• ASX health stocks have been out of favour this year with rotation away from growth to value sector
  • Morgan’s Scott Power said a lot of biotechs aren’t able to convert their complex science into layman’s terms
  • Hot money going to lithium and resource stocks, but need for healthcare makes the sector recession proof

I’m a big fan of Dr Karl Kruszelnicki. He’s an Australian legend who has made science fun and understandable for more than 40 years.

Dr Karl (as he’s affectionately known) has an ability to explain the most complex, medical and scientific concepts simply in a way which we can all relate to without needing a Phd in biochemistry, molecular biology, astrophysics or some other scientific speciality.

In 2002 he was honoured with the prestigious Ig Nobel prize awarded by Harvard University in the USA for his ground-breaking research into Belly Button Lint and why it is almost always blue.

There are ASX health stocks which could do with a bit of a helping hand from a guy who make the world want to know more about belly button lint. There are very clever people doing very clever work among the companies which make up the sector that most Australians would be incredibly proud to share a country with – if they knew.

Most are familiar with the giant CSL (ASX:CSL), but that’s because it makes up 65% of the S&P/ASX 200 healthcare index (ASX:XHJ). Very few could tell you what next in line Sonic Healthcare (ASX:SHL), at 7%, actually does.

That applies especially among those mid and smaller names. Reading their ASX announcements is like having a conversation with Sheldon Cooper.

Essentially, biotech has a PR problem.

ASX health stocks needs a big KISS

Yep, the classic ‘Keep it simple, stupid’, noted as a design principle by the US navy in 1960, is still as valid as ever. The KISS principle states that most systems work best if they are kept simple rather than made complicated and therefore, simplicity should be a key goal in design, and unnecessary complexity should be avoided.

The principle has also been widely adopted in the years since, including in the training of journalists where it would often be changed to Keep it Short and Simple.

Healthcare and life sciences expert Scott Power, who has been a senior analyst with Morgans Financial for 26 years, told Stockhead a lot of companies simply aren’t able to convert their complex science into layman’s terms. This can be a problem when attracting investment.

“Unless you can tell your story simply and make it understandable then you don’t have that hook,” Power said.

“So many of these people are incredibly smart and the science is important to them but the investment community don’t often have that depth of knowledge.”

Power said a lot of companies are good at explaining their work but many miss the point and need presentation that are good for a scientific conference but one also that is understandable to investors.

“I think many do struggle and there are some good IR firms out there that help bridge the gap and take the objective view of ‘right tell me in simple words what are you trying to do’,” he said.

“I have seen improvements in companies and often it’s been helped by a good IR firm.”

Power said investors will tend to look at the larger companies because they can understand what they do a bit better or look at large well-known international firms tackling a particular health issue.

Tough year for out of favour ASX health stocks

We can’t blame a lack of communication for all the woes of the ASX health sector this year. Unfavourable macroeconomic conditions and market uncertainty has seen a rotation out of growth stocks and into value throughout 2022, putting pressure on the sector.

The S&P/ASX 200 healthcare index (ASX:XHJ)  is down 8.7% for the year, while the S&P/ASX 300 healthcare index (ASX:XHK) is down 9.1%. The small and mid cap end of the market has fared better and is up 2.44%.

