How to minimise the risks of biotech shares on the ASX? Here are 4 traits investors should look for

Nick Sundich Nick Sundich, June 14, 2024

To minimise the risks of biotech shares is a major challenge for investors, but not one that is insurmountable. The biotech sector on the ASX represents a substantial opportunity for investors to generate spectacular returns, while also having a major impact on the world around them.

 

Investing in Biotech stocks takes patience

Companies that have successfully bought drugs through clinical trials and to market (or alternatively have sold drugs to major companies that have gone on to commercialise them) have made spectacular returns for investors. Nevertheless, it also represents a significant risk for investors. Biotech companies can fail clinical trials and this can be a catalyst for the destruction of shareholder value. Even when companies are on the right track, it takes several years to bring a drug to market, but investors may not have the patience to stick with the company.

 

4 company traits to watch for to minimise the risks of biotech shares on the ASX

 

1. Companies with multiple assets

Many biotech companies that fail do so because they have just one asset that they have ‘gambled the house on’. That is to say that they have pinned their hopes on just one asset and that it will succeed. Factor Therapeutics (ASX:FTT) is one example of such a company, and a demonstration of what can happen to such companies. In December 2018, its flagship wound-dressing drug failed a clinical trial and as the company had no other assets, and little to no prospects of finding another indication anytime soon, shares fell over 95% on the day the news was announced.

However, investors in companies with multiple assets have less of a risk of this happening. Investors may still receive the news of failed clinical trials badly, but the company will not be in a situation where it is essentially ‘wiped out’, as the company can pivot to focus on other assets that may offer a better future potential of clinical trial success and commercialisation.

 

2. Companies at a later stage

The later clinical stage a biotech company is at, the less risk there is of the drug failing a clinical trial. Whenever you hear the words ‘preclinical’ in relation to a clinical trial, that means the drug is being tested on animals – generally mice and monkeys. Although good results from preclinical trials can be received well, there is no guarantee that this will be replicated in human clinical trials.

There are generally 3 phases of human clinical trials: Phase 1, Phase 2 and Phase 3. Phase 1 is a small-scale trial that is primarily testing for safety. Although there may be some efficacy data, and such data may be encouraging for investors, it is Phase 2 that is most important because it is at this stage where a drug’s efficacy is firmly in the spot light. A company with one or multiple drugs in Phase 2 is less risky than those in Phase 1 or at the pre-clinical stage. Phase 3 also tests for efficacy and is often a fait accompli if the drug reaches this stage, although it typically need to be done to satisfy regulators, and is conducted in a far larger population (at least several hundred people). The risk of a drug passing Phase 2 but failing at Phase 3 is a lot less than at earlier stages and so investors in Phase 3 companies have less of a risk than investors in companies at earlier stages.

 

3. Companies going for US approval

The US is the world’s largest healthcare market and has the world’s most stringent regulator, the FDA. It is a challenge in and of itself to even get regulatory approval for a clinical trial. However, if a company can get a trial up and running in the USA, it has better prospects than companies not running a trial in the USA. This is because such biotech companies may need to conduct further clinical trials to satisfy the FDA when going for regulatory approval. Other regulators tend not to require further domestic clinical trials to obtain regulatory approval, although exemptions do occur. It is important to note that any studies need not be entirely conducted in the USA, although the country’s general population means it may be easier to find patients to undertake the trial, particularly in respect of rare diseases.

You may be implying that we are assuming all biotech companies go for approval in the USA. Although not all biotech companies seek the USA as their first market, all biotech companies wanting their drug to have a major commercial impact will have to crack the US market, and consequently obtain FDA approval. Investors can be confident that companies with clinical trials at least partly being conducted in the USA are closer to commercial success than companies running trials without a single patient in the USA.

 

4. Companies with potential to obtain fast-tracked approval

Some regulators allow fast-tracked approval for certain drugs that target diseases for which there are no existing treatments approved. The US is one of the countries with such mechanisms with Qualified Infectious Disease Product designation (QIPD) under the Generating Antibiotic Initiatives Now (GAIN) Act being one. This designation includes Fast Track status and guarantees 10 years of market exclusivity post-approval.

 

Here’s one company that fits the bill

Recce Pharmaceuticals (ASX:RCE) is a company that meets all four of those points. It has multiple assets in several clinical trials, although its main focus is RECCE® 327 (R327). R327 is in several clinical trials for multiple indications, most of which are conditions caused by so-called ‘superbugs’, a word used to describe bacteria strong enough to resist conventional antibiotics.

Recce has no less than 4 trials in Phase 2 including:

  • Phase 1 for Sepsis/Urosepsis – Completed
  • Phase 1/2 for Urinary Tract Infection (UTI)/Urosepsis infections – Ongoing
  • Phase 1/2 for Burn Wound Infection (BWI) – Ongoing (Stage 2 to be initiated)
  • Phase 1/2 for Diabetic Foot Infections (DFI) – Ongoing

Recce Pharmaceuticals is aspiring for eventual regulatory approval in the US, and its prospect appears promising, with the company obtaining QIDP designation.

 

Why we like Recce Pharmaceuticals

For all these reasons, Recce Pharmaceuticals is better positioned than many other clinical-stage biotech stocks on the ASX. It is true that biotech companies with commercialised assets such as CSL (ASX:CSL) and ResMed (ASX:RMD) may be safer investments for risk-averse investors. But Recce has positioned itself to pose less risk than many other small cap biotech companies, in having multiple assets, conducting multiple clinical trials against multiple indications and being granted a designation that could see it obtain Fast-Tracked approval and a decade’s market exclusivity in the world’s largest healthcare market.

 

This is a sponsored article.

 

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