CELEBRATE OUR NINTH BIRTHDAY
SAVE $100 ON SMALL CAPS! Access Now
x

ASX Shares: 4 Rules when Investing in ASX Shares in the Biotech Sector

Richard Hemming

Investment lesson from Avita which went from $31M to $1.6bn in Market Cap

Back in mid-2012 I recommended the young but promising Small Caps biotech Avita Medical (ASX Share: AVH) at 20 cents a share. Stock in the small caps burns treatment specialist subsequently did nothing. That is, until the start of 2019, when its share price exploded, climbing from 10 cents at the start of the year to current levels of over 70 cents, principally due to initial success in cracking the giant US market following FDA approval.

The thing is, I’d forgotten about this company when it was still a Small Cap, with Under the Radar having ceased coverage some five years ago. When I covered ASX Share Avita, it had already had experienced a number of false starts but was still riding high on the roll its “ReCell” therapy played in the Bali bombings back in 2002. The treatment was invented by Perth surgeon Dr Fiona Woods and it was reported that ReCell saved 28 victims in the terrorist attack. In 2005 she was nominated for Australian of the year.

The standard treatment for burns is skin grafting, which involves a lot of dressing. The ASX Shares listed company told me that ReCell is much simpler and cleaner. It utilises a tiny portion of skin and is sprayed onto the wound surface, usually within 30 minutes. Healthy skin is then grown within seven days.
 

Subscribe to Under the Radar Report.
Uncover this week's best Small Cap stocks to buy.

As was described to me then by ASX Share Avita’s California based head of business development, ReCell was a “game changer”. By 2014 all I saw, however, was cash burn, disruption at board level (new CEO and Chairman) and a ASX Share price that had halved to 10 cents. In late 2014 we told our Stock Report subscribers: “we continue to believe that there is demand for ReCell but AVH is desperate for capital. Hold.” Oh, and we stopped coverage.

Back then the ASX Share company’s market cap was $31m. Having raised hundreds of millions in equity, increasing its shares on issue from 370m to 2.1bn, its value on the ASX Share market is now $1.6bn.

Opportunity Cost of Investing in Other ASX Shares

This story about this ASX Stock highlights several important points for would-be med-tech investors. The first is that such ASX listed companies, which often involve black box technology, have the potential to burst into life very quickly. The second, that it’s prudent to hold a position of size that you can carry. This might be 1% of your portfolio. You cannot afford to leave 10% of your portfolio dead for 10 years. The opportunity cost of other ASX shares is too high.

Personal ASX Share investors can hold underperforming ASX Stocks but Fund Managers can’t


Personal investors have the luxury to hold underperforming ASX stocks for the long-term. Fund managers, whose jobs are on the line if they’re not beating the market, don’t. This has always been the case, but it’s more so today, considering the structural shift of active to passive investing (index funds).

ASX Stocks, Medical Developments (ASX Shares: MVP)

A med-tech I’ve written about a great deal in this column is the producer of the famed “Green Whistle” analgesic, Medical Developments (ASX Shares: MVP). This ASX share has had a tremendous run, pretty much from the get-go since we first covered it about the same time as we ceased coverage on then small cap Avita. Back in 2014 it was just over a $1 a share and now it’s approaching $11.

We’ve been banking profits and trading its ASX Shares around a core position, having lots of fun doing clever things. It’s easy to be clever with shares when an ASX stock goes up over a relatively long period of time.


ASX Stocks, Pharmaxis (ASX Shares: PXS)

Then there has been ASX Shares in Pharmaxis (PXS) which focusses on development drugs for inflammation and fibrotics disease. The ASX stock was 15 cents when we first analysed it in mid-2013 and it hasn’t gone anywhere, despite some great hope. The current price of this ASX Stock is 11 cents.
The most recent news was hard to take. in mid-December that the giant German pharma Boehringer Ingelheim was discontinuing development of a compound it had acquired from Pharmaxis in 2015. The fact that a big pharma can simply write off tens of millions of dollars gives you a great deal of perspective as a minority shareholder. The group has four other compounds it is developing, $23m in cash at last count and no debt. There is still hope.

ASX Shares: 4 Rules when Investing in ASX Shares in the Biotech Sector

In summary, if you own a biotech or two:
  1. don’t panic if things don’t go your way;
  2. don’t feel you have to put your hand in your pocket every time the company asks for money;
  3. and don’t invest too much.
  4. Moreover, these ASX stocks are good to have in your ASX Share portfolio because they have little market related risk.

Right now, with all that is going on, these ASX Shares are worth considering for your ASX Share portfolio.

Under the Radar Report currently covers (In February 2020) 8 Biotech Small Cap ASX Shares and three Medtech Small Cap ASX Shares. And our expert analsysts are always hunting for Small Caps in this space.

About the Author

Richard Hemming

Richard Hemming (r.hemming@undertheradarreport.com.au) is an independent analyst who edits www.undertheradarreport.com.au, which provides investment opportunities in Small Caps that you won’t get anywhere else.

Under the Radar Report is licensed to give general financial advice only (AFSL: 409518). The author does not own shares in any of the stocks mentioned.

Did you miss?

As Seen In