Broker laments 'catastrophic negative surprise' that highlights the risks with these types of ASX shares

Canaccord Genuity recommends a 'basket approach' when investing in these types of stocks.

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ASX share Opthea Limited (ASX: OPT) remains suspended from trading as the biotech company works to avoid insolvency.

Opthea last traded at 60 cents per share.

Created with Highcharts 11.4.3Opthea PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.com.au

Last week, we learned that Opthea has decided to cease development of its flagship sozinibercept (OPT-302) treatment.

OPT-302 had been a potential treatment for wet age-related macular degeneration (wet AMD).

The ASX biotech is now in a serious financial bind, and has told investors "there remains material uncertainty as to Opthea's ability to continue as a going concern."

Broker Canaccord Genuity said Opthea's story highlights the inherent risks of investing in ASX biotech shares.

Broker surprised by trial failure

Opthea advised the market on 24 March that its Phase 3 COAST clinical trial of OPT-302 had failed to meet its primary endpoint.

In a note issued after the COAST trial news, Canaccord Genuity described the result as "a catastrophic negative surprise to us".

The broker said it was taken aback by the Phase 3 failure because the Phase 2 data had looked so promising.

Canaccord said Phase 2 involved a relatively large patient cohort and the results had been "statistically significant and compelling".

This had been a contributor to the broker's buy rating on Opthea shares back in February.

Back then, Canaccord Genuity said:

OPT-302 is unique and differentiated, in our view, on safety and efficacy metrics, and we see the upside opportunity for peak sales of US$1b and upside to >$3/share, pending clinical, regulatory and commercial success.

Canaccord said it had assessed a 65% probability of success for OPT-302.

It noted there "always is some degree of risk when moving from a Phase II to a larger Phase III" for ASX biotech shares.

As a result of the COAST study's failure, Canaccord placed its Opthea shares rating under review.

ASX biotech shares: Risks and rewards

Biotech companies seek to develop new treatments for diseases.

Arguably, Australia's greatest biotech success story is CSL Ltd (ASX: CSL).

It's the largest ASX biotech share and ranks third within the S&P/ASX 200 Index (ASX: XJO), with a market cap of $125 billion.

Many investors have enjoyed fantastic long-term returns from CSL shares.

The CSL share price has risen 640% in value over the past 20 years.

Created with Highcharts 11.4.3CSL PriceZoom1M3M6MYTD1Y5Y10YALL4 Apr 200520 Jun 2025Zoom ▾200620082010201220142016201820202022202420102010201520152020202020252…20252…www.fool.com.au

But investing in smaller ASX biotech shares that are yet to establish an approved product is inherently risky.

The rewards can be huge, but the risks are also high.

Just ask Mesoblast Ltd (ASX: MSB) shares investors.

In October 2020, they were blindsided when the US FDA knocked back the ASX biotech's flagship drug, Remestemcel-L, or Ryoncil.

The medicine treats steroid-refractory acute graft versus host disease (SR-aGVHD) in children.

The FDA asked for more trials, which meant more than two years of extra work before Mesoblast was ready to apply again in 2023.

And it got rejected again.

The company finally gained approval in December last year.

Anticipation of the approval and confirmation in December saw the ASX biotech share rocket 900% over 2024.

That's a long-awaited reward for long-suffering investors.

And it's worth noting that the ASX biotech share has never returned to the price level it traded at in 2020 before the first FDA rejection.

Created with Highcharts 11.4.3Mesoblast PriceZoom1M3M6MYTD1Y5Y10YALL4 Apr 202020 Jun 2025Zoom ▾Jul '20Jan '21Jul '21Jan '22Jul '22Jan '23Jul '23Jan '24Jul '24Jan '252021202120222022202320232024202420252025www.fool.com.au

Opthea provides another case in point as to the risks with younger ASX biotech shares.

While things worked out for Mesoblast investors with Ryoncil, Opthea is facing the very real risk of collapse after OPT-302's failure.

What's the lesson for ASX biotech shares investors?

Canaccord analyst Elyse Shapiro said the Phase 3 failure of OPT-302 highlighted the risks of investing in ASX biotech shares.

Shapiro said:

Investment in biotechnology companies is notoriously risky and binary … and that the negative read-through highlights the importance of taking a basket approach when it comes to the sector.

Shapiro said that OPT-302 was the only treatment Opthea had in development, and the company was now at serious financial risk.

We therefore place our forecasts and rating under review, noting the potential that the stock has no value from here.

A basket approach, or diversification, protects investors somewhat from a single stock's downturn, as performing stocks within their portfolio can offset it.

Easy diversification is a key reason why ASX shares investors are increasingly investing in exchange-traded funds (ETFs).

Motley Fool contributor Bronwyn Allen has positions in CSL and Mesoblast. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended CSL. The Motley Fool Australia has recommended CSL. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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