How out of favour Biotech has a PR problem and could learn from Dr Karl
Health & Biotech
Health & Biotech
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.
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.
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%.
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.
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.”
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.