After underperforming the sharemarket for years, the biotech sector is set to gain in 2011 as a decade of research nears commercialisation. Industry watchers believe biotech gains from last year will continue as several key companies approach important milestones.
"2011 looks very strong for Australian biotech," David Langsam, editor of Biotech Daily, a leading independent biotech newsletter said. "Every company in the top 20 biotechs rated by Biotech Daily has major announcements due this year.
"If we get another Acrux or Mesoblast, the eyes of American institutional investors will increasingly turn to Australian biotech, seeking the next big story. The expected impetus from offshore investors could take Australian biotech to new levels."
Acrux's deal in March with Ely Lilly and Company was a much-needed win for the biotech sector, propelling Acrux shares to an 87 per cent one-year return. The deal involved an exclusive worldwide license agreement for potential commercialisation of Acrux's underarm testosterone solution (Axiron). In December, the US Food and Drug Administration approved Axiron for marketing in the US, triggering a $85.6 million payment to Acrux.
The other key deal in 2010 involved regenerative medicine researcher Mesoblast and global biopharmaceutical company Cephalon Inc. The pair announced a strategic alliance in December to commercialise Mesoblast's novel adult stem-cell therapeutics for central nervous and cardiovascular systems. Mesoblast's one-year total shareholder return is 178 per cent.
The accompanying chart, which tracks the aggregate performance of Biotech Daily's top 40 biotechs against the S&P/ASX 200 index, shows the effect of these deals. Langsam selects the top 40 biotechs on research potential, management, and other market factors. Mesoblast, Acrux, Pharmaxis, Sirtex Medical and Biota Holdings are among the larger biotechs chosen. The sector's three largest companies - CSL, Cochlear, and ResMed Inc. - have their own category.
The top 40 biotechs badly underperformed blue-chip stocks from 2006 until late 2009 as the mining boom starved the sector of speculative funds. However the index shot ahead in the second half of 2010 and has maintained a significant performance gap over the broader sharemarket.
Two key questions are: will the outperformance continue, and will more local investors pay closer attention to mid-cap biotech stocks, a sector not known for significant support from fund managers who typically avoid speculative situations?
"One of the most important changes in biotech last year was that more sharebroking firms expanded their biotech research coverage or initiated coverage," Langsam said. "More broking research should get more local fund managers looking at the sector. Just as important is news flow from the sector, which should be significant in the first half, with several biotechs releasing results from key research trials."
Disappointing research results of course will decimate investor sentiment, which remains fragile thanks to years of overly optimistic forecasters and promoters and the perception that biotech companies struggle to maintain positive momentum after large deals.
That said, it would only a take a few big wins to propel the biotech sector higher in 2011 and attract more international investors onto the share registers of Australian biotech companies. And if that happens they might begin to reap the rewards from their decade-long journey from discovery to commercialisation.
