Biotech doesn\u2019t need another pandemic for a resurgence \u2013 it\u2019s made a strong comeback regardless. Stockhead spoke with Andrew Chapman, head of Perth-based fundie Merchant Group \u2013 to learn why this is the case, and which are his top picks for the sector.\u00a0<\/p>\n
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The global biotech industry has been pulling in a wave of funding of late, ending a two-year deal drought after interest in the sector waned post-pandemic eye of storm.<\/p>\n
It\u2019s been attracting big money in US equity markets in particular. And according to the FT<\/em><\/a>, with an inflow of US$6.2bn in equity capital markets in January \u2013 per data from Jefferies \u2013 the money\u2019s been piling in at the fastest rate since the peak of the mid-pandemic boom.<\/p>\n There\u2019s big interest for Australian biotech innovation, too, as Merchant Group managing director Andrew Chapman attests.<\/p>\n In a recent chat with us, Chapman told Stockhead<\/em> that biotech is a sector moving in the right direction globally, notably \u201ccoming off a super low base\u201d.<\/p>\n And that means the timing could be very good indeed right now for ASX investors to take a closer look at the diversity and opportunities on offer in this complex and competitive sector that\u2019s potentially highly rewarding in more ways than one.<\/p>\n \u00a0<\/p>\n As of end of January, the Merchant Group Biotech Fund is up about 57% this financial year vs the Small Cap Index and the Healthcare 300 Index, correspondingly up about 10%.<\/p>\n Chapman puts its recent outperformance, and the biotech sector\u2019s as a whole, down largely to macro conditions, and a surge of funding in the space in the US.<\/p>\n \u201cWith the view that interest rates may have peaked and likely to come down in 2024, I think risk-on investors are looking for diamonds in the rough and the best place to start in my view is always the most bombed-out sectors. So I think ultimately at the moment, the interest coming into the US market with M&A deals there for instance is now flowing through into Australia.\u201d<\/p>\n Chapman says Merchant Group\u2019s, and his own, interest in biotech is long-held. The sector has historically been a \u201chappy hunting ground\u201d for the firm, with an active view to investing in companies at a very early stage, such as Race Oncology (ASX:RAC)<\/strong><\/a>, PolyNovo (ASX:PNV)<\/strong><\/a> and BCAL Diagnostics (ASX:BDX)<\/strong><\/a>.<\/p>\n However, he admits the biotech, medtech and life sciences focused fund had a difficult first 12 months as the biotech market melted down from about February 2021.<\/p>\n \u201cThe overall timing on launching a fund focused on arguably the worst sector in the market was pretty average,\u201d said Chapman.<\/p>\n The past six months have, though, recovered that initial lost ground and then some, with the fund well and truly back in positive territory for its investors.<\/p>\n \u00a0<\/p>\n And adding to that question, how does Merchant Group decide which companies or technologies to invest in and what attributes and factors are important?<\/p>\n Regarding the primary strategy, it\u2019s essentially one of \u201cactive investment\u201d, said Chapman. And that means becoming involved with research helping to advise the the company as much as possible.<\/p>\n \u201cWe\u2019re generally not ones to sit on the sidelines,\u201d Chapman told us. \u201cWe look to take large stakes in companies with excellent management teams that we believe have unique assets and some type of moat around them.\u201d<\/p>\n \u00a0<\/p>\n When considering biotechs, a particularly important consideration said Chapman \u2013 as much as the science itself, and cash balances for funding for at least 12-18 months \u2013 is companies with strong marketing management.<\/p>\n \u201cFor example, a poorly designed trial can have a huge adverse effect. If there\u2019s a mistake there, all the amazing science in the world is not going to shine through,\u201d the Merchant Group boss told us.<\/p>\n \u201cThis is where I come back to having the right commercially minded people who understand the science but also how to design trials appropriately in order to get the best results. It\u2019s super important, and it\u2019s where someone like Dr Tillett for RAC is exceptional. Board of IIQ, same story.