Check Up: Is biotech good investment in higher rate cycle? Turns out theory is just a theory

Conventional wisdom is that higher rates are bad for tech stocks – including biotech – but the reality may well be very different. Here’s why.

Check Up – a roundup of ASX health stocks winners and losers this week. Picture: Getty Images

The Fed and RBA raised interest rates last week to tackle inflation, and both have promised to unleash more this year.

With rates moving higher, what could investors expect from biotech stocks?

Theoretically, higher rates are bad for tech stocks – and that includes biotech.

The reason is simple cashflow discounting – when higher rates are used to discount cashflows, the present value (or today’s stock price) will be lower.

This is especially pronounced in growth stocks where revenues don’t yet exist, which means cash flows have to be discounted from further out in the future.

That’s the theory but in practice, that negative correlation doesn’t quite exist.

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According to a study from Bank of America analyst Ying Huang, there is no such negative correlation between higher rates and biotech stock prices.

In other words, higher rates do not necessarily translate to deflated biotech prices.

However, the study did reveal that larger capped biotechs are less sensitive to rate changes than smaller capped ones.

The moral? Investing into large cap biotechs is perhaps the better way to invest in the sector heading into a higher rate cycle.

So what does it mean for small cap biotechs? Do they have a place in this current cycle?

Some experts argue that smaller biotechs could in fact be a good hedge in an inflationary environment.

This is because junior biotechs mostly rely on debt to survive, and outstanding debt is worth less in the future when inflation chips away at the value of a dollar.

This is turn, makes the debt holder more valuable …. theoretically speaking.

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Significant ASX healthcare movements

PolyNovo (ASX:PNV)

Polynovo was the best performing health stock this week, with a return of +17%.

There was no major news but the company did say it still has not secured a candidate to replace CEO Paul Brennan, who resigned in November.

PolyNovo said there are several candidates being considered, but it won’t make any decisions by Q1 2022.

This is consistent with what the company already said previously.

Oventus Medical (ASX:OVN)

The sleep apnoea and snoring specialist reported a solid Q3, with new leads increasing by 63% over the prior quarter.

In total, 6,100 new leads were generated in the quarter.

Revenue was $233k, down from the record December quarter as expected, but above the two previous quarters.

Cash receipts meanwhile were $195k.

Opthea (ASX:OPT)

The retinal diseases company presented its clinical data results at the Association for Research in Vision and Ophthalmology (ARVO) 2022 Annual Meeting last week.

Titled “Efficacy and Safety of OPT-302 in combination with Ranibizumab for Polypoidal Choroidal Vasculopathy”, Opthea shared its findings to demonstrate the far-reaching potential of OPT-302.

OPT-302 is Opthea’s lead asset that treats retinal diseases such as wet age-related macular degeneration and diabetic macular oedema.

The same clinical data were presented earlier in February at the 19th annual Angiogenesis, Exudation, and Degeneration 2022 Conference.

Biotron (ASX:BIT)

In a significant step forward, new data shows that Biotron’s lead drug BIT225 protects from severe disease, even when there is an established infection.

Mice that commenced treatment with BIT225 after infection with SARS-CoV-2 had similar levels of protection against severe disease as mice commencing treatment with BIT225 prior to infection.

Biotron says the results are important as they provide key information that will assist in determining the dosing regimen for BIT225 in planned human clinical studies.

Prescient Therapeutics (ASX:PTX)

The clinical stage oncology company announced that its Phase 1b clinical study of PTX-200 and cytarabine will progress into the next dosing stage.

The combination therapy treats patients with relapsed and refractory acute myeloid leukaemia (AML).

The study will expand the cohort at 45 mg/m2 PTX-200, following another complete remission and no dose limiting toxicities at this dose level.

Approximately 158,000 patients globally suffer from AML, a cancer of the bone marrow that prevents formation of normal blood cells.

This latest data, together with data from the previous Phase 1 monotherapy study of PTX-200 in acute leukaemias, has guided Prescient to expand enrolment at this dose level to another three patients.

Immutep (ASX:IMM)

The immuno-oncology company reported that new biomarker and exploratory analysis data from its Phase IIb AIPAC trial was presented at ESMO’s Breast Cancer Congress in a poster presentation.

The AIPAC trial evaluated efti in combination with paclitaxel chemotherapy, compared to placebo plus paclitaxel, in 227 patients with HER2-negative/HR positive metastatic breast cancer.

Final results were reported in November 2021 in a late breaking abstract at SITC (Society for Immunotherapy of Cancer), showing encouraging efficacy.

This content first appeared on stockhead.com.au

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