NEU Neuren Pharmaceuticals 8.37 351% $1,035,437,857
LCT Living Cell Tech. 0.018 125% $21,851,183
CTE Cryosite Limited 0.71 97% $34,654,790
PNV Polynovo Limited 2.15 44% $1,389,544,892
PGC Paragon Care Limited 0.36 22% $246,129,723
NTI Neurotech Intl 0.082 17% $65,226,824
MVF Monash IVF Group Ltd 1.005 7% $399,375,711
BOT Botanix Pharma Ltd 0.064 7% $73,984,735
BXN Bioxyne Ltd 0.025 4% $16,641,135
HGV Hygrovest Limited 0.07 3% $16,096,779
TLX Telix Pharmaceutical 7.13 2% $2,221,440,028
PBP Probiotec Limited 2.17 2% $176,471,791
OSL Oncosil Medical 0.048 1% $47,579,629
CU6 Clarity Pharma 0.99 1% $167,603,177
SCU Stemcell United Ltd 0.013167 0% $14,995,837
ICS ICS Global Limited 0.575313 0% $6,054,605
RAD Radiopharm 0.1175 0% $22,593,069
OCC Orthocell Limited 0.495 -7% $94,657,474
ARX Aroa Biosurgery 1.045 -9% $349,578,692
PIQ Proteomics Int Lab 0.92 -11% $106,071,027
OSX Osteopore Limited 0.195 -13% $22,867,306
VLS Vita Life Sciences.. 1.5 -16% $79,511,418
CAJ Capitol Health 0.315 -17% $334,817,351
BIT Biotron Limited 0.039 -19% $26,673,443
RCE Recce Pharmaceutical 0.68 -20% $119,313,138
SDI SDI Limited 0.84 -20% $102,224,356
CGS Cogstate Ltd 1.9075 -20% $332,128,021
ACW Actinogen Medical 0.13 -21% $224,674,227
CAN Cann Group Ltd 0.24 -21% $80,390,796
OPT Opthea Limited 0.975 -21% $450,938,070
PAA Pharmaust Limited 0.075 -25% $23,768,429
PAR Paradigm Bio. 1.62 -26% $430,602,913
AHC Austco Healthcare 0.1 -26% $28,981,734
RSH Respiri Limited 0.041 -28% $33,651,927
ILA Island Pharma 0.2 -29% $8,649,266
LBT LBT Innovations 0.067 -29% $21,616,045
EZZ EZZ Life Science 0.335 -30% $4,338,400
EYE Nova EYE Medical Ltd 0.28 -31% $43,759,335
VBS Vectus Biosystems 0.96 -31% $45,361,255
TSN The Sust Nutri Grp 0.14 -32% $16,884,894
CYC Cyclopharm Limited 1.275 -33% $125,622,665
RAC Race Oncology Ltd 2.24 -34% $359,460,002
1ST 1St Group Ltd 0.009 -34% $11,593,564
CMP Compumedics Limited 0.23 -34% $40,747,478
RHT Resonance Health 0.07 -35% $32,259,639
M7T Mach7 Tech Limited 0.58 -36% $144,679,326
PCK Painchek Ltd 0.029 -37% $37,595,756
IRX Inhalerx Limited 0.063 -37% $11,797,818
VHT Volpara Health Tech 0.665 -37% $166,357,560
RGS Regeneus Ltd 0.045 -38% $13,789,661
DXB Dimerix Ltd 0.155 -38% $49,735,418
CYP Cynata Therapeutics 0.33 -39% $47,281,276
RHY Rhythm Biosciences 1.115 -40% $243,227,700
DVL Dorsavi Ltd 0.013 -40% $5,655,081
GLH Global Health Ltd 0.24 -40% $13,920,811
IMC Immuron Limited 0.077 -41% $17,768,271
PXS Pharmaxis Ltd 0.065 -41% $43,145,864
NXS Next Science Limited 0.73 -41% $150,353,094
SHG Singular Health 0.155 -42% $10,119,806
PTX Prescient Ltd 0.1425 -42% $100,773,336
BPH BPH Energy Ltd 0.026 -42% $18,124,359
ALA Arovella Therapeutic 0.025 -43% $16,771,270
SOM SomnoMed Limited 1.3 -43% $107,587,110
GSS Genetic Signatures 0.75 -44% $107,554,497
BNO Bionomics Limited 0.061 -45% $86,614,448
OIL Optiscan Imaging 0.12 -45% $74,352,672
CDX Cardiex Limited 0.305 -46% $39,224,863
IMM Immutep Ltd 0.295 -46% $268,122,283
ACR Acrux Limited 0.067 -46% $19,174,829
NYR Nyrada Inc. 0.125 -47% $18,721,044
