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Bull's-Eye - volatile biotech sector rewarding brave investors

Bull's-Eye - volatile biotech sector rewarding brave investors

By Staff Journalist 13.11.2011


Stock pickers rarely do a proper analysis of sectors and stocks within each sector to find the hidden gems, or standout stocks that may provide much-needed diversification in a portfolio. In this week's column we study the pharmaceutical and biotechnology industry group of the healthcare sector (XHJ).

The Healthcare Sector may be down 6.8% for the year, but the blame falls squarely on the shoulders of the Healthcare Equipment & Services industry group (HE&S). While it has foundered the other more volatile member of the Healthcare sector, the Pharmaceutical & Biotechnology (P&B) industry group, has soared.

One thing's for certain - the pharmaceutical & biotech industry group isn't for the faint-hearted. Sure, the average gain for the industry group was almost 30%, compared to an 8% loss for the ASX200. However seasoned investors know all too well that gains like that don't come without risk. Of the 21 companies in the group, six soared by more than 50%, while six dropped by 24% or more. The best and worst performing stocks tell the real tale of volatillity in the group - the top gainer skyrocketed 435%, while the biggest loser plunged 70%.

Chart: XHJ 1 year price chart as at 11/11/11 

Volatility aside, it's complicated terminology and machines that go "bing" that make the sector intimidating to some investors.  If you firmly believe in the maxim buy what you know, what do you do if you know practically nothing about modern medical treatments and drugs?

It isn't necessary to be a medical expert to invest in biotech shares. You can learn what you do not know through online searches of specific terms as well as looking for company-specific news items and industry-related items.

This is what makes the current time different for investors. Armed with little more than Google the average investor can research just about anything and uncover a wealth of information on whatever topic he or she wishes.

Need to know what a "clinical trial" is? Know nothing about stem cell research? Just Google it. Unimaginable just 15 years ago, today's investor has access to information that would have made yesterday's analysts weak at the knees. It takes a little time and effort, but is worth every ounce you put in. If you're a novice on the net, or even a regular search engine user, this page will give you some hints that will help you get better results from your research.

Sector: Health Care

Code: XHJ

1 year return: 29.2%

Industry Group: Pharaceutical & Biotechnology

Companies: 

Largest: CSL Ltd (CSL), $16.2 billion market cap

Top gainers (12 months): Genetic Tech (GTG) 436%, Mesobast (MSB) 174%, QRxPharma (QRX) 78%

Biggest losers (12 months): Cbio (CBZ) -70%, Pharmaxis (PXS) -52.7%, Alchemia (ACL) -50%


Top Gainer - Genetic Technology (GTG) +436%
Market capitalisation: $70.0 million
Price/earnings ratio:  68.18 times
Share price: $0.15

CHART 

Chart: Share price over the year to 11/11/2011 versus ASX200 (XJO)

Although it is sitting at less than half its annual high of 35 cents, Genetic Technologies (GTG) is still up an incredible 436%. Ah, the amazing gains you can make from a penny biotech, but be aware that this type of stock can just as easily head back to where it started.

However that's not what Marc Sinatra from Lodge Partners Research thinks. Sinatra believes that this is just the beginning for this biotech, going as far as to say in a recent research report that there is a high probability that one day GTG will be "considered in the realm of Cochlear, Cellestis, Resmed and Sirtex." Sinatra obviously believes that GTG is set to continue Australia’s good run with medical devices. "GTG recently completed an AUD11.7 million equity capital raise to domestic and US institutional and sophisticated investors," he says. "The money raised is earmarked for acquisitions and to accelerate the roll out of their flagship breast cancer risk test, BREVAGenTM, in the US."

"BREVAGenTM sales commenced in late June 2011 and we are extremely impressed with the approach taken by management in preparing for and executing its US market entry," he adds. Sinatra expects BREVAGenTM sales to grow solidly over the coming year, placing a 12 month price target of 57 cents.

Scott Power of RBS Morgans is almost as keen on the stock, with a price target of 46 cents. Power sees the recent maiden profit as a turning point that will attract new investors. "The business is well cashed up and discussions with management suggest the roll out in US of the genetic test for non-familial breast cancer is progressing to plan," he says.

