Things are looking up for Australian biotech stocks, with the sector on the cusp of a multi-year bull run if indications from their United States peers are anything to go by.
Biotech stocks listed on the US NASDAQ are running red hot, with the group delivering a total return of 50.6% since the start of the year, nearly 70% ahead of the broader NASDAQ Index.
Local biotech experts haven’t been this excited in a long while, as the rise in US life science stocks is fuelling speculation that it is Aussie biotechs’ turn to shine. Indeed, our sector is only just starting to pull ahead of the market.
While retail investors probably wouldn’t have been hurt too much in the past by ignoring biotech stocks, locally listed medical innovation companies have matured significantly in the last few years. As such, they are fast becoming an important part of any portfolio in the current environment where profit growth is getting increasingly harder to generate.
The earnings potential for these companies is generally not dependent on economic cycles. If they achieve an important milestone they will be re-rated regardless of economic conditions, with ageing demographics supporting demand for medical products and services.
Australian retail investors should be looking at life science companies, as never before have so many of them been this close to, or in, commercial production.
The increasing importance of biotech stocks is not lost on sophisticated investors, and the upswing in sentiment is fuelling a raft of new life science floats in Australia. This is much like what has occurred in the US, with 41 new listings worth around $US3 billion hitting the NASDAQ since the start of 2013.
This marks the second-largest initial public offer (IPO) boom for the sector in US history. The only float boom that has been bigger to date was during the height of the technology stock bubble in 2000, when 63 IPOs raised $US6 billion, according to the chief investment officer of Biotech Select Fund and research principal of Bioshares, Mark Pachacz.
“The US biotech market goes in a five-year cycles. It started in 1982 with the advent of genetic engineering,” says Pachacz.
“The last one was meant to be in 2007-2008, but we missed that because of the GFC [global financial crisis]. So, we’ve got 10-years of money going into the sector and nothing coming out in terms of IPOs.”
The life science IPO fever is also starting to grip Australian investors, who have poured a record $419 million into newly listed companies in 2013. Fertility services company Virtus Health (VRT) led the charge in June this year, with the stock up 51% since its public debut.
The amount raised in IPOs is likely to swell further, with incontinence monitoring company Simavita and motion analysis device developer dorsaVi both looking to list before Christmas.
While the number of deals is still low, the average amount raised per float is increasing. That is a positive sign for our market as it indicates a growing level of maturity and sophistication that has been lacking before.
“I think ultimately price raises and valuations overseas must translate into something,” says investment director for DMP Asset Management, Julian Mitchell.
“There seems always to be a value arbitrage between how life sciences are valued in America and Australia, but you need to make sure you are comparing apples with apples as we are generally a less-developed market.”
However, one cannot immediately assume that a 50% surge in US biotech stocks will automatically translate to a similar gain here because of the difficulty in making comparisons between the two markets.
Offshore fund managers who spoke with Eureka Report are reluctant to draw too much of a connection.
London-based Polar Capital complains that few Australian biotechs make the effort to schedule face time with the investment community there, and that is why its new biotech fund with $US550 million in funds under management is focused on opportunities in the US, UK and Europe instead.
“Without regular contact and exposure to the stories it is difficult to build familiarity, especially as due diligence is hampered by distance and time,” writes Polar’s fund manager David Pinniger in an email to Eureka Report.
Edinburgh-headquartered Standard Life Investments is also not taken with Australian biotechs, even though the fund, which has $311 billion in assets under management, has a bullish outlook for the global biotech sector.
“An area that we grapple with is trying to understand what the sustainable competitive edge [is] of many small Australian biotechs in the global industry,” writes its investment director Will Malcolm.
“The R&D [research and development] dollars put to work by the Australian companies is pretty small in the context of the better capitalised and arguably more sophisticated North American sector.”
He goes on to say that by the time an Australian biotech is successful enough to catch his eye, it is usually too late as the company is often taken over by a global player.
These are valid arguments, but I believe they are becoming less of an issue. International investor interests in Australian life science companies have increased materially over the last two to three years, with these investors popping up on the registers of biotechs such as Starpharma Holdings (SPL), Phosphogenics (POH) and Mesoblast (MSB).
