I. Sector Landscape and Outlook
Australia is a hub for world-class medical research and life sciences with robust infrastructure, government funding programs, and top-tier research institutions. The nation ranked among the top five in biotechnology innovation as mentioned by AusBiotech. The strength of the nation lies in medical technology, digital health, agritech and foodtech, therapeutics, and regenerative medicine. Healthcare and social assistance accounted for ~7.8% of GDP in September 2020 quarter.
Figure 1. Biotechnology and Lifesciences– an attractive investment destination in Australia:
Source: Data from AusBiotech, Australian Trade and Investment Commission, Chart Created by Kalkine Group
Key Trends in Biotechnology and Lifesciences Industry:
Regenerative Medicine (RM): Australia is one of the first movers in the regenerative medicine space. Globally, investment in RM is growing exponentially. A new set of therapies is expected to hit the market in the next five years and the global market is expected to reach $120 billion by 2035 as per the MTPConnect an independent industry body formed as a part of the Federal Government’s Industry Growth Initiatives in 2015. Recently, the industry body, AusBotech, formed an alliance with leading research and technology companies to spearhead the commercial opportunities in RM. The Australian government has earmarked $150 million to be invested in research programs in stem cell therapies over the next nine years.
Rising Lifesciences Establishments: Lifesciences showed robust growth next to the Mining sector in Australia. The number of establishments have increased by 12% from 2017 to ~1,852 companies in 2019. Medical technology & digital health, pharmaceuticals, and food & agricultural sub-sector comprise ~55% of the Lifesciences sector, while support services make up the second largest with 485 establishments.
Figure 2. Below Sub-Sectors Represent ~55% of Lifesciences:
Source: Data from AusBiotech, Chart Created by Kalkine Group
Victoria and New South Wales serves as Lifesciences Research hubs. Melbourne is the epicentre for cell and gene therapies, while Brisbane is known for the medical device and medical technology base. The Lifesciences workforce has increased by 5% since 2017 with ~243,406 people employed in 1,852 organizations in 2019. There were 161 Lifesciences companies listed on ASX as of 2019, of which ~67 companies provide medical technology and digital healthcare services.
Figure 3. NSW and VIC Serve as Research Hubs:
Source: Data from AusBiotech, Chart Created by Kalkine Group
Fostering Clinical Trials: Australia provides a supportive environment for small and medium businesses in conducting clinical trials. Increasing government investment in cancer research and genomics provides positive conditions for early-phase trials. With streamlined regulatory requirements and an R&D incentive programs there has been a steady growth in several clinical trials recently. Pharmaceutical, biotechnology, and medical device companies in Australia generate exports of nearly $5 billion in a year as mentioned by the Australian Trade and Investment Commission. Medicines and vaccines are exported to China and the United States, the biggest markets. Historically, Phase III studies were the largest component of clinical trials activity in Australia, however, Phase I has been rising steadily in recent times. Higher trials were seen in Oncology, Central Nerve Systems, and Infectious Disease.
Figure 4. Phase III Clinical Trials Activity Remains the Largest:
Source: Data from Australian Trade and Investment Commission, Chart Created by Kalkine Group
Ageing Population: Demand for healthcare services to continue to grow aided by the increasing ageing population. Australians over 65 age of years are forecasted to grow from 15.5% of the total population in 2017 to 16.8% by 2022 as stated by the NSW Treasury.
Government Incentives: The Australian government provided tax incentives for R&D with 43.5% refundable tax credit for companies with turnover of less than $20 million and 38.5% for companies above that limit as stated by the Australian Taxation Office. The incentive provides support for home-grown and foreign companies in strengthening R&D investments. KPMG placed Australia among the top ten most competitive locations for R&D investments. In addition, the Department of Health provided an initiative to drive clinical trials with an investment of $614.2 million over the next 10 years. The Biomedical Translation Fund has been set-up with a total corpus of $501.25 million to be boost start-ups in the Biotechnology and Lifesciences sector.
Index Performance:
The ASX 200 Pharmaceuticals & Biotechnology Index (Industry Group) generated returns of ~+145.69% in the last 5 years vis-à-vis ASX 200 Index returns of ~+39.94%. Favourable investment climate for clinical trials and R&D aided by the government’s various incentive programs and increasing aging population drove the sector gains.
Figure 5: ASX 200 Pharmaceuticals & Biotechnology Index outperformed ASX 200 Index by 105.75% over the last five years
Source: Refinitiv (Thomson Reuters) as on the close of 3 February 2021
Key Risks and Challenges:
A lot of companies in the sector are in the early-stage clinical trials phase which requires substantial investments. As markets collapsed across the globe during the pandemic and interest rates were standstill in a majority of markets, overseas investments declined, and fresh investments were put on hold. Companies have faced a dearth of funding availability. According to Ausbiotech’s recent survey, a lot of early-stage biotech companies have put their trials on-hold. Remote monitoring and teletrial capabilities were being pursued instead.