<\/p>\n \u201cA really good CEO can make the science shine, when a really good scientist won\u2019t necessarily be able to make the company shine.\u201d<\/p>\n \u00a0<\/p>\n \u2026 and how does it manage risks?\u00a0<\/strong><\/p>\n Chapman notes that at any one time the fund has a spread across sectors within the broader biotech space.<\/p>\n \u201cAt the moment we have about 20 positions in the portfolio and believe that spreading the risk across different companies within the space is the best option,\u201d he said.<\/p>\n \u201cThis doesn\u2019t mean, though, that in a broader sector downturn like we have seen from March 2021 to this year, we are immune from the chaos,\u201d he caveated.<\/p>\n \u201cWe are very careful to not pull our flowers and water our weeds \u2013 meaning we will let the winners run and this is where we did really well in the past with companies such as RAC and PNV.\u201d<\/p>\n \u00a0<\/p>\n Right then, the juicy bits you\u2019ve probably been waiting for in this piece \u2013 biotech stock success stories to date for the fund, and its top picks looking ahead. Some, have already actually been mentioned.<\/p>\n Starting with recent<\/em> excellent performers, Chapman said the ones driving the fund\u2019s success over the past few months include: Arovella Therapeutics (ASX:ALA)<\/strong><\/a>, PharmAust (ASX:PAA)<\/strong><\/a>, Neurotech (ASX:NTI)<\/strong><\/a>, and Neuren Pharmaceuticals (ASX:NEU)<\/strong><\/a>.<\/p>\n \u201cThese ones are have all been long-term holds, so they aren\u2019t new additions, but they\u2019ve all been winners of late,\u201d he said, noting that the firm did sell out of NEU recently.<\/p>\n As for stocks that Chapman believes are primed for a rally in favourable conditions this year, he has four\u2026<\/p>\n \u00a0<\/p>\n Inoviq is developing and commercialising next-generation exosome isolation tools and precision diagnostics to enhance detection and management of cancer and various other illnesses.<\/p>\n The company has commercialised the EXO-NET pan-exosome capture tool for research applications, as well as the hTERT test to complement urine cytology testing for bladder cancer.<\/p>\n IIQ is also developing blood-based tests for the early identification and monitoring of ovarian, breast, and other types of cancer.<\/p>\n Chapman tells us: \u201cIIQ has had a recent board reshaping to now be the same board that was in place with us at PNV when it went from $0.15 to $3.00.<\/p>\n \u201cThe company has a very tight capital structure \u2013 with us and chairman David Williams\u00a0 the largest shareholders.<\/p>\n \u201cLike I said before \u2013 excellent management teams but also IIQ has over the years developed next-generation diagnostics and therapeutics for cancer to save lives.\u201d<\/p>\n Chapman also notes IIQ is well diversified \u2013 \u201cso its isn\u2019t a binary outcome like some biotechs\u2019, where it\u2019s a flip of a coin and all is riding on one tech or test,\u201d adding:<\/p>\n \u201cLess risk, excellent management and very far advanced tech is why we think we are only at the start of the movement in this stock. There is plenty of upside from here in my opinion.\u201d<\/p>\n \u00a0<\/p>\n This clinical stage biopharmaceutical company makes drugs that are designed to treat cancer better with its lead asset, bisantrene (RC220), currently in Phase II trials for Acute Myeloid Leukemia.<\/p>\n \u201cWe\u2019re about to start a series of new trials towards the second half of 2024 for solid tumours so basically all other cancers,\u201d CEO Dr Daniel Tillett told Stockhead<\/em> in a separate interview that delves into what\u2019s coming up for the biotech stock this year.<\/p>\n \u201cRAC \u2013 again another story of excellent management,\u201d said Chapman.<\/p>\n \u201cAfter a management break, Dr Tillett is back at the helm and is a great operator and as the largest shareholder has a lot of skin in the game.<\/p>\n \u201cHe understands the stock market also, so from an investor perspective is very backable. We believe a lot will happen in 2024 and will be the year of RAC.