The past year has highlighted the importance of biotechnology on our lives and wellbeing.

But virus-ridden 2020 was also a profitable year for smart value investors with the right biotech shares in their portfolio.

According to the industry newsletter Bioshares, its top six stock picks for calendar 2020 delivered a 56.6 per cent return, versus a flatlined ASX 200 index for the same period (down 2.7 per cent).

But investing in individual biotech stocks can be like a rollercoaster ride.

For instance, shares in stem cell developer Mesoblast (ASX:MSB) have been crunched from $5.50 in late September 2020 to around $2.30 as of early January – a circa 60 per cent decline.

Yet in December 2018 the stock was worth around $1. The 450 per cent rise up to $5.50 was largely driven by hopes of a COVID-19 therapy that has since been thwarted by the US Food and Drug Administration (FDA).

Telix Pharmaceuticals (ASX:TLX) shares have gone from around 50c in February 2018 to around $4 now – a 700 per cent increase over less than three years.

A $20,000 investment in Telix at its lowest point would be worth around $160,000 now.

And there are other great Australian biotechnology stories, such as Polynovo (ASX:PNV). Shares in the wound care house have soared from around 20c in August 2017 to close to $4 now – an1800 per cent increase in just over three years.

So how should investors go about capturing the next Telix or Polynovo in 2021, and avoiding train wrecks?

Firstly, you need a bunch of biotechs in your portfolio – not an unmanageable flock but more than just one. Biotechnology is complex and risky, and companies frequently fail to hit expected milestones.

There are more than 150 listed biotech companies on the ASX, so you need to back a select shortlist to outperform. While the science is often complex, look for companies that are capable of taking longer strides over the medium term.

What do I mean by longer strides?

Biotechnology involves complex science, specialist terminology and uncertainty. One life science play can look pretty much like another at the surface – but some are more likely to be winners than others.

Biotechnology companies are expensive businesses, not academic exercises or hobbies. Their management needs to have shareholder payoff as front-of-mind and not an afterthought.

That said, a credible biotech needs some people with ‘PhD’ and ‘MD’ after their names to steer the enterprise towards a valuable new medicine (or two).

Biotechnology companies are built upon a foundation of good science, detailed plans, testing and intellectual property (patents and/or know-how). These require a dedicated in-house team of experts working hard and with purpose, ensuring step-by-step care and precision.

‘Teamwork’ is the key here: after all, no Australian Rules football team has won a premiership with 18 gun forwards and nothing else.

The ideal biotech should have diversity in the team – scientists, deal-doers and people who glue it all together.

If the aim is to start selling product then a multidisciplinary ‘go-to-market’ team is essential.

Companies at this stage include Telix and Medical Developments (ASX:MVP), which has rights to the front-line pain relief device colloquially known as the ‘green whistle’.

If management’s aim is to do a deal with a large pharmaceutical company, then the biotech needs a team that can combine asset development, deal making skills and tech transfer expertise.

That makes for a real team sport. Either way, it is hard to see a mere handful of people building a $1billion company.

It always helps to question the team’s track record, but also its motivation. Are the board and key management striving to add value, or more interested in the lifestyle benefits attached to running a listed company?

Plenty of biotechs have promised much and delivered little over decades, yet somehow manage to keep raising enough capital to keep the director fees and CEO stipends flowing.

For many investors, their investment approach boils down to three approaches: buy and sell on gut feel and emotion, take ‘pot luck’ or avoid biotechnology shares altogether.

None of course is likely to be good for their portfolio.

Rather than ignoring the sector or relying on the belly compass, investors should be striving to find the stocks with the value-adding management teams capable of taking longer strides. Even if the way they tell their story is a bit ‘clunky’ or hard to understand.

Having found their worthy gem, investors need to consider how long they should hold a stock.

If you look at some of the recent ‘winners’ in Australian biotechnology, real value creation has taken three years or more. One example is the eye disease house Opthea (ASX:OPT).

During the waiting period doubt can start to set in and the urge to sell can become irresistible.

But patience is usually a virtue. If you bought shares in a company that is taking longer strides than 100 other listed biotech stocks, then the quality should compound over time and reward investors’ patience.

Dr Ian Dixon is founder and CEO of Exopharm Ltd, an ASX listed, clinical stage platform technology and product company at the forefront of developing both precision and regenerative medicines using exosomes or EVs.