Figure 6. Key Risks in Biotechnology and Lifesciences Sector:
Sources: Chart Created by Kalkine Group
Outlook:
There are many companies conducting clinical trials for developing COVID-19 vaccines. The government chalked out vaccination roll-out plans with $1.9 billion funding support to bring vaccination to everyone in Australia. The government has invested over $3.3 billion in promising vaccine candidates - Pfizer-BioNTech, Oxford-AstraZeneca, and Novavax. Further, it had committed $363 million in Gavi’s COVAX facility. The government has initiated $20 billion through Medical Research Future Fund to be invested in over the next 10 years in improving healthcare offerings and rural health system. These programs drive the sector growth and improve drug development as well as healthcare systems in Australia. The nation continues to receive healthy FDI for the healthcare sector specifically from the US. Recently, Novartis signed a US $50 million licensing agreement with Mesoblast to commercialize cell-based platform technology. A separate report by the Australian Investment Council mentioned that Australian healthcare companies witnessed an increase of 37% in private equity funding in 2019 (in value terms).
II. Investment theme and stocks under discussion (CSL, MSB, ARX, OSL)
After understanding the sector, let us now look at four companies listed on the ASX. The price potential of the companies under discussion has been analysed based on the ‘Enterprise Value/ Sales’ method.
1. ASX: CSL (CSL Limited)
(Recommendation: Buy, Potential Upside: Low Double Digit, Mcap: A$127.51 Billion)
CSL Limited develops, manufactures and markets human pharmaceutical and diagnostic products derived from human plasma.
Valuation
Our illustrative valuation model suggests that stock has a potential upside of 23.51% on 4 February 2021. We believe that the stock might trade at a slight discount compared to its peer average EV/Sales (NTM Trading multiple) given the recent development that the Australian government had cancelled production of COVID-19 vaccine by CSL due to undesirable trial results. For the said purposes, we have taken peers such as Cochlear Ltd. (ASX: COH), Resmed Inc. (ASX: RMD), Next Science Ltd. (ASX: NXS). The stock delivered an annualized yield of 1.04%.
2. ASX: MSB (Mesoblast Limited)
(Recommendation: Speculative Buy, Potential Upside: Low Double Digit, Mcap: A$1.49 Billion)
MSB is engaged in the development of regenerative medicine products. It develops and commercializes allogeneic cellular medicines.
Valuation
Our illustrative valuation model suggests that stock has a potential upside of 25.84% on 4 February 2021. We believe that the stock might trade at a slight discount as compared to its peer average EV/Sales (NTM Trading multiple) given the elevated risk in vaccine development and the fact the company has not yet entered into the commercialization phase. For the said purposes, we have taken peers such as Aroa Biosurgery Ltd. (ASX: ARX), Oncosil Medical Ltd. (ASX: OSL), Cochlear Ltd. (ASX: COH).
3. ASX: ARX (Aroa Biosurgery Limited)
(Recommendation: Speculative Buy, Potential Upside: Low Double Digit, Mcap: A$366.88 Million)
ARX is a soft-tissue regeneration company that develops, manufactures, sells, and distributes medical and surgical products.
Valuation
Our illustrative valuation model suggests that stock has a potential upside of 27.39% on 4 February 2021. We believe that the stock might trade at a slight premium as compared to its peer average EV/Sales (NTM Trading multiple) as the company entered into the commercialization phase with a significant push in marketing and distribution arrangements. We also factored in regulatory clearances for products in wound care and the Indian market which will ramp-up sales going forward. For the said purposes, we have taken peers such as Clinuvel Pharmaceuticals Ltd. (ASX: CUV), Telix Pharmaceuticals Ltd. (ASX: TLX), CSL Ltd. (ASX: CSL).
4. ASX: OSL (Oncosil Medical Ltd.)
(Recommendation: Hold, Potential Upside: Low Double Digit, Mcap: A$100.91 Million)
OSL is a late-stage medical device company, which is focused on localized treatments for patients with pancreatic and liver cancer.
Valuation
Our illustrative valuation model suggests that stock has a potential upside of 19.82% on 4 February 2021. We believe that the stock might trade at a slight premium as compared to its peer average EV/Sales (NTM Trading multiple) as OSL is expected to hit the first year of commercial sales of its pancreatic cancer treatment products in 2021. The company is conducting post-marketing activities in the majority of markets which will push revenues going forward. For the said purposes, we have taken peers such as Hexima Ltd. (ASX: HXL), Polynovo Ltd. (ASX: PNV), Clinuvel Pharmaceuticals Ltd. (ASX: CUV).
Note: All the recommendations and the calculations are based on the closing price of 4 February 2021. The financial information has been retrieved from the respective company’s website and Refinitiv (Thomson Reuters).
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