In the final trading week of the year, we saw examples of both the windfall gains and wipe-out losses that can occur from investing in biotechnology companies developing next-generation drug treatments.
For the long-suffering investors in ASX-listed Mesoblast, Christmas came early, as news of the US Food and Drug Administration’s approval for its Ryoncil therapy to be used in children afflicted with a rare but devastating disease sent shares rocketing over 50 per cent.
It was a milestone 20 years in the making for which shareholders endured a roller coaster of rejections, delays and capital raisings to realise. In the past year, Mesoblast’s shares have risen from 30¢ to $3, a significant gain for some, but for others who invested during the peaks of over $9, a significant capital burner.
Riding the biotech rollercoaster on the ASX is not for the faint-hearted. Credit: rico ploeg / Alamy Stock Photo
In the very same week, investors in Percheron Therapeutics were left with nothing but a large tax write-off for Christmas when shares fell over 90 per cent on news that its experimental muscular dystrophy drug failed to show efficacy in trials.
These two contrasting outcomes illustrate the binary nature of the industry for investors. The earlier you invest, the greater the gains should the drug succeed, but higher the chance of failure.
“I’ve seen many disasters over the years – sadly many, many more than the handful of success stories,” says Dean Fergie, Portfolio Manager at Cyan Investment Management.
“Personally, biotech is an industry I prefer to steer clear of,” he said.
Investing later in development process is one way to for investors to minimise risk, but there exists a trade-off in returns, with the likelihood of success already factored into the share price. Others choose to invest betting that one day there will be a takeover by ‘Big Pharma’ players like Pfizer, Merck, or Johnson & Johnson.
“Biotechnology is an extremely specialised and complex industry and, quite bluntly, most investors (retail or professional) don’t have the education or knowledge to effectively understand the science or the commercial viability of a potential drug or product,” cautions Fergie.
Globally, the biotech industry is struggling, with the sector more than 50 per cent below its 2021 peak as a result of rising interest rates making their inherent riskiness less appealing to larger investors.
“The process from devising an idea to hitting commercialisation is generally around a 10-year process and requires many clinical trials and extensive capital to fund the journey to sales,” says Grady Wulff, a Market Analyst at Bell Direct.
Australia punches above its weight with a plethora of companies developing life-changing treatments, from spray-on skin to novel prostate cancer treatments.
There are over 80 companies listed on the ASX in the ‘biotechnology and life sciences’ industry, the majority with market capitalisations below $50 million, putting them in what I would consider as ‘highly speculative’ companies.
Clarity Pharmaceuticals, Telix Pharmaceuticals, and Neuren Pharmaceuticals are just a few of our Aussie success stories. From a more utopian perspective, biotechs play a critical role in furthering our species.
If we are ever to cure cancer, achieve immortality, or cure baldness (please hurry!) it will be a biotech company that does it. Such life-changing treatments are why so many investors are seduced to invest in biotechnology companies. It’s the same reason that the likes of Bryan Johnson, the man attempting to defy biological ageing, and Elon Musk’s Neuralink, which aims to make man and machine one, set our imaginations running wild.
As a trader, I have had great success riding the share price momentum of biotechs into expected approvals, but disasters like that which occurred to Percheron serve as good a reminder why I never dare to hold into a binary outcome.
However, for the longer-term investor, biotechs can play a part in a diversified portfolio.
“There are different ways to invest in healthcare which caters to all risk profiles of investors,” advises Wulff. “For those risk-taking investors, looking at early-stage biotechs can offer great upside potential, and for those more risk-averse investors, adding a well-established biotech giant like CSL can offer safer returns over the long-run.”
- Advice given in this article is general in nature and not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
The Business Briefing newsletter delivers major stories, exclusive coverage and expert opinion. Sign up to get it every weekday morning.