<\/p>\n \u201cResults are imminent and again with a tight cap structure, we think the stock could run higher from here having peaked at $4.00 a couple of years ago and is now circa $0.80 \u2013 again a lot of upside from an already proven drug.\u201d<\/p>\n \u00a0<\/p>\n Arovella is\u00a0focused on developing its invariant Natural Killer T (iNKT) cell therapy platform for cancer treatment and continues to advance this tech towards first in-human clinical trials.<\/p>\n Arovella saw its share price more than double back in April last year after announcing its lead drug ALA-101 confers significant anti-tumour effect and survival benefit in aggressive leukemia models.<\/p>\n Clinical data indicated that ALA-101 has the potential to be a novel \u2018off-the-shelf\u2019 cell therapy to treat CD19-expressing leukemias and lymphomas.<\/p>\n \u201cALS will keep going,\u201d said Chapman, \u201cand I think could go a lot higher than here, given it\u2019s one of, if not the, cheapest cell therapy stocks in the world.\u201d<\/p>\n \u00a0<\/p>\n Neurotech, meanwhile, is following in the footsteps of 2023 biotech market darling Neuren Pharmaceuticals with another possible treatment for the rare neurological and developmental genetic disorder Rett syndrome.<\/p>\n Mid last year, NTI received Human Research Ethics Committee (HREC) approval and Clinical Trial Notification (CTN) scheme clearance by the Therapeutic Goods Administration (TGA) to investigate the use of NTI164 \u2013 the company\u2019s proprietary cannabis-derived drug formulation \u2013 in female Rett Syndrome patients.<\/p>\n The progressive neurological disease occurs almost exclusively in girls, with an incidence of one in 10,000 female live births.<\/p>\n Its executive director Dr Thomas Duthy has been quoted as saying this equates to a US$2 billion market opportunity.<\/p>\n Regarding the company\u2019s trial\/testing, Chapman enthused:<\/p>\n \u201cIn all my years of biotech investing I have never seen a circumstance where people elect (and the authorities encourage) to stay on a trial after being on it for +90 weeks!<\/p>\n \u201cThis one\u2019s a no-brainer and this I think will be a huge year for NTI. NEU is sitting at $3B market cap and NTI is at $100m \u2013 so massive upside if they get it right which I believe they will from here.\u201d<\/p>\n \u00a0<\/p>\n \ufeff<\/span>\ufeff<\/span>\ufeff<\/span><\/span>\u00a0<\/p>\n When asked about the most exciting investment narratives or sub-sectors within the biotech sphere, Chapman again pointed to the four ASX stocks listed above.<\/p>\n \u201cI think all of the four companies mentioned are super exciting but not only from an investment perspective, they are exciting from a humanitarian perspective and this is what I really like about being involved in the space and hopefully making a difference to the outcomes of peoples lives.\u201d<\/p>\n He also gave a bonus nod, however, to medical cannabis as a grouping that he thinks could \u2013 at last \u2013 make a move higher, too.<\/p>\n \u201cMedical cannabis has been the worst-performing sector of the last three years, so it\u2019s due some time in the sun soon. With positive changes coming in the US and Europe, it\u2019s shaping up as one to watch, too.\u201d<\/p>\n At Stockhead, we tell it like it is. While Race Oncology and Neurotech are Stockhead advertisers, they did not sponsor this article.<\/em><\/p>\n <\/span><\/p>\n The post Fundie Merchant Group picks four biotech stocks that could rip as sector hits rude health again<\/a> appeared first on Stockhead<\/a>.<\/p>","protected":false},"excerpt":{"rendered":"Why has biotech made a comeback?<\/h2>\n
What\u2019s the biotech fund\u2019s overarching strategy?\u00a0<\/strong><\/h2>\n
\u2018A really good CEO can make the science shine\u2019<\/h2>\n
How is the biotech fund diversified?\u2026<\/h2>\n
Recent biotech winners<\/h2>\n
Merchant Group\u2019s biotech picks for 2024<\/h2>\n
Inoviq (ASX:IIQ)<\/strong><\/a><\/h2>\n
Race Oncology (ASX:RAC)<\/strong><\/a><\/h2>\n
Arovella Therapeutics (ASX:ALA)<\/strong><\/a><\/h2>\n
Neurotech (ASX:NTI)<\/strong><\/a><\/h2>\n
IIQ, RAC, ALA and NTI share prices today:<\/h2>\n\n
Bonus narrative \u2013 medical cannabis<\/h2>\n