HCT Holista CollTech Ltd 0.028 -47% $7,806,402
AMT Allegra Orthopaedics 0.105 -48% $10,968,216
AN1 Anagenics Limited 0.032 -48% $7,072,682
PSQ Pacific Smiles Grp 1.53 -49% $242,564,546
ATX Amplia Therapeutics 0.105 -49% $20,370,581
IPD Impedimed Limited 0.092 -49% $160,487,024
1AD Adalta Limited 0.045 -50% $14,138,314
ALT Analytica Limited 0.001 -50% $4,613,801
AVE Avecho Biotech Ltd 0.009 -50% $16,540,824
TRU Truscreen 0.038 -50% $15,603,249
PAB Patrys Limited 0.02 -50% $41,139,995
GTG Genetic Technologies 0.003 -50% $27,701,895
S66 Star Combo 0.14 -50% $18,911,617
IIQ Inoviq Ltd 0.57 -50% $51,070,380
IHL Incannex Healthcare 0.27 -50% $434,224,781
PYC PYC Therapeutics 0.074 -51% $229,026,679
MDR Medadvisor Limited 0.19 -51% $103,329,571
BDX Bcaldiagnostics 0.07 -52% $9,526,630
IVX Invion Ltd 0.011 -52% $70,621,013
ANP Antisense Therapeut. 0.098 -53% $66,210,604
RNO Rhinomed Ltd 0.12 -54% $34,286,363
ALC Alcidion Group Ltd 0.16 -55% $209,231,394
ONE Oneview Healthcare 0.13 -55% $74,608,059
MX1 Micro-X Limited 0.13 -57% $64,369,212
CBL Control Bionics 0.18 -59% $9,059,563
AC8 Auscann Grp Hlgs Ltd 0.04 -60% $17,621,884
4DX 4Dmedical Limited 0.49 -60% $147,245,919
TRP Tissue Repair 0.26 -63% $12,162,892
ATH Alterity Therap Ltd 0.01 -64% $26,580,603
MVP Medical Developments 1.6975 -65% $144,561,168
NOX Noxopharm Limited 0.165 -66% $46,758,072
ICR Intelicare Holdings 0.028 -67% $3,373,057
IMU Imugene Limited 0.1825 -68% $1,174,926,948
MDC Medlab Clinical Ltd 8.5 -69% $19,409,767
VTI Vision Tech Inc 0.3 -69% $9,398,731
EXL Elixinol Wellness 0.029 -69% $9,171,702
ADR Adherium Ltd 0.004 -69% $19,100,782
JTL Jayex Technology Ltd 0.007 -70% $1,495,371
IBX Imagion Biosys Ltd 0.028 -70% $32,518,237
CHM Chimeric Therapeutic 0.088 -70% $26,974,515
MXC Mgc Pharmaceuticals 0.013 -72% $37,256,015
AT1 Atomo Diagnostics 0.057 -73% $32,540,786
NSB Neuroscientific 0.096 -74% $13,773,278
ADO Anteotech Ltd 0.051 -74% $101,385,258
ZNO Zoono Group Ltd 0.105 -75% $16,692,522
UBI Universal Biosensors 0.24 -75% $50,842,664
AGH Althea Group 0.066 -76% $22,990,901
EPN Epsilon Healthcare 0.025 -77% $7,508,850
IDT IDT Australia Ltd 0.099 -78% $23,861,158
OVN Oventus Medical Ltd 0.02 -79% $4,834,531
CPH Creso Pharma Ltd 0.0205 -80% $40,391,057
MEM Memphasys Ltd 0.015 -84% $14,402,988
ZLD Zelira Therapeutics 1.025 -85% $9,577,116
BWX BWX Limited 0.63 -86% $125,992,126
MEB Medibio Limited 0.001 -87% $3,320,594
TD1 Tali Digital Limited 0.003 -87% $3,697,892
DOC Doctor Care Anywhere 0.065 -88% $14,769,307
LDX Lumos Diagnostics 0.052 -93% $12,174,574
KZA Kazia Therapeutics 0.098 -94% $16,340,898
HXL Hexima 0.017 -96% $2,555,820
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However, it is worth noting that most of the move upward on the smaller end was dominated by Neuren Pharmaceuticals (ASX:NEU) which is up ~350% in the past year with  the US Food and Drug Administration (FDA) accepting for review a New Drug Application (NDA) of trofinetide for the treatment of Rett syndrome. It will be the first drug for the treatment of the rare neurological disorder.

