ASX biotech investors should follow track record, not fundamentals
Health & Biotech
Health & Biotech
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Biotech investors can diversify risk by investing in medical devices which have a shorter product development time frame, says Dr Anton Uvarov, a biotech expert and consultant at Forrest Capital.
Welcome to Stockhead’s Expert Q&A. Tell us about your background.
I spent few years as an equity research analyst in New York with Citibank covering small and mid cap biotechs and have a doctorate in biochemistry and medical genetics. Since coming to Australia five years ago I have been involved in a number of start ups and small cap ASX listed companies.
How does the Australian biotech market shape up?
In Australia the ASX is not really a platform for investments, it is a platform for gambling.
Fundamentals do not drive the ASX like they do in the US, so you most often have to follow a track record of people who have made a return for their investors as opposed to the facts themselves. Science drives the US market; in US no one will invest while it is still in the pre-clinical stage, it must be in humans and is backed by the FDA. In Australia we have to pick the best of what is offered, meaning we have to take more risks and invest in early stage companies , quite often pre-clinical.
On the ASX there are a few companies that have really good science that are dramatically undervalued and some that have really terrible science that have gained a fair bit of traction – we do not have a fundamentally driven market.
What should everyday investors look out for when investing in biotechs?
There a few key factors to investing in the industry:
You want to look into whether it will be able to reach the US market – anything with the backing of the FDA demands a higher valuation.
You should investigate where the product is coming from – if it is coming from my grandma’s garage it is probably not the greatest idea, but if it comes from a reputable university then it has much more credit.
You must invest in people, check whether they have a track record in the industry – are they doctors or scientists? If there is just a bunch of accountants in the boardroom then they probably would not have the best ideas for a biotech.
Then look at the product itself – you have to pick out the companies that are creating a niche product with a large medical need. If there is a small company investing into something for heart failure you know that they are going to need a significant amount of investment which can often be out of reach.
What challenges lie ahead for biotechs?
I think historically the problem has been communicating with retail investors – biotech executives often struggle to speak in plain language.
Investors need to know the basics of what is good and what is bad and often that can be hard to get across. They are mostly technically complicated and it will take some time to educate the market through independent conversation.
The problem at the moment is that Australian biotechs are too small for institutional investors and are too complicated for retail investors so no one wants to cover it.
Historically the function of a research analyst was to work out what was good and what was bad, but they are increasingly paid by the companies themselves. We need to have more of the forums which encourage independent conversation and allow for executives and management to have more points of contact with retail investors.
There are no freely available place for investors to read something that is unbiased.
Do you have any tips for investors?
For Australian investors they should diversify the risk by investing in medical devices because they have a shorter time frame for product development and therefore less risk.
People can more readily understand devices whereas every time you talk about biotech most people have no idea what you’re talking about.
Anton Uvarov has significant experience as an equity analyst in the healthcare industry with a focus on biotechnology sector, both domestically and internationally.
Dr Uvarov’s scientific expertise and company knowledge spreads across variety of therapeutic areas and spectrum of market capitalizations with his particular interest in early stage biotechnology companies. He holds a PhD degree in Biochemistry and Medical Genetics from the University of Manitoba, Canada and an MBA degree from the University of Calgary, Canada.
This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.