Positive outlook for biotech in latest Deloittes index

The latest Deloitte index of companies on the Australian Stock Exchange's Healthcare and Biotechnology Index has painted a picture of increasing investor confidence in smaller stocks.

Deloittes life sciences partner Glen Sanford, one of the authors of the report, told Australian Biotechnology News that the sector had exhibited "wild swings" since the company's last report, in late 2001.

"In the previous edition, we reported that 40 stocks went down," Sanford said. "This edition, 40-odd stocks have gone up."

For the second time, Deloitte has provided a split index that shows progress of shares in medical devices, biotech, and the sector without the presence of the "big three", CSL, ResMed and Cochlear.

Between September 2001 and March 2002, those three companies all suffered losses on the market.

"A significant contributor to that result is no doubt the very high price earning multiples that CSL, ResMed and Cochlear had been trading on, as well as some healthy realism amongst some sectors of the investment community," Black said.

But with the big three (who now make up 76% of the index), taken out of the equation, the index actually increased by 38 per cent.

In the six months to March 31, only 14 companies showed a fall.

Increases in value by small biotech stocks were mostly driven by market announcements, Sanford said - not by sales or profits, as in larger stocks.

The report leads with a backgrounder on the current stem cell debate in Australia, which Sanford said was key to the biotech sector.

"It's a big issue that's being given lots of prominence in the media," he said.

'It's getting people thinking and interested, and can only help the sector.

"The down-side is that if it follows the genome reporting route, it excites the mum and dad investors a bit too much," increasing the risk of volatile swings.

Australian biotech could expect to benefit from a confident venture capital sector, the report said. In 2001, Australian VCs sunk $114.3 million into 85 healthcare and biotech ventures -- the second-largest sector by number of investments.

But Sanford and Black warned against complacency by either side of the investment equation.

The understanding by VCs of biotechnology opportunities needed "some development", they said, as did the biotech entrepreneurs' understanding of how to approach private equity for money.

However, the increased investor confidence paved the way for new listings on the ASX, the report said.

"While it is positive to see this turnaround in share prices, the most encouraging sign that the biotech industry is warming up again is the number of new and upcoming listings," including Cryosite, BioDiem, Cbio, Xenome and Kinacia, Sanford said.

And while biotechs were often accused of listing too early as an easy fundraising option, listing was certainly not an easy option at the moment, said Black and Sanford.

"Don't underestimate the compliance costs, the public scrutiny, the explanations you're required to give to shareholders," Sanford said.

Black pointed out that of the 62 companies in the biotech list, only 13 had a market capitalisation of over $100,000.