 

Biggest Loser - Cbio (CBZ) -70%
Market capitalisation: $47 million
Price/earnings ratio:  - times
Share price: $0.20

CHART 

Chart: Share price over the year to 11/11/2011 versus ASX200 (XJO)

A biotech that's tanking is going to draw some blood, and Cbio has been no exception with the share price plunging 70% in a year of missteps for the company. The only good moves the directors have made this year have been to offload shares at opportune moments. Director Stephen Streeter sold 50,000 shares back when the stock was trading at 50 cents and Stephen Jones and Michael Monsour got rid of 40,000 shares at a higher price - just before the share price plummeted.  

Cleo Nanni of Alpha Broking has a sell on this biotechnology company that is focused on developing new products to treat autoimmune and inflammatory diseases. "Junior biotech companies are high risk/reward plays," he says. "In today’s volatile market and the biotech sector in particular, I prefer companies with proven income streams that look like they can be sustained for the longer term."

You can see why Nanni is running a mile - a legal battle, nepotism, management changes that weren't approved by shareholders, delays in drug trials, a share placement and a plunging share price all ring alarm bells for this stock. 

 

Largest by market cap - CSL Ltd (CSL)
Market capitalisation: $16,193 million
Price/earnings ratio:  17.02 times
Share price: $30.84

CHART 

Chart: Share price over the year to 11/11/2011 versus ASX200 (XJO)

Investors in CSL are not too pleased by the stock’s 15% fall over the last 6 months as the high Australian dollar eats into profits, however Citi isn’t giving up on the company yet. It rates CSL as a Buy, arguing that industry plasma volumes are increasing due to rising product demand. The big hope for investors in CSL is that its Alzheimer’s drug gets up, but analysts believe that is still way off.

CSL is another company with a share buyback in the wings worth some $900 million (around 6% of its issued capital). Since 2005, CSL has bought back almost 20% of its shares in five separate buybacks. The latest buyback should drive a 6% earnings per share accretion, according to analysts. Before you get too bullish on CSL, however, remember that CSL derives almost 90% of its profit overseas and makes all of its immunoglobulin products in Switzerland, where the rising franc has made production all that more expensive. Chairman Elizabeth Alexander recently noted at an AGM that CSL will book a $85 million hit to its bottom line due to the currency situation. This year CSL also recorded an expense of $25m on losses from the sale of Greek government bonds at a discount to their face value. Deutsche maintains a Buy on CSL with a target price of $30.20, while Credit Suisse has upgraded it to "Outperform".

John Rawicki, Ord Minnett also has a Buy on the biotech giant. "This blood products and vaccines maker is a defensive stock that will continue to benefit from earnings stability," says Rawicki. "CSL will boast a strong balance sheet after completing its $US750 million private placement and proposed $900 million buyback over the coming year. We expect underlying earnings will deliver double-digit growth via additional market share, emerging market demand, stable margins and increasing albumin prices."

 

Rising Star - Prima Biomed (PRR)
Market capitalisation: $188 million
Price/earnings ratio:  - times
Share price: $0.18

CHART 

Chart: Share price over the year to 11/11/2011 versus ASX200 (XJO)

Rising biotechnology company Prima Biomed continues to generate much medical and investment interest with its ovarian cancer vaccine Cvac. Prima is currently in a final phase III trial and success will possibly pave the way to bringing the vaccine to market by 2015. Like any trial, there’s a chance of failure – that’s the risk.

John Rawicki, of State One Stockbroking, believes an investment is well worth the risk. From a financial perspective, Rawicki says: “Ovarian cancer treatment is a huge $3 billion market, giving Prima massive upside potential for rapid growth upon commercialisation.”

Rawicki sees similarities between Cvac and biotechnology company Dendreon’s recently (US Food and Drug Administration) approved Provenge vaccine for treating prostate cancer. He says Dendreon has a market capitalisation of about US$5.6 billion, which is indicative of the potential for Prima Biomed.

Nomura also thinks it's worth the punt and has a 31 cent price target on the stock. "We believe there are a number of potential near-term catalysts for the stock, including the successful conclusion of clinical trials," said Nomura analyst David Stanton in a November research report. "Should these turn out to be positive, this would imply a further confirmation of PRR’s technology and business model...hence, we would expect the share price to react positively."

 

 Industry Group Pharmaceutical & Biotech*, Healthcare Sector

Average 1 year return: 29.2%

Sector Market Cap: $21.2 billion

 *Only stocks with a market cap of more than $30,000,000 have been included, there are other small- and micro-caps in the  industry group.

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Please note that TheBull.com.au simply publishes broker recommendations on this page. The publication of these recommendations does not in any way constitute a recommendation on the part of TheBull.com.au. You should seek professional advice before making any investment decisions.



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