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