Yesterday I was lucky enough to go along to the 2014 Australia Biotech Invest Conference in Melbourne.
It's a conference designed to connect innovative Australian biotechnology companies and investors, who don't mind holding a little extra risk in their portfolios.
It was great to see so many CEOs and senior management personnel talk about the potential future of their companies and the exciting developments they've made to the world of medicine and healthcare.
Whilst some of the companies are not yet listed on the ASX, share market investors have ample opportunities to get involved in what could be a big part of Australia's economic future.
Below I'll share my favourite stock ideas, but first here are five key takeaways from day two of the conference.
- There is a disconnect between valuations of US-listed biotech companies and those listed locally on the ASX.
- The end of the mining boom and increasing investor confidence could result in a meaningful increase to the flow of capital currently directed at the listed biotech space.
- There are a number of ambitious companies lead by highly qualified and experienced healthcare professionals, right here at our very own doorstep.
- Investors' lack of understanding is contributing to a number of these aspiring biotech companies being significantly undervalued.
A word of warning
Junior biotech stocks are not for the fainthearted and for every big winner like CSL Limited (ASX: CSL) there are likely many dozens more which don't make it past clinical trials.
However, as was shown at yesterday's proceedings, there is a notable parallel in the risk-reward trade-off in the resources sector and the biotechnology space. But I would go one step further to suggest investing in junior biotechnology companies – whose aim it is to improve the delivery of health-related services – is much more rewarding for shareholders.
For example, even if a company does not go on to become a complete success story like Sirtex Medical Limited (ASX: SRX), the research and science behind its undertakings will likely improve other companies' chances of success.
Whether that be finding a more superior ointment for chicken pox or the cure for lung cancer, there is something much more honourable to investing in companies that could potentially have a lasting positive effect on society, rather than leaving a bunch of abandoned holes in the ground somewhere in the desert.
Some ASX stocks to keep an eye on
Even the most diehard value investors – myself included – can sometimes be impartial to the idea of taking a speculative punt on an up-and-comer, provided a well-diversified portfolio is maintained.
Some high-risk/high-reward junior biotech stocks which caught my attention were:
- Analytica Limited (ASX: ALT) – a company which is now marketing its PeriCoach product, an e-health system for women who suffer from urinary incontinence.
- Dorsavi Ltd (ASX: DVL) – is a particularly interesting company out of Melbourne which only listed on the ASX in late 2013. It has developed wearable sensors for use in elite sporting clubs, OHS environments and clinical practice.
- Immuron Limited (ASX: IMC) is currently increasing its distribution network of Travelan, a drug which helps with traveller's diarrhoea. It is also pursuing two other possible game-changing products.
But these three weren't the only companies which have enormous potential. Biotron Limited (ASX: BIT), Bionomics Ltd (ASX: BNO) and Actinogen Limited (ASX: ACW) could also go on to handsomely reward investors willing to take on more risk – although investors should conduct their own due diligence.
Foolish takeaway
Whenever you invest in micro-cap stocks which require a number of significant 'catalysts' before becoming profitable, it's vital to go in with your eyes wide open. Do not risk more than you can afford to lose. Indeed even if a company can get through years of trials and regulatory clearance, there's still no guarantee the product will gain traction with its intended market.
To add more certainty to your investment thesis, focus on the products which offer differentiation and those which you believe can become commercially viable. The potential return versus downside risk should also be asymmetric (i.e. risking $1,000 for a potential return of $500 in five years is hardly worth it). Then determine which managers have a viable strategy in place to get the company from the lab to the customer.
