast.  

With a staggering 223.1% growth forecast, Bionomics Ltd (BNO) seems a good place to start.  As always, however, there are two problems with raw earnings forecasts.  The first is regardless of their source, they are nothing more than intelligent (we hope) guestimates from a financial analyst.  The second is the quality of the analyst.  Bionomics does not have coverage from any major analyst firms.  From Yahoo Finance Australia we learn there are three analysts covering the company with average EPS (earnings per share) estimates of $0.03 per share for FY2014 rising to $0.11 in FY2014.  The company website includes analyst reports dating back three years.

Bionomics is developing drugs and treatments for medical needs with potentially large populations – Alzheimer’s, cancer and central nervous system disorders, including epilepsy, multiple sclerosis, and anxiety disorders.  The company has a treatment for renal cancer in Phase 2 trials in partnership with Pfizer and others and a treatment for anxiety and depression disorders in Phase 1.  The potential market size for the anxiety/depression treatment is estimated at $US15 billion per annum.

The company recently signed a deal with Merck & Co for a chronic pain treatment.  In March of 2013 the company executed a successful capital raise to fund further development of its drug candidates.

Starpharma (SPL) has a nanotechnology platform using dendrimers aimed at a variety of industrial and healthcare applications.  Understanding the technology is a daunting task at best but the company has an impressive list of partners and has had recent positive trial results.

The product furthest along is called VivaGel to be used for both treatment and prevention of genitourinary conditions.  If you are not sure what a genitourinary condition is, consider that major condom manufacturers are ready to market VivaGel coated condoms.  Starpharma’s technology has agribusiness applications as well and the company in August of 2012 announced an agreement with Nufarm Australia to use dendrimer technology to develop crop protection compounds.  

CIMB Securities has an OUTPERFORM rating on the company with a $1.72 price target.  From Thomson/First Call we learn there are 5 analysts covering SPL, with three STRONG BUYS; one BUY; and one HOLD.  According to the Starpharma website, coverage is provided by Nomura, Bell Potter, Canaccord Genuity, CIMB, and Philip Capital. Investors have had a rough year with SPL but the share price is up about 15% over the last three months.

Tissue Therapies Ltd (TIS) is best known for its VitroGro ECM, a treatment for hard to heal wounds.  Earlier in the year the company announced some bad news that European regulators said VitroGro should be regulated as a medicine, not as a medical device as the company had hoped.  The European Medicines Agency (EMA) has now set a start date for the regulatory review beginning in September 2013.

Astute investors might question the market potential for hard to heal wounds, but TIS also develops treatments for a wide range of applications, many of them very common such as burns, acute wounds, skin ulcers, and psoriasis.  Other applications include scar prevention, and breast, colon, and prostate cancers.

CIMB Securities has a NEUTRAL recommendation on the shares and Thomson/First Call indicates one other broker covering the company with a BUY rating.

QRxPharma Limited (QRX) is working on new treatments for pain management, with an eye towards commercialization in the US and EU markets.  The company’s prime offering, MOXDUO, is ready for commercialization with only one remaining regulatory hurdle.  However, that hurdle from the US FDA has been troublesome, to say the least, and serves as a prime example of the high risk of biotech investing.

Considering the size of the market for effective pain management treatments, it is little wonder this company was well-regarded by analysts.  Although the FDA had already determined data from the company’s original NDA (New drug Application) was sufficient to demonstrate efficacy and had found no safety issues, at the end of August 2013 they once again asked for more.  They are asking for validation of an issue that will require looking back at millions of data points in the 375 patients studied.  The company put on a positive face and maintains they will resubmit and expect approval in Q1 of 2014.  Investors were not impressed and the share price dropped 25%.  Here is a one month chart:

The approval delay led to the analyst at JP Morgan downgrading the stock from OVERWEIGHT to NEUTRAL and cutting the target price from $1.15 to $0.95.  The analyst suspects the additional six month delay could jeopardize the company’s current funding.  

Despite the setback, Citi still sees significant upside providing FDA approval comes through and maintained its BUY rating and price target of a lofty $2.52.

Strictly speaking the remaining three companies are not Biotechs, but rather medical device companies.  However, some Biotech research investment firms include them with traditional Biotech companies.

The largest of the three, Nanosonics Ltd (NAN) has products in the market and is actually generating revenue, but unfortunately still losing money!  Full year results for FY2013 showed a 21% increase in sales but a net operating loss of $5.8 million.  The company makes products for the control of infections acquired from healthcare related activities, or the industry terminology HAI’s (Health Acquired Infections.)  The US Center for Disease Control (CDC) estimates close t