The Fickle Nature of Biotechnology


What’s the most amount of money you’ve ever lost?

Ten dollars? A hundred? Maybe you’ve lost a few grand on a speculative stock punt. What about $1 billion?

Sirtex Medical is an ASX listed biotech company. Their lead drug development program is SIRFLOX, which is to treat colorectal cancer. The other day they released the results of their trial.

This had been some time coming. And the markets had bid the company up in anticipation of successful results. Over the last year, the stock has gone from $15.71 on the 18th March 2014 to $39.92 last Friday. That’s a whopping 154% gain.

Then on Monday the company went into trading halt. The results were in. Time to tell the market. If you were a holder of Sirtex stock, you’d have probably been confident of success.

The market certainly was. 154% in a year is a pretty good sign that everyone from fund managers to mum and dad investors were confident.

And then Tuesday the stock came out of trading halt. And the news was bad. Really bad. The primary endpoint of the clinical study was not met.

In other words, the treatment doesn’t work any better than currently available treatments. The stock shed a massive 55% on Tuesday, the equivalent of $1 billion.

It sent shockwaves through the Aussie biotechnology world. Another ASX company also involved in a similar cancer treatment, Oncosil Medical [ASX:OSL], was down 27% just on Sirtex’s news.

It’s a big drop for one of the ASX’s ‘big’ biotech companies. But it’s not the first time it’s happened, and it’s not going to be the last.

Speculation and a good old fashion punt

The ASX is an interesting beast. At one end of the spectrum, you’ve got multi-billion dollar ‘blue chip’ giants. BHP, Telstra and CBA are a few of them.

Then at the other end of the scale you’ve got the penny-pinchers — stocks that trade literally for the ASX minimum price step of 0.1 cent.

Very few biotech companies sit at the upper echelon. CSL Limited [ASX:CSL] is easily the biggest at $44 billion. Mesoblast is some way off at $1.25 billion.

But down the small, mini and micro cap stocks, you’ve certainly got plenty to choose from. To me, the biotech sector is similar to Aussie junior miners.

Many of them are putting the house (so to speak) on just one or two plays. Like when a junior minor has a mining tenement with the potential for a big payday. You can liken this to a biotech company that has a new drug going through the clinical phase process.

Miners explore; biotech companies undergo clinical trials. Both are speculative, both are a punt on a company that could have something huge. But the flipside is there could be nothing. No oil, no gold, no gas…no cure, no treatment. In both cases, no company.

Sirtex is a prime example of what can happen when a biotech gets a negative result. Another example would be Pharmaxis Limited [ASX:PXS]. Back in 2011, PXS was in the midst of clinical trials for its Bronchitol treatment.

They had a meeting to get European Marketing Approval. The meeting was with the Committee for Medicinal Products for Human Use. The committee took a vote, which resulted in a negative outcome. They would not give EU approval.

It sent the stock into a spiral. The stock dropped 68% in a week.

However, when there is something, the reward can be huge.

For example in October last year Clinuvel received European Marketing Approval. This gives them permission to sell their drug SCENESSE across 31 European states.

In the lead up to the announcement and after the announcement, the stock took off. On the 21st October, Clinuvel was $2.14. One week later, the stock was $4.59.

That’s 114% gain in a week.

At the end of January Viralytics Limited [ASX:VLA] started Phase I trials of its bladder cancer treatment. 35 days later, the stock was up 52%.

Longer term, biotechs can prove to be some of the best investments of all. CSL was languishing around $10 in mid 2005. 10 years later, it’s seen more than 800% gains.

The thing with biotechs is you shouldn’t treat them like other ASX stocks. They are (generally) high risk, high reward. That comes with it the ups and downs of high risk investing. Double-digit daily swings are common.

Aussie biotechs have a good reputation for breaking new ground. But some are just good for emptying wallets. The trick is to find ones that meet an unmet need, ones that are doing something new.

These are hard to find, and biotech in general can be a minefield for the inexperienced. You need to come to terms with the science behind it. You need to understand the regulatory hurdles that companies face every step of the way. Then there’s the fact they have to prove their treatment is effective. Then they need to get overseas market approvals. And to top it all off, they have to protect their tech with patents.

So for companies with market caps in the small millions, that’s a lot of time, money and resources. And that’s just to get to market. Staying there’s another ball game.

That’s why many fail. And why many put everything behind just one treatment. Because if it does pay off, it can be a company maker. And the returns that CSL had in 10 years, might come in just a few.

It’s an exciting investment field. But it’s also one of the most risky. In the end though, it can also be one of the most profitable. You just need to know where to look.

Sam Volkering
Editor, Revolutionary Tech Investor

Editor’s Note: This article originally published in Tech Insider.

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Sam Volkering
Sam is Editor for Money Morning and it's small-cap and technology analyst. He spends his time hunting down the most exciting stocks on the planets, whether they’re potential-packed volatile small-caps or tech firms transforming our future through cutting-edge technologies. You can find more of Sam’s work over at Australian Small-Cap Investigator, where he shares the best small-cap stocks he finds on the ASX, or at Revolutionary Tech Investor where he reveals the latest breakthrough tech investment he’s discovered.

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