Here’s why it is a terrific time to look at ASX biotech small caps, and 4 worth considering for FY26

It’s been a tough few years for ASX biotech small caps. Even in the last 18 months, the market recovered from post-COVID inflation small cap biotechs have been left behind. The ASX 200 Healthcare Index is down 7% in 2025 whilst the broader ASX 200 is up 4% (yes, even with the crash due to Trump’s tariffs). The failure of Opthea (ASX:OPT) has startled many investors, and even established companies like CSL (ASX:CSL) have seen weak investor sentiment for many reasons, including potential tariffs.

Nonetheless, we still think it is a good time to consider investing in this sector. Yes, it is easy for us to say that because the sector is our main specialty at Stocks Down Under. And we have been saying this for a couple of years now. But there are a few factors that mean FY26 will likely be a better year (at least for some companies).

Why there’s cause for optimism in ASX biotech small caps

One key reason that Big Pharma is hungry is the patent cliff. When biotechs bring drugs to market, they are protected for several years by patents. When patents expire, other drug companies can release generic forms of these drugs which means there’s more competition and margins decline. Just look at  drugs like viagra and humira, just to name a couple.

This is always the case in ‘Biotech Land’, but there are no less than 69 blockbuster drugs coming off patent by 2030 or earlier. Analysis by Evaluate Pharma forecasted in 2023 that $59 billion in sales would be at risk just in 2029. Up until and including 2030, the total is $236bn. The main one of note is cancer drug Keytruda, which is sold by Merck and responsible for over 33% of Merck’s revenue. Analysts predict sales could fall by up to 20% in the year after. For this reason, big pharma companies are buying out smaller companies en-masse, and ASX biotech small caps could be the beneficiaries.

Another key reason is the accentuation of emerging markets as clinical trial destinations, particularly in the ASEAN region. Such countries can possess large populations – Vietnam has over 100m people and Indonesia 200m. Given this, healthcare problems can be even greater and so the urgency to act on these problems becomes more important. And so companies may find it easier to conduct trials in those countries and/or seek approval first.

Ultimately, companies may run their trials in several countries including developing countries, and investing in healthcare is a key priority for many of these countries. Developing countries are often looking to enhance their standing globally for clinical trials by trialling new, innovative technologies from the Western world.

4 ASX biotech small caps to look at and why

Recce (ASX:RCE)

Who is Recce and what is it targeting? Recce Pharmaceuticals (ASX:RCE, FSE:R9Q) is a Sydney-based biotech company targeting ‘superbugs’ – bacteria with resistance to conventional antibiotics. Its lead candidate, RECCE^® 327 (R327), has a unique Mechanism of Action (outlined below), working fast and continuing to work just as effectively with repeated use. R327 is targeting multiple clinical indications including Diabetic Foot Infections (DFIs), Burn Wound Infections, UTI/Urosepsis, Acute Bacterial Skin and Skin Structure Infections, and more

Why consider Recce? There are many reasons but the most relevant to what we outlined above is that R327 as a topical gel is in a 300-patient Phase III clinical trial for DFIs in Indonesia. If this trial is a success, it could commercialise R327 in the Indonesia as early as next year, while also accelerating further approvals throughout the broader ASEAN region.

The Asia Pacific market for DFI treatments is US$1bn per year, and approval in Indonesia could unlock this quickly. Just in Indonesia, it is US$189m, and 11% of the population is impacted. Moreover, approval for DFIs (just one type of bacterial infection) could be the tip of the iceberg.

Avita (ASX:AVH)

Who is Avita and what is it targeting? Avita is the biotech company behind the Recell technology. It is a rapid cell harvesting device that enables surgeons to treat skin defects like burns using a patient’s own cells. It works as a ‘spray-on’ product, which can be done at the point of treatment and with a small quantity of cells. A doctor takes a biopsy on any part of the body and mixes cells into a liquid spray. It is ready for use in 30 minutes and can cover 80 times the area of a skin graft with the same amount of material an ‘ordinary’ skin graft would.

Why consider Avita? Because Avita is rolling out new products that could aid it in reaching patients it cannot now. Just before Christmas last year, the FDA approved Recell Go Mini that can treat areas too small for the first generation – this is more than triple the number of procedures. It is also rolling out, Cohealyx, its new collagen-based dermal matrix. This ensures that it can meet skin defects at literally every layer, ensuring that wounds can be closed in a better was than stitches.

Orthocell (ASX:OCC)

Who is Orthocell and what is it targeting? Orthocell is a Perth-founded biotech that has a biological collage membrane ‘platform’ device known as Celgro which is the basis of Remplir and other products. Remplir helps repair peripheral nerve injuries by wrapping the area with collagen nerve. Right now, the gold standard technique for peripheral nerve repair is by suturing – in other words, stitches (a needle and thread is used to close wounds). The trouble is that it is difficult to achieve alignment, and it may induce foreign body reaction which can lead to chronic inflammation, fibrosis and scarring. But Remplir offers an alternative – it provides compression-free protection to the nerve, generating an ideal microenvironment to aid healing.

Why consider Orthocell? Because Remplir was recently approved in the USA, a US$3.5bn market. ven though there are some market incumbents, even they have a low penetration rate. The problem is that materials are too rigid, challenging to deploy and make it difficult to manage size differences between nerve ends, leading to compression injuries or neuroma formation.

Proteomics (ASX:PIQ)

Who is Proteomics and what is it targeting? Proteomics is a Perth0based company commercialising a trio of medical tests: PromarkerD for DKD (Diabetic Kidney Disease); PromarkerEndo for Endometriosis and, PromarkerEso for Esophageal cancer. PromarkerEndo and PromarkerEso are purely diagnostic tests, while PromarkerD is a predictive test (i.e. it tests the likelihood of that patient capturing DKD). In all instances, the tests can do their job quicker than competitors which may only be able to ‘work’ at a later stage, by which time it may be too late to tackle these conditions or it may only be possible through invasive mechanisms.

Why consider Proteomics? PIQ is at a pivotal point, having just launched PromarkerD in Australia. Over the next 2-3 years, the company intends launching all 3 into Australia, the USA and the EU.

This is a sponsored article.

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