The spike in Neuren’s share price saw the company promoted to the S&P/ASX 300 in the September quarterly rebalancing.

Moomoo Australia chief market strategist Matt Wilson points out that while the sector did well during Covid-19’s early days, ‘hot’ money is now chasing more immediate returns, such as lithium.

“Lithium is hot right now because of the huge focus on renewables, particularly the rapidly expanding electric vehicle market which has seen the demand for lithium dramatically increase,” he told Stockhead.

“The market has often been described as an air mattress – if you push down on one side, the other side rises.”

However, Power said it is worth remembering that investing goes in cycles and what might be a sector out of favour now will at some point become popular again.

“I can remember when the tech boom of late 1990s and early 2000s finished it all rolled into life sciences and then when that boom finished it all rolled into resources,” he said.

“What we are talking about is risk money so people who have the appetite for the riskier investments are looking for where the next opportunity is and clearly at the moment it’s in rare earths and when that starts to lose its shine, will feed into something else.”

However,  Power said while the ASX healthcare sector seems to have bottomed in June it has started to creep back up towards the end of the year.

“I remain confident of a rally into the seasonally strong Christmas period,” he said.

Biotech tests patience of investors

Wilson said the technological innovations of biotech companies have potential for massive profits.

“However, some product failures or failure to get regulatory approval and the incredibly long time it takes to get a product to market can test the patience of the most devoted of investors,” he said.

Wilson said like any investment, research is key.  It’s important to understand a biotech company’s financial foundations and know what stage of a biotech company you feel comfortable investing at, whether it be within its research-and-discovery stage, preclinical stage or  late-clinical stage. Our series on different phases of clinical trials might be worth a read.

“The earliest stage is typically the highest risk/return, while investing in late-stage ventures covers off some of the development/approval risk, but the returns can often be much lower,” he said.

He said it’s worth noting biotech funds, which invest in a wide range of therapies, drugs, and devices, understand a significant number of those investments may fail for one reason or another.

“The hope is that say three out of 10 investments significantly outperform,” he said.

Firebrick Pharma (ASX:FRE) founder and executive chairman Peter Molloy told Stockhead the variables involved in drug development is vast, which makes investing in biotech stocks somewhat speculative.

“Investors need to understand that while many are not going to get off the ground, the ones that do become successful can be incredibly lucrative,” he said.

“Perhaps the issue is less about investors understanding the intricacies and nuances of every single biotech company, and more about understanding the value of holding several different biotech stocks to increase the probability of picking a winner.”

Molloy said patience is the most important aspect of investing in biotechs. He said as a sector biotech will always be incredibly important and it is worth remembering healthcare is always needed and consequently recession proof.

“Biotechs can be dormant, or even declining for long periods of time and then suddenly take off,” he said.

“However, the timing of when particular companies get off the ground are due to a myriad of factors, rather than being correlated heavily with the current economic conditions.”

Australia developing strong biotech sector

Wilson said before the onset of the Covid-19 pandemic, Hong Kong was regarded as the centre for biotech in Asia with more than 250 biotech companies based there.

“Hong Kong has a high life expectancy and a vibrant technology sector, so given the role of technology in biotech it is a natural home for product development,” he said.

Hong Kong was the second largest market for biotech IPOs after the US, which follows a concerted effort by the Hong Kong government to promote and support advancements in biomedical technology.

Wilson said Australia also has a very strong biotech and health sector stemming from its world-leading medical research rankings at leading universities.

Australia is consistently one of the world’s top 10 contributors to life sciences research, according to Nature Index.

“Many of today’s biotech stocks have evolved out of university commercialisation programs designed to smooth the pathway from discovery to commercial implementation,” Wilson said.

“Australian investors have been buoyed by past successes such as CSL, Cochlear, spray-on skin technology and even the development of ultrasound technology going back as far as 1961.”

And so while biotech may not be the colour of the season right now, it’s like the little black dress in your closet – a classic go-to outfit. You may just want to chose some accessories to go with your dress that are on trend.

“The best advice for investors in biotech companies is to choose companies with a strong team, and a long patent runway with composition of matter protection and research that is aimed at a disease that is in vogue with Big Pharma,” Molloy said.

The views, information, or opinions expressed in the interviews in this article are solely those of the interviewees and do not represent the views of Stockhead. Stockhead does not provide, endorse or otherwise assume responsibility for any financial product advice contained in this article.