One venture capitalist says there's one thing investors are getting wrong about investing in health in Australia
Expert view: Here’s what investors are getting wrong about Australian health stocks
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The health sector hasn’t attracted as much investing activity as the tech sector in Australia, and Dr Geoff Waring reckons there’s one simple reason why.
Health in Australia a ‘blind spot’
Waring, of Stoic Venture Capital, reckons the lack of revenue from earlier stage health companies is a contributing factor.
And in turn, it underpins a belief in the market that future M&A deals are further away.
“It [health care] is a blind spot for investors. Even in the small cap sector you’ve got companies developing drugs, stem cell therapies; they have no revenues and so investors are a bit shy,” Dr Waring said.
“With software companies, you can measure revenues — how fast they’re growing – so investors feel more certain about them.”
“What they don’t realise is that in healthcare, if a company is waiting for an acquisition they don’t need revenues (to acquire). They need good results in Phase II clinical trials.”
“If there’s good efficacy and safety at the end of Phase II, there’s a high chance of being acquired.”
“We’ve got such a history of software-based tech companies doing well and we haven’t got such a history of companies in the healthcare, except for CSL (ASX:CSL), getting really big.”
What will make things change?
But Dr Waring thinks if just a handful of health companies in Australia join CSL in growing big or making significant achievements, investing activity will increase.
“I think we’ll get a few of those coming in the next few years and that’ll make investors take more notice in the healthcare stocks,” he said.
“You see companies like Mesoblast seeing their stem cell therapies getting approved by FDA. That can be a big gain for them and show what is possible for healthcare companies to do.”
“There’s a few smaller drug companies like Cynata Therapeutics (ASX:CYP) or Dimerix (ASX:DXB).
“They’re much smaller but they’re getting close to having Phase II clinical trial results coming out.
“So investors who understand the acquisitions come after results will appreciate the value in them and start buying them when they see what Mesoblast does.”
Small caps benefiting from diverted VC money
Speaking more broadly about venture capital during COVID-19, Dr Waring also noted less investor money has gone towards seed capital investments and towards later stage investments – including the listed sector.
“Small caps have been booming lately with all this money coming in,” Dr Waring said.
“I think people have seen small caps as attractive because they’re more liquid than these startups that require consistent money being fed to them as they go through different round of financing.”
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