Why it'll pay to be more open to biotech investment opportunities
The Chinese biotech sector is entering its purple patch. Erin Jonasson
by Stirling Larkin
Despite the successes of penicillin and other biotech miracles, investors remain cautious about biotech investment opportunities.
There has arguably been no greater discovery in human history than that of penicillin by Scottish scientist Alexander Fleming in 1928. First deployed in 1942 to eradicate bacterial infections during the war, it not only proved its mettle but opened the world's eyes to a whole new field, today become known as biotechnology – or biotech.
Penicillin proving its mettle and forging a legitimate place for biotech was not in itself trivial, as much of the nineteenth and early twentieth centuries was plagued by "snake oil" ruses.
It's no surprise that the driver of biotech has been the United States, where post-war industrialisation, innovation and risk capital have placed it at the front of the curve.
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But what may be news to many investors – and those working with proactive Australian ultra high net worth and family office investors – is how biotech is realigning globally in research and development and investment opportunities. Significantly, the Chinese biotech sector is entering its purple patch.
The traditionally overly-prudent China Food and Drug Administration has begun liberalising the use of new medications in many parts of China and setting new rules allowing capital inflows. The Chinese pharmaceutical market has upcoming biotech listings on the Hong Kong Stock Exchange (HKEX), which Australian investors have access to via the Shanghai-Hong Kong Stock Connect channel.
On February 23, HKEX released a consultation paper on the listing regime for companies in emerging and innovative sectors, highlighting pre-revenue biotech as one of the key focus areas in the new proposal to enhance listing rules in Hong Kong. New access
The new rules became effective on May 1, opening the doors for pre-revenue Chinese biotech companies, which would allow R&D-driven biotech start-ups without commercialised products access to international investors, such as Australians, via Hong Kong.
Previously these start-ups could only feasibly access foreigners via a Nasdaq listing in the US, with well-known examples including BeiGene (BGNE:US) and Zai Lab (ZLAB:US).
What this also meant for Australian investors is that what previously could only be accessed via hedge funds or synthetic proxies – such as Blackrock's iShares Nasdaq Biotechnology ETF (IBB:US) – could now be accessible directly via any Australian stockbroking account with access to Hong Kong's stock connect.
Paul Hopper, executive chairman of ASX-listed Imugene says: "Immuno-oncology, and targeted small molecule drugs, offer extraordinary opportunities for savvy investors. As China continues to rise, and with it, consumers' demand for the best cancer care, you are seeing a land-grab take place in the Chinese life-sciences market both in term of investment in foreign cancer companies and as a surge in the growth of domestic Chinese biotechs developing home-grown technology."
At the same time, Australia's own domestic life science's sector is emerging and maturing, evidenced by some of the larger international life science funds (such as Orbimed, BVF, Baker Bros, Abbingworth and Cormorant) selectively buying ASX-listed biotechs; this was unheard of only a decade ago.
Innes Willox, CEO of the Australian Industry Group, says: "The Australian biotech and related sectors are a growing part of our national economy.
"They are at the cutting edge of Australian innovation and research and development, with a lot of that technology being transferable to other sectors. If Australia is to push ahead into developing a real 21st century economy, then investment in biotechnology and related manufacturing must be at its core." Stricter rules
But for Australian biotechs to move forward, Hopper believes that corporate governance needs to be rethought. "ASX biotechs often exaggerate the significance of their data, even if Australian science can often be world-class, as evidenced by Merck's buy-out of Viralytics," he adds.
Next to data, the most important factor in a small biotech is the CEO and management, as fundamental life science investors require confidence in the stewardship of the company they are investing in, given the patient capital nature of the asset class.
Converging sciences, technologies and even asset classes are not a new phenomenon for Australian investors. What is new are the ways to access realigning investable potential in new markets such as China and Africa, and the best "penicillin" to combat a stagnant portfolio is to be open to discovering what's new.
PTX Price at posting:
11.0¢ Sentiment: Hold Disclosure: Held