Courting overseas investors
If Australian life science companies make the effort to market themselves to overseas investors, and assuming they have a commercially attractive innovation, they are likely to find a willing audience.
“From my own experience, and I know from experiences of other similar sorts of [Australian] companies, we have found it to be a pretty productive exercise,” comments the chief executive of Starpharma, Jackie Fairley. Two thirds of Starpharma’s institutional investors are currently from the US or Europe.
However, the Australian life science sector needs a catalyst if it is to pull further ahead of the broader market – and it may just get the kick it needs in the very near term, predicts Pachacz.
“What is really going to set this sector on fire is an acquisition or a major licensing deal, and I think we will see one in the next three-months,” he adds.
His pick for a likely takeover target is Universal Biosensors (UBI), which developed blood glucose and coagulation testing devices.
Its glucose tester is licensed to LifeScan, a Johnson & Johnson subsidiary; and its coagulation device is licensed to Siemens.
Universal Biosensors is under pressure, with the stock slumping 41% this year to 54 cents – its lowest level since the darkest days of the GFC back in March 2009.
A delay in the launch of its coagulation tester and the loss of its test strips manufacturing contract for the LifeScan device are the key drivers for its underperformance, but the market is under appreciating the earnings potential of Universal Biosensors, which receives 1 cent for every test strip that LifeScan makes.
I rated the stock “outperform” in my article on September 4 and the stock has shed 22% since for the reasons outlined above. However, I believe the stock will be a lot higher over the next 12 months to where it is today and I re-iterate my recommendation on the Universal Biosensors.
As for the company likely to strike a major licensing deal, Starpharma is a standout. Preclinical data released by the biotech over the past few months indicates that its dendrimer technology can significantly improve the efficacy and effectiveness of a number of common anti-cancer drugs.
This means big pharmaceutical companies that own these drugs will be interested in some partnership deal as the new formulation with the dendrimer means they can extend the patent life of their blockbuster drugs, which have, or are coming off patents.
As I stated in my July 17 article, and I’ll say it again: I believe the stock can double in value over the next year or so.
Another life science stock that is worth buying is Nanosonics (NAN). The company has developed a device to disinfect ultrasound probes more effectively and is expected to deliver its maiden profit in the current financial year.
If history is any guide, a company like Nanosonics is likely to keep rallying after it posts its full-year results in August next year even though the market is anticipating the good news.
Think big, go smalls!
List of "outperform" recommendations on the Uncapped 100
|Name||Code||Article date||Price*||Article Name|
|eBet||EBT||26-Jun-13||$1.130||Small cap with biggest earnings upgrade|
|Silex Systems||SLX||03-Jul-13||$2.320||Why a dog can be an investor's best friend|
|Newsat||NWT||03-Jul-13||$0.400||Why a dog can be an investor's best friend|
|Tiger Resources||TGS||03-Jul-13||$0.190||Why a dog can be an investor's best friend|
|M2 Telecommunications Group||MTU||10-Jul-13||$6.020||Big expectations for small caps|
|Starpharma Holdings||SPL||17-Jul-13||$0.940||Five bargains for under a buck|
|Colorpak||CKL||17-Jul-13||$0.725||Five bargains for under a buck|
|GI Dynamics||GID||17-Jul-13||$0.600||Five bargains for under a buck|
|Horizon Oil||HZN||17-Jul-13||$0.355||Five bargains for under a buck|
|Collins Foods||CKF||07-Aug-13||$1.760||The next dividend dazzelers|
|LogiCamms||LCM||07-Aug-13||$1.470||The next dividend dazzelers|
|NRW Holdings||NWH||14-Aug-13||$1.140||A mining services revival?|
|WDS||WDS||14-Aug-13||$0.590||A mining services revival?|
|Thinksmart||TSM||21-Aug-13||$0.355||Biggest smalls earnings surprises|
|Beadell Resources||BDR||28-Aug-13||$0.865||Short-selling gold signals|
