Signs of life are emerging in the global biotech sector, after the longest and sharpest downturn in history that was so severe it left hundreds US companies trading below cash backing.
The green shoots of recovery are also being felt in the local sector, with sentiment improving on the back of positive company specific news.
But market participants also warn that funding conditions remain very difficult, with early stage and poorly capitalised unlikely to access equity capital without a compelling story.
A proxy for the life science sector globally, the SPDR S&P Biotech ETF (XBI) has lost more than half its value since February 2021 – the longest decline in record.
But the fund has also rebounded 20 per cent since its mid June low point. Similarly, the Nasdaq biotech index fell 38 per cent between its early September 2021 zenith and its mid June nadir, but this loss has now been trimmed to 28 per cent.
Locally, the sector has enjoyed a buoyant month, with the rising tide of sentiment lifting all but a few boats.
According to the industry newsletter Biotech Daily, the “dramatic turnaround” saw 32 of the top 40 ASX listed biotechs rebound in July, with 28 of them gaining more than 10 per cent and five surging more than 50 per cent.
The best gainer, device house Medical Developments surged 73 per cent while Auckland based breast cancer imaging play Volpara Health Technologies bounced 63 per cent.
Outside of the top 40 stocks, shares in cannabis house Althea Group rocketed by 160 per cent.
In one sense, the sector is merely correcting from ultra oversold level to more normal settings.
But there are other factors at play as well, with a string of good news showing that local life science sector is advancing.
For example, radiopharmaceutical play Telix Pharmaceuticals in December last year won US Food & Drug Administration (FDA) approval for its prostate imaging agent, ILLUCCIX.
The company has wasted not time getting it to market and last month disclosed maiden June quarter sales of $22.5 million.
At the smaller end, Rhinomed has struck successive deals to sell tens of millions of its revolutionary covid testing swabs to local and Canadian customers. These include its Rhinoswab Junior variant, the first swab specifically designed for children’s use.
Meanwhile, Neuren’s commercial partner Acadia has filed an FDA application for marketing approval Trofinetide, Neuren’s proposed treatment for the orphan condition Rett syndrome.
Neuren’s shares have bucked the biotech trend, surging 250 per cent over the last 12 months.
Neuren chief executive Jon Pilcher says the market ‘vibe’ certainly has changed since the company carried out a round of meetings with brokers and investors after key clinical results four months ago.
“We got a great hearing, but we felt they were petrified about the market,” he says.
“So, to pitch anything new to them was really difficult.
“But I do sense things have moved and our share price shows things have moved in the last couple of weeks. If we needed to raise money we would be eminently capable of doing so, but we don’t need to.”
Dr Andreas Fouras, the chief executive of lung imaging innovator 4D Medical is confident that “things are on the way up” for the sector.
“The fascinating thing [about the downturn] is how companies moved up and down together,” he says. “There was some pretty indiscriminate investor behaviour.”
He adds: “I’m pretty happy we’ve got money in the bank to last until Christmas 2024.”
The head of Platinum Asset Management’s international healthcare fund, Dr Bianca Ogden says the “unprecedented” sell off has been driven by the broader concerns about rising inflation and interest rates and the spectre of recession.
Dr Ogden is yet to be convinced that life has returned to the sector, with the improvement more likely attributable to technical factors such as index rebalancing.
The sector’s rising tide is also yet to lift all boats. A notable outlier is Kazia Therapeutics, which saw its shares more than halve after news that its drug candidate for glioblastoma (brain cancer) would not move into the second stage of an adaptive global study.
However as Corporate Connect analyst Marc Sinatra highlights in a new report, Kazia still has multiple potential routes to market to treat what essentially is an unmet medical need.
According to Dr Ogden, “signs of stabilisation” emerged in the latter part of the June quarter: with short sellers covering their positions and investors returning from the sidelines to avail of cheap valuations.
While the Platinum fund lost 5.4 per cent for the quarter and 33 per cent for the year, it gained 6.6 percent in the month of June.
She says the focus of management and the market remains on “cash runways”: how long a loss-making biotech can last without relying on funding that may not be available.
She adds that the sector is showing its ability to adapt, with many companies narrowing their research focus and implementing redundancies.
Interestingly, some of those with healthy balance sheets are mulling returning money to shareholders: a recognition that the market will be unlikely to reward R&D efforts for some time.
Dr Ogden says a driving factor will be the pace of big pharma patent expirations, which means the sector’s collective $US200 billion in cash is likely to be deployed in the biotech sector.
The stunning recovery of the ASX buy now pay later (BNPL) stocks – another tech-oriented sector harshly dealt with by investors – shows how sentiment can turn on a dime.
A key difference is that the BNPL recovery did not appear to be supported by any factors other than a perception the troubled sector had been oversold.
Despite the short term sentiment, she says, the backdrop for the sector is sound.
“In our view, now is not the time to turn our backs on the biotech sector,” she says. “It is a time to do the due diligence, engage with companies and build the portfolio for the coming years.”
Dr Ogden’s sentiments are echoed by Andy Acker, the US-based portfolio manager of Janus Henderson Investors global life sciences fund.
In a recent interview Acker describes the sector as “stronger than ever” despite the deepest decline in both absolute terms and relative to the broader market.
“It’s easy to be discouraged by this performance, but we don’t believe the long term outlook for biotechs has become impaired.
“On the contrary, with valuations compressed and innovations in the sector accelerating, we would argue the case for biotechs has grown stronger.”
4D Medical’s Dr Fouras says the companies that deliver against its stated milestones ultimately will be rewarded.
In the case of 4D Medical, the company has sealed a deal with I-MED, Australia’s biggest medical imaging chain, which is expected to generate substantial and stead software-as-a-service revenues.
“As we get towards the end of the year .. the average punter will see how significant our progress is,” he says. “I’m not sure if investors necessarily are joining the dots at the moment.”
