ASX to teach investors how to approach biotech

Australian investors tend to adopt a herd mentality and this is making it difficult for listed Australian biotechnology companies to retain their liquidity and make inroads into the investment community, the Australian Stock Exchange's James Gerraty told attendees at an AusBiotech roadshow in Melbourne this week.

He said the ASX recognised that biotechnology would become a key market for Australian investors, and were in the process of developing a strategic plan to assist the industry with a number of issues including the tendency of companies to lose liquidity and educating investors and brokers about the sector.

Gerraty said that the ASX was taking a lesson from the mining sector by setting up a framework for brokers to understand the industry, noting that there were obvious parallels between the two industries.

In essence, he said, there needed to be a way of converting the dense qualitative information coming from a scientific enterprise to a simple and more quantitative form, allowing brokers and investors to understand the significance of the announcement.

"I wonder how many brokers could explain the four stages of FDA approval, or can tell the difference between a diagnostic and a delivery method," he said.

Gerraty also emphasised that research analyst coverage was a critical liquidity driver for listed companies. Brokers and analysts often overlooked announcements, he said, and investors just wanted to be spoon-fed independent research.

"Brokers, institutional investors and financial planners all want to see independent research before they'll recommend stocks," Gerraty said.

Another initiative under development by the ASX for the biotechnology industry is addressing market structure problems, said Gerraty.

"ASX listing can happen much earlier than US or London listing -- there are not enough rounds of private equity funding," he said. The Catch-22 scenario is that several years after the IPO, companies have burned through all their cash, but because they have no liquidity, they can't raise capital on the public market. While the company's IP or technology might be of interest to private equity, venture capitalists either can't or won't invest in listed securities.

"The end result is that biotechnology companies are left languishing, and are cut off from both public and private sources of funding," said Gerraty.

To overcome this problem, he said, the ASX is working with a group of private equity funders, the Australian Venture Capital Association (AVCAL), and lawyers to create a safe haven environment that would provide companies with the profile of listing but with access to private equity, as an alternative to going into administration or being forced into a trade sale.