OPINION: View from the summit

By Stuart Roberts
Tuesday, 01 November, 2005

Southern Cross Equities biotech analyst Stuart Roberts was behind the recent DNA, Devices and Dealers conference in Sydney. Here, he explains his passion for hanging out with biotech's true believers.

As I laboured through July and August with Rebecca Wilson and her team at Buchan Consulting to get ready for September's DNA, Devices and Dealers conference, I would often stop and think about how far all of us involved in Australia's nascent biotech industry have come in just a few short years.

Take my story, for example. My involvement in Australian biotech began on the afternoon of February 20, 2002, when Peptech announced that it had 'received a Notice of Allowance for its patent entitled Tumour Necrosis Factor Antibodies, from the US Patent Office.' As a member of the research team at Southern Cross Equities I was asked to write a couple of pages for the benefit of Southern Cross's clients about what it all meant.

How the heck would I know what antibodies were, let alone tumour necrosis factor? I was just a stockbroker who in his spare time was into history, politics, modern jazz and the Anglican church. I had a Masters degree in finance but the charm of science had eluded me at high school and I hadn't touched any since the age of 15. I had, however, been forced by my paltry state school education to become something of an autodidact over the years. Faced with the prospect of missing something that the Peptech cognoscenti ought to know, I went out and bought Watson's The Double Helix and Matt Ridley's Genome, and devoured both by night while painfully writing up my Peptech magnum opus by day.

Now fast-forward three and a half years to September 2005. At a book fair, I bought The Genetics of Bacteria and Their Viruses by William Hayes and Molecular Biology of Bacterial Viruses by Gunther Stent. Just before that, at DNA, Devices and Dealers 2005, the real biotech guys -- the chemists, cell biologists and immunologists who bootstrapped Australia's biotechnology industry in the 1990s, while I was reading books like David Dreman's Contrarian Investment Strategies: The Next Generation, gave a good demonstration of how they've been evolving as well, albeit in the opposite direction to me. They know their science. And they're now working hard on understanding the commerce, and the psychology of investment types like me.

They had come to a two-day conference we billed as 'Australia's pre-eminent biotech investment event'. Five years ago no one was putting on biotech conferences for the benefit of Australia's investment community. Now, in 2005, the biotech guys were addressing around 180 people from both the industry and investment scene on themes highly relevant for both groups, and the speakers were neither pitching for funds nor dumbing it down for those in the audience who may not know what 'recombinant' meant. All up we had about 20 biotech CEOs presenting over two days, and the investors present loved the fact that their talks had a high level of candour and authenticity.

The theme we gave our event was 'Biotechnology's Great Expectations'. What we were emphasising with our line-up of speakers was that the sector's great stumbling block over the last year or so was not lack of money. There's plenty of capital flowing into Australian biotech -- around $1 billion a year for the last couple of years in terms of the listed part of the game. That money, however, has been invested over the last 12 months at prices perhaps a quarter below what would have been the case in the previous corresponding period, because of a terrible bear market for biotech that started in November 2004 and is only now coming to an end.

Part of the reason for that bear market, we at Southern Cross would contend, has been biotech's frequent failure to perform to stakeholder expectations. Companies that have done everything they said they would do are a rarity, or so the market would have us believe. Each favourable development in the sector seems to happen later than investors had been led to expect or have less in the way of dollar-value pay-off than investors had initially thought possible. Meanwhile in the lab and the clinic, Murphy's Law prevails -- if something bad can happen it inevitably does, with unfortunate consequences for biotech stocks in the market.

The outcome of all this is that in late 2005 investors have become very wary of the Australian biotech sector, at least in terms of backing the stocks of companies already listed. By and large they're staying away from the secondary market, and they won't come back in a serious way until the sector starts performing to their expectations. Now, if the biotech guys had read Contrarian Investment Strategies: The Next Generation, maybe they'd understand why investors are taking this stance. Dreman's book illustrates a number of ways in which stocks go down based on missed expectations, where a rational investment strategy can exploit this quirk of investment psychology. It's a book every biotech CEO should read before doing his or her next capital raising because it deals a lot with the issue of 'expectations management'.

We invited our DNA, Devices and Dealers speakers to talk to investors about expectations from the industry's side of the fence. Steve Carter's presentation provided a good illustration of our approach. The Solbec Pharmaceuticals CEO and his team have been working since 2001 to take a cytotoxic natural product, turn it into a licensable drug, and get that drug tested in patients. Most investors who look at biotech in Australia are probably unaware of how hard this kind of work can be, and think by contrast that the difficult part of commercial biotech is licensing the drug to Big Pharma. Those who listened to Steve Carter on the steps involved will have come away with an appreciation of the many pitfalls that can beset a drug even before the first infusion into a patient. The take-home lesson from Steve's talk, in my view, is that if those pitfalls and strategies for avoiding them can be communicated to investors as well as Steve did at our conference, then investors will have less reason to sell their stock in the event that a bump in the road is actually encountered.

As a member of the investment industry, what I principally took away from DNA, Devices and Dealers was that biotech can be a risky business the less you know about it, but if the risks are spelled out to you in plain English the perception of risk is diminished and the propensity to invest higher. What I hope the biotech industry people came away realising was that investment is such an expectations-driven game, that to not understand investor expectations and manage them accordingly can be disastrous.

Perhaps if expectations had been better managed we wouldn't have seen biotech sector's share of total ASX trading drop 79 per cent between March 2004 and May 2005. But that's the past. If, in the future, Australian biotech learns the art of expectations management, I'm willing to predict that by 2010 we'll have realised the bright future for biotech that many of our speakers at DNA, Devices and Dealers were looking to.

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