|Universal Biosensors||UBI||04-Sep-13||$0.680||Smalls in a sweet spot|
|Forge Group||FGE||18-Sep-13||$5.230||Small cap surprises for 2014|
|Specialty Fashion Group||SFH||18-Sep-13||$0.930||Small cap surprises for 2014|
|Mint Wireless||MNW||02-Oct-13||$0.180||Four new stocks for the Uncapped 100|
|YTC Resources||YTC||09-Oct-13||$0.260||Xmas sale starts early for small caps|
|Ridley Corporation||RIC||16-Oct-13||$0.850||Appetisers from the agri stocks field|
|Wide Bay Australia||WBB||16-Oct-13||$5.600||Appetisers from the agri stocks field|
|STW Communications||SGN||30-Oct-13||$1.580||Small consumer stocks at Christmas crossroads|
|Retail Food Group||RFG||30-Oct-13||$4.580||Small consumer stocks at Christmas crossroads|
|Nanosonic||NAN||06-Nov-13||$0.830||First profit, first choice for stock pickers|
|AMA Group||AMA||06-Nov-13||$0.365||AMA chief's double plan|
|*At date of article|
|Source: Eureka Report|
Uncapped 100 - Australia's most interesting small cap stocks
|Small cap stocks covered by the Uncapped team|
|Code||Name||Rationale||Market cap ($m)||Total return 1-year (%)||Sector (GICS)|
|MTU||M2 Telecommunications Group||Amazing growth story and well run company. High free float and strong insto support.||1,105.01||69.06||Telecommunication Services|
|NHF||NIB Holdings||Only listed health insurer. Widely held. Good performer.||1,071.17||32.29||Financials|
|GEM||G8 Education||Only listed childcare operator. Acquisition strategy paying off with stock delivering solid gains.||927.94||117.27||Consumer Discretionary|
|MMS||McMillan Shakespeare||One of the best performers since the GFC, but ongoing risk of change to FBT rules is hanging over the company.||904.72||0.49||Industrials|
|ARP||ARB Corp||Well covered but good candidate for core holding due to quality management.||848.76||16.22||Consumer Discretionary|
|MRM||Mermaid Marine Australia||Its strategically located facility on WA coast gives it a key advantage over competition in servicing Gorgon & Pluto projects.||814.28||14.02||Industrials|
|AAD||Ardent Leisure Group||Widely held stock. Earnings more defensive than anticipated. Good yield. Potential core holding.||808.09||58.85||Consumer Discretionary|
|BGA||Bega Cheese||Corporate interest in Australian food companies makes the cheese maker worth following.||701.62||142.66||Consumer Staples|
|SRX||Sirtex Medical||A shining star in the biotech space and one of the best performing stocks in 2012. Great product (liver cancer treatment) and bright outlook.||681.72||11.49||Health Care|
|AUB||Austbrokers Holdings||The insurance broker is a strong performer. Widely held and well liked by small cap investors.||677.47||52.64||Financials|
|BDR||Beadell Resources||Will be a very big FY14 for miner as it has to prove it aims to produce 200,000 ounces of gold a year.||664.21||-11.58||Materials|
|RFG||Retail Food Group||Owns a number of well know franchise brands. Widely followed by instos.||632.19||49.85||Consumer Discretionary|
|SGN||STW Communications Group||One of few companies able to benefit from online shift. Widely held and good insto support.||604.53||55.14||Consumer Discretionary|
|SEA||Sundance Energy Australia||Analysts have a favourable take on the oil & gas explorer, but stock is still under radar of most. Sundance provides exposure to prospective Eagle Ford shale.||503.09||32.62||Energy|
|CWP||Cedar Woods Properties||Property developer with good ROE and earnings growth track record.||491.80||65.4||Financials|
|RCR||RCR Tomlinson||Good first half FY13 result and outlook, but will its fortunes change this year with the mining capex slowdown?||483.91||91.45||Industrials|
|TGR||Tassal Group||Salmon farmer is finally turning a corner with an improved harvest strategy and growing demand for product.||473.22||132.45||Consumer Staples|
|AMM||Amcom Telecommunications||Well covered junior telco but good candidate for core holding.||472.00||54.03||Telecommunication Services|
|TOX||Tox Free Solutions||Widely held stock in the waste solutions business. Its unique because it operates in a defensive-growth niche.||464.95||19.78||Industrials|
|BRU||Buru Energy||Substantial size but not often covered by press. Widely held with good insto support.||450.53||-44.69||Energy|
