Biotech performance was tale of two halves in 2005: Intersuisse

Australian biotech stocks underperformed both the All Ordinaries and the Nasdaq Biotech Index in 2005, but the second half of the year was brighter with stocks gaining 23.2 per cent, according to the Intersuisse Biotechnology Index.

Now in its 10th year, the index tracks 82 ASX-listed biotechnology, life sciences and medical device companies with a market capitalisation of over AUD$10 million.

While the All Ordinaries gained 16.2 per cent in calendar 2005, and the Nasdaq Biotech Index gained 2.8 per cent, the Intersuisse Biotechnology Index dropped 5.8 per cent over the year.

However, from July 1, 2005, Australian biotech companies gained 23.2 per cent -- outperforming both the All Ordinaries (11.3 per cent) and the Nasdaq Biotech Index (14.5 per cent).

"It was a lousy period up until April, sparked by general disillusionment with biotech" said Intersuisse's Peter Russell.

Negative announcements by Australian biotech companies, including Metabolic Pharmaceuticals (ASX:MBP) at the end of 2004, "when everybody was hoping for a blockbuster obesity drug," Russell said, combined with big pharma woes and a downturn in the Nasdaq to produce the biggest downturn in the Intersuisse index since 2002.

But the second half of the year showed broader-based strength in the biotech sector. In the last quarter, for example, fear of an influenza pandemic boosted Biota Holdings' (ASX:BTA) share price by more than 250 per cent. Recognition that the life science sector was undervalued in the first half of 2005 also saw a re-correction by the market.

However, Russell said he believed overall market conditions were the leading driver for the Intersuisse index's growth in the second half of the year, rather than any particular news from the biotech industry.

"Overall there was a better tone to the whole market in the second half -- not just in biotech, but also in resources and the small cap companies as well," said Russell. "People were worried in the first half that perhaps China wouldn't succeed, that there would be more interest rate hikes and inflation would come back, and the US might falter.

"Then, as the second half progressed, people realised that none of those things were actually happening. So it was good for all the market, and particularly the smaller cap stocks because they are more volatile than the larger ones."

The good, the bad and the ugly

Over the 2005 calendar year, just 22 stocks on the Intersuisse index gained value, and 54 stocks lost value -- 42 of them by more than 20 per cent, The worst performers, Polartechnics (ASX:PLT) and Compumedics (ASX:CMP), lost 73 per cent of their values, according to Intersuisse.

Only 16 of the market gainers rose by more than 20 per cent, but six of those stocks rose by over 80 per cent. The leaders, Pharmaxis (ASX:PXS) and Biota Holdings, were both up 173 per cent, and Life Therapeutics (ASX:LFE) rose by 123 per cent.

"Everyone recognises that Pharmaxis has done a brilliant job," said Russell. "They appear to be very professional. They're at the phase III marketing end of their business now and all the studies they've done seem to have come off very well.

"And Life Therapeutics has totally reinvented itself. It's now relying on steady revenues and profits from its US collection centres, and the original Gradipore instrument has prospects of being used with a partner, rather than having to sell it to other people who don't quite understand it and want it."

The traditional Australian biotech sector leaders also performed strongly in 2005 -- Cochlear (ASX:COH) rose 81 per cent, ResMed (ASX:RMD) was up 62 per cent and CSL (ASX:CSL) increased 45 per cent.

"Cochlear, ResMed and CSL are the bellwethers for the sector," said Russell. "One could argue that they shouldn't be in this index, because they are genuinely profitable companies, but I think they deserve to be seen as those that have come through and matured."

Since July 1, 2005, 45 companies showed price rises and 34 fell. Avantogen (ASX:ACU) was the only company to see its stock fall more than 50 per cent (down 53 per cent) with Compumedics and Virax Holdings (ASX:VHL) losing 48 per cent.

"It is very difficult to bring a product to the market," said Russell. "Even navigating through the regulatory trial or activities you still have this enormous job ahead of marketing. It's only those companies that have the capital and the supportive connections and management capability that will actually be able to turn it all to good account. Even when you've got money and management competence, it's still a very tough job."

In comparison, 19 companies saw price rises of over 50 per cent with Biota leading the pack, followed by Mesoblast (ASX:MSB) (176 per cent), Occupational & Medical Innovations (ASX:OMI) (141 per cent), Alchemia (ASX:ACL) (127 per cent) and Peplin Biotech (ASX:PEP) (125 per cent).

Russell was reluctant to predict the biotech sector's fortunes for 2006. However, he noted that: "the general trend for returns is one of very high volatility -- sharp drops and sharp rises. We've had a bit of a rise now and there's probably more to come."

The industry has matured, said Russell.

"You don't make money overnight," he said. "I think most biotechs have got reasonable funding now, and there are a few like Progen and several others that are looking for partnerships."

Risk and reward

Over the 10 years of the Intersuisse index, Australian listed companies have shown an average capital growth at a compound annual rate of 22.2 per cent, more than double that of Nasdaq biotechnology stocks (10.1 per cent) and well ahead of the All Ordinaries (8 per cent). "That reflects the much higher risk involved, but there have also been some good performers," Russell said.

In the last decade, Ventracor (ASX:VCR) was the best performer (1,573 per cent), ahead of Cochlear (1,477 per cent) and CSL (962 per cent). "Ventracor has been working for 10 years to get its heart LVAD on the market," Russell said. "It just shows the time period you're looking at."

Ten years of the Intersuisse biotech index

Top performers include:

• Ventracor +1,573%
• Cochlear +1,477%
• CSL +962%
• Institute of Drug Technology +941%
• Novogen +466%
• Life Therapeutics +251%
• Peptech +251%
• Progen Industries +57%
• Circadian Technologies +39%

Worst performers include:

• Polartechnics -89%
• Meditech Research -81%
• Biota Holdings -18%
• ChemGenex Pharmaceuticals -7%
• Agenix +4%

Since July 1, 2005

Best performers include:

• Biota Holdings +251%
• Mesoblast +176%
• Occupational & Medical Innovations +141%
• Alchemia +127%
• Peplin Biotech +125%

Worst performers include:

• Avantogen -53%
• Compumedics -48%
• Virax Holdings -48%
• Sunshine Heart -41%
• Chemeq -40%

Source: Intersuisse