Biotech beats the All Ords, but market indigestion on the way

Australia's biotechnology industry has had its best performing year since the halcyon days of the 1999-2000 tech boom, with both Intersuisse and Southern Cross Equities reporting a 24 per cent rise in their biotechnology indices to the end of the financial year, compared to the 18 per cent rise seen in the ASX's All Ordinaries Index.

"This was the best biotech performance outside of the heady tech boom years of 1999 and 2000 when the sector rose 38 percent and 106 per cent respectively," said Jonathan Buckley, director of Intersuisse Corporate.

"During the last eight financial years the best year's performance by the All Ordinaries Index was a gain of 22.0 per cent in 1996-1997."

Top performing companies have included:

-- nanotechnology company pSivida (ASX: PSD), whose share price almost quadrupled to close the year 387 per cent up at AUD$1.12;

-- Progen (ASX: PGL), which has risen 368 per cent, largely on the back of the success of Genentech's drug Avastin, which is a monoclonal antibody against the same target as Progen's small molecule drug;

-- Australian Cancer Technology (ASX: ACU), which has risen 316 per cent with one product in Phase II clinical trials, the acquisition of a nutraceutical line for chemotherapy patients and the recent acquisition of US vaccine adjuvants company Galenica;

-- Epitan (ASX: EPT), whose rise of 241 per cent is in response to favourable early clinical trial results for its tanning drug Melanotan;

-- and Anadis (ASX: ANX), which has gone up by 177 per cent as it prepares to launch its colostrum-based products for protection against bacterial infection.

Other companies which have seen their share price more than double this year include Virax (ASX: VIR), Clinical Cell Culture (ASX: CCE), Premier Bionics (ASX: PBI), Starpharma (ASX: SPL), ChemGenex (ASX: CXS) and Solbec Pharmaceuticals (ASX: SBP).

Underperformers include VRI Biomedical (ASX: VRI), which dropped 65 per cent, AVT Bioplasma (ASX: AVT), which dropped 61 per cent and BioProspect (ASX: BPO), which lost 57 per cent.

According to Stuart Roberts, 2003 was Australia's first real biotech boom. While he admits to being rather bearish on the sector at present, he's forecasting a recovery later this year.

"It's been a tough market, and it has had to digest the money that has been put into it," he said. "The market can't be said to be in healthy shape at the moment."

Roberts blames the market's current woes squarely on the volume of placements and IPOs -- which have brought almost $500 million into the sector -- that have swamped investors over the last 12 months.

"It's an extraordinary amount of capital, but not a lot of it has performed very well," he said. "There's a danger that too much capital will be raised."

His opinions are echoed by BioShares analysts David Blake and Mark Pachacz, who recently noted that 25 companies have joined the Australian biotech and healthcare sector over the last year to increase its value to $25.5 billion.

"One of the big surprises of last year was how long the IPO window opened for -- it was amazing how many companies listed through IPOs or backdoor listings," Blake said.

However Blake said that whether an IPO was underwritten or not had a major impact on the success of the listing, with underwritten companies performing far better than those that were not underwritten.

Going forward, Blake said he expected that some companies, particularly the smaller ones, might face some difficulties, particularly as the competition between companies to attract analyst and media interest was growing with the expansion of the sector.

"We really think that some companies are going to have an extra hard time," he said. "There is bound to be a bit of weakening towards biotech given that we've had a bit of a run, but are we likely to see a biotech 'nuclear winter' -- no. Are we likely to see more realistic valuations -- yes -- with increases as well as decreases."

Analysts agree that a few big clinical successes in the industry in the latter half of the year could galvanise renewed interest in the sector. Blake said that companies to watch included Metabolic Pharmaceuticals (ASX: MBP), Antisense Therapeutics (ASX: ATL) and Pharmaxis (ASX: PXS).

See 'Four of the Best' for a review of biotech's biggest winners