|MYX||Mayne Pharma Group||Sizeable generic drug maker with interesting board members.||442.32||190.74||Health Care|
|ACR||Acrux||One of the most successful Australian biotechs in recent history. Widely held by instos.||438.78||0.32||Health Care|
|NXT||NEXTDC||The cloud computing company is an IT sector darling. Fairly widely held and followed.||438.15||10.95||Telecommunication Services|
|CCP||Credit Corp Group||Strong price run attracted good investor interest. Leveraged to any rise in loan defaults. Not well covered by press.||434.56||23.79||Industrials|
|HZN||Horizon Oil||One of better regarded small energy stocks that doesn't receive much media attention.||416.37||-17.88||Energy|
|MYS||MyState||Well regarded and could make good alternative to bank stocks. Has good yield and earnings growth over past few years.||412.35||39.93||Financials|
|CCV||Cash Converters International||Strong performance is attracting investors. It's Australia's only listed pawn shop and pay day lender.||409.25||3.77||Consumer Discretionary|
|TGA||Thorn Group||One of few retail stocks that is performing well. The Radio Rentals chain owner is also well supported by instos.||391.60||38.23||Consumer Discretionary|
|SLX||Silex Systems||Its uranium enrichment technology could become one of Australia's best innovations given its potential to change the nuclear power industry.||379.66||-34.8||Information Technology|
|MOC||Mortgage Choice||Has a good track record and is leveraged to any housing recovery. The stock is also liquid with good insto support.||366.39||81.35||Financials|
|FGE||Forge Group||One of the better performers in its industry. Good track record and potential core holding.||360.19||5.72||Industrials|
|IPP||iProperty Group||Worth watching as it is trying to be the REA Group of Asia.||341.03||104.35||Information Technology|
|NWH||NRW Holdings||One of the better regarded mining & civil contractors with good track record in delivering on projects.||334.67||-28.48||Industrials|
|UXC||UXC||Company has turned corner and enjoyed re-rating. What's next?||319.34||21.69||Information Technology|
|RKN||Reckon||Fierce competition for cloud base accounting software puts it in firing line.||295.92||1.6||Information Technology|
|BNO||Bionomics||One of the larger cancer treatment developers in this market.||284.39||116.89||Health Care|
|AEU||Australian Education Trust||Well performing childcare centre property owner. Good yield story and outlook.||273.73||40.24||Financials|
|GID||GI Dynamics Inc||Largely forgotten by investors but could attract attention this year as it looks to gain US approval to use its intestinal liner on diabetics.||272.98||7.69||Health Care|
|RIC||Ridley Corp||High corporate interest in the sector and the shrinking pool of agri listed stocks make Ridley worth following.||270.88||-15.56||Consumer Staples|
|IMF||IMF Australia||Litigation funder is unique stock. Stock not liquid but its outlook appears promising given the number of potential class action lawsuits.||265.02||14.08||Financials|
|TGS||Tiger Resources||Future lies in its Kipoi copper mine expansion in the Congo but miner is fully funded with DRC govt holding 40% stake in tenement. Next 12mths will be interesting.||253.74||12.93||Materials|
|SPL||Starpharma Holdings||Noteworthy for its good pipeline of innovations. Well run, widely followed.||251.49||-46.36||Health Care|
|SHV||Select Harvests||Noteworthy for turbulent past and exposure to soft commodity market.||249.76||236.35||Consumer Staples|
|GXL||Greencross||Acquisitive veterinary group. Good profit growth and share price performance, but gets little press.||242.85||108.29||Health Care|
|VOC||Vocus Communications||Telecom stocks are in favour but Vocus is one of the least covered||242.70||77.89||Telecommunication Services|
|AJA||Astro Japan Property Group||Strong leverage to Japanese economy makes this an interesting stock to watch.||242.63||21.07||Financials|
|TFC||TFS Corp||The sandalwood products company offers exposure to both the agri and cosmetics industry. It will start commercial harvest this year.||237.01||105.35||Materials|
|SIV||Silver Chef||Strong jump in the share price of the equipment financing group has attracted a good following.||236.43||73.54||Industrials|
|NWT||Newsat||Potential large cap if it can launch its own satellite in 2015.||220.32||-18.13||Telecommunication Services|
|NAN||Nanosonics||A successful medical tech story. Should be close to turning in maiden profit with its disinfection device.||219.46||56.07||Health Care|
|MXI||MaxiTRANS Industries||Transport equipment maker posted good interim result. Has appealing yield and growth.||218.03||29.03||Industrials|
|WBB||Wide Bay Australia||The building society is trying to turn its fortunes around. Also worth watching for its exposure to Queensland housing market, particularly around major resource projects.||213.81||-5.35||Financials|
|ACL||Alchemia||One of the few biotechs with revenue stream. Good pipeline of oncology treatments.||210.82||9.24||Health Care|
|CLH||Collection House||In similar space as Credit Corp. Strong stock performance has attracted a following and the stock appears to be well placed to run further||201.19||61.97||Industrials|
|DWS||DWS||Will be a big beneficiary if governments start spending on IT again.||196.56||13.09||Information Technology|
|PFL||Patties Foods||Illiquid stock but has suite of well recognised consumer brands. Defensive yield.||193.30||-9.3||Consumer Staples|
|RCG||RCG Corp||The footwear retailer is one of the best performing consumer stocks as online competition is not a big threat. Company has a good yield as well.||186.33||88.5||Consumer Discretionary|
|IFM||Infomedia||Interesting tech play in the car parts market. Strong share price gain but gets little air play.||176.87||65.94||Information Technology|
|NEA||Nearmap||A stellar performer with an Interesting business that offers high quality aerial maps to companies & government.||174.61||1359.46||Information Technology|
|HSN||Hansen Technologies||Operates in a high potential/growth industry but is not covered by press or brokers.||171.81||25.81||Information Technology|
|DTL||Data#3||Well respected IT company that receives little press coverage.||167.06||2.03||Information Technology|
|SFH||Specialty Fashion Group||In early stages of turnaround. Can the women's apparel retailer sustain the momentum?||161.48||43.31||Consumer Discretionary|
|ESV||Eservglobal||Mobile money transfer company that has been gaining traction. Widely held by instos but low press coverage||160.63||81.69||Information Technology|
|CKF||Collins Foods||One of the few food franchise listed companies.||151.59||37.36||Consumer Discretionary|
|IMD||Imdex||Drilling company is well supported by instos and should benefit from any rebound in exploration activity.||145.23||-44.69||Materials|
|MCP||McPherson's||The personal care and household products supplier had been relatively insulated from volatile discretionary spend and online threat, but its latest profit warning shows it's not immune.||144.66||-5.07||Consumer Discretionary|
|BGL||BigAir Group||The wireless small cap has gained strong following over past year or two but is often overlooked by investors and the press.||140.57||47.1||Telecommunication Services|
|MLB||Melbourne IT||A perennial underperformer could be interesting turnaround story as management is in midst of restructuring the business.||135.06||12.71||Information Technology|
|AZZ||Antares Energy||Liquid with good insto support. Already in production with exploration upside in Texas.||131.32||-4.63||Energy|
|SAR||Saracen Mineral Holdings||Emerging gold producer that is widely held by instos. Hitting milestones and looks cheap. Key asset is close to gold majors, which makes it a potential takeover target.||129.47||-51.67||Materials|
|AMA||AMA Group||Good turnaround story but under the automotive services group is radar of most.||122.00||12.26||Consumer Discretionary|
|GHC||Generation Healthcare REIT||One of the more interesting REITs. Income is more defensive than typical property stock and its greenfield expansion gives it earnings growth potential.||121.88||36.64||Financials|
|LCM||LogiCamms||Strong price performance and reasonable valuation attracting interest.||120.65||71.06||Industrials|
|POH||Phosphagenics||Sizable biotech with a game changing FY14 year ahead. Good insto following but questions of poor audit and governance standard could dog company.||119.90||-18.97||Health Care|
|WDS||WDS||Widely held with strong insto support. Engineering contractor diversified across mining, energy and infrastructure.||115.79||48.85||Industrials|
|MNW||Mint Wireless||Huge market potential if the mobile card payment solutions provider can gain market traction. Management aiming for $1 billion in transaction value a year.||113.08||1547.05||Information Technology|
|REX||Regional Express Holdings||Well run airline that is overshadowed by Virgin and Qantas.||110.09||-15.25||Industrials|
|JIN||Jumbo Interactive||Innovative small cap facing off industry dominated by giants. Worth watching to see if it can carve out a profitable global business.||105.01||18.61||Consumer Discretionary|
|RUL||RungePincockMinarco||IT company to resource industry. Facing tough operating climate with new CEO trying to restructure and turnaround company.||98.94||55.56||Industrials|
|UBI||Universal Biosensors Inc||Well regarded biotech and one of few that's successfully manufacturing in Australia. Struck deal with a few global medical companies.||94.38||-50.46||Health Care|
|DRM||Doray Minerals||Widely held by instos. One of the more favoured gold explorers by brokers.||90.09||-22.56||Materials|
|CAA||Capral||An aluminium manufacturer that is actually holding up relatively well given that manufacturing is on the nose.||89.92||-2.56||Materials|
|BOL||Boom Logistics||Crane hire group is riding out the downturn in construction. It's widely held by instos and is very liquid.||87.85||-30.19||Industrials|
|CLV||Clover Corp||One of the star performers in 2012. Operates in growing but relatively stable niche.||81.76||-3||Health Care|
|LGD||Legend Corp||Electronic parts supplier to utilities and other industries. Stable earnings with good yield. Often overlooked.||74.63||35.06||Information Technology|
|AOH||Altona Mining||Noteworthy copper play with Xstrata pull-out of Roseby project in Australia and the good ramp up of its Finnish project.||74.51||-47.17||Materials|
|EML||Emerchants||Trying to change way corporates and governments disburse cash with its trackable and controllable debit card offering. If company can get $1 billion in loaded value on cards, the stock will surge.||72.31||346.15||Financials|
|TAN||Tandou||The only direct equity exposure to cotton prices. Also trades water rights and receives little press.||68.72||16.72||Consumer Staples|
|YTC||YTC Resources||Next 12-mths will be eventful after YTC secured funding for its projects from Glencore.||66.98||8.7||Materials|
|PEN||Peninsula Energy||Widely held by instos and large free float. It's the only uranium miner on the list.||66.91||-52.17||Energy|
|CKL||Colorpak||The small cap packaging company has grown via acquisitions over past few years.||66.86||46.88||Materials|
|KOV||Korvest||The construction products and services supplier has been hit by project delays and deferrals. But its relatively high yield could give it some support.||57.74||6.35||Industrials|
|CUV||Clinuvel Pharmaceuticals||Interesting skin disorder treatment developer that has done reasonably well over past year||55.03||-25.39||Health Care|
|GXY||Galaxy Resources||Good upside potential if it can get its problem-prone Jiangsu plant back on track. Won't be easy to right this ship.||53.40||-84.27||Materials|
|OTH||Onthehouse Holdings||Alternative small cap to online property leader REA Group. It is trying to use more timely housing data as a competitive edge against REA.||51.77||-3.08||Consumer Discretionary|
|TSM||ThinkSmart||Potential turnaround story worth keeping eye on.||50.32||55||Financials|
|EBT||eBet||Potential alternative to star performer Ainsworth Tech. Has exclusive deal with US poker machine maker WMS.||43.98||194.22||Consumer Discretionary|
|UML||Unity Mining||Growing Tassie gold producer with high free float. Valuation looks compelling too.||40.72||-53.6||Materials|
|NTC||NetComm Wireless||Under appreciated small IT hardware maker that is punching above its weight. Hardly covered by press.||27.67||86.96||Information Technology|
|PGC||Paragon Care||Emerging hospital equipment supplier that has been ignored by market.||19.83||139.82||Health Care|
|Source: Eureka Report, Bloomberg|