It was 1999 and I had just purchased my first equity on the Australian Stock Exchange (ASX); 1,000 Biota Holdings (BTA) at $4.22 a share. The stock had fallen heavily after a US Food and Drug Administration (FDA) advisory committee (AdCom) had recommended the FDA issue GlaxoSmithKline (GSK) a “Not Approvable” letter for its influenza drug, zanamivir (Relenza). GSK had licensed zanamivir from Biota in 1990 and Biota would receive a windfall should this blockbuster drug make it to market, or so we believed.
The FDA doesn’t have to follow the recommendation of an AdCom, but normally does. In this case, there was a strong line of logic that the FDA would still grant approval. And it did! The share price went up to around $9.00 and I tasted my first investing success.
Unfortunately, Relenza was a commercial FLOP and one that is regularly mentioned in all-time top ten lists.
I did learn from it, though.
When your investment (trading, may be a better word here) thesis is fulfilled, it is time to exit, almost irrespective of the price. Biota’s share price hadn’t hit my target of $9.50, so I held.
In doing so, I essentially assumed that the FDA’s approval meant the drug would be a blockbuster. As I found out, it doesn’t. Approval by the regulator is simply a very important box that needs to be ticked to find out if commercial success will follow.
I continued to hold my Biota shares, without a real investment thesis, for years. Eventually, selling at 55 cents per share. The lesson, never let a short term investment thesis turn into a long term investment without a thesis.
In hindsight and after additional experience, I realise that at $9.00 per share, Biota was almost certainly very significantly overvalued. A common feature of biotech stocks is that their price almost always gets ahead of reality prior to big milestones. Analysts and investors get too optimistic. This is particularly the case with drugs associated with small companies, with analysts routinely over-estimating peak sales by an average 40%. Any biotech investor should consider taking something off the table at the times.
At the same time I made the Biota investment, I came to know a company in the US called Gilead Sciences. Biota and Gilead had both licensed anti-influenza drugs to big pharma partners. Gilead had licensed osletamivir (Tamiflu) to L. Hoffman La Roche, and both zanamivir and osletamivir were approved by the FDA in 1999.
While I never invested in Gilead, I always wished I had. The reason is easy. My five thousand dollars back then would be well over five hundred thousand today, if I had (figure 1).
To be clear, when I talk about biotech, I am talking about pre/early revenue companies, like Mesoblast (MSB) and Genetic Signatures (GSS). The big caps, CSL Limited (CSL), ResMed Inc (RMD) and Cochlear Limited (COH) are more industrial in nature than biotech.
I think I have made it clear that I have developed a bit of a fascination with biotech, the real question at hand, though, is why you should be interested in biotech?
Figure 1. Gilead Sciences Stock1 Price Chart (Source: Google Finance).
1: Gilead has had five 2:1 stock splits since listing on the NASDAQ (Feb 22, 2001; Mar 8, 2002; Sep 7, 2004; Jun 25, 2007; Jan 28, 2013).
A big reason, of course, from a portfolio point of view, is that biotech offers a unique form of diversification that will help reduce the specific risk of your portfolio. The demand for the products of biotech companies are driven by healthcare spend, as one would expect, but the companies themselves are tied to the finance sector and the flow of investment dollars, because many will need to raise capital, again. It is this mix of low and high risk dependencies that makes the industry unique as an investment class.
Including some biotechs in your portfolio will also strengthen that part of your portfolio where real out performance can come from. The top fifty or top two hundred companies can ensure that you get solid investment returns. You only need one Gilead amongst the small number of biotechs you include in your portfolio to turn those solid portfolio returns into magnificent returns. While they haven’t provided Gilead like returns, you would have been more than happy to have bought Sirtex Medical (SRX), Mesoblast Limited (MSB) or Cellestis Limited (now a part of Qiagen NV), among others, at their IPO and just held them (table 1).
Table 1. Returns from select successful biotechnology IPO’s (Source: Lodge Research).
|Company||ASX Code||IPO Year||IPO Price||Current/Final Price||% Return|
|Medical Developments Int. Ltd.||MVP||2003||$0.25||$4.601||1,740%|
1: Stock price as at 10 March 2016; 2 Cellestis was acquired by Qiagen N.V. for this price in 2011.
Biotech is good for those who want to aggressively seek alpha. Popular industries and large companies are put under the investment analysis equivalent to an electron microscope by analysts and investors. Although some would will argue, I would contend and have always felt that these areas are highly efficient (i.e. accurately priced), severely restricting the alpha available.
Biotech on the other hand, isn’t overly efficient in my experience. There seem to be a lot of reasons for this. Most ultimately come back to biotech being a relatively new investment class in Australia, with investors still learning what is and what isn’t important. With only a handful of funds that invest in the space, you are competing with mainly high net worth and retail investors, who don’t have the discipline of funds and, often, are investing, at least partly, for altruistic reasons. A little bit of effort can put you in a very good position when investing in ASX-listed biotech.
For investors who like to trade, biotech is a playground because there are few, if any, sectors that have more share price volatility than biotech. Volatilities of 80% to 100% are normal, with volatilities well in excess of 100%, at least for periods of time, are not rare. If you are one who likes to identify companies at the bottom of their cycle and ride them up, biotech can be a happy hunting ground. One company, in particular, that I have followed for many years is Genetic Technologies. As its share price chart shows, if you are in the right place at the right time, you can do very well (figure 2).
Figure 2. Genetic Technologies (GTG) 5-Year Stock Price Chart (Source: Google Finance).
In future pieces, I intend to look largely at biotech through the prism of recent events and often in a themed way. I hope I have given you reason to read my next piece and I hope, even more, I can provide insights that ultimately lead to a meaningful improvement in the performance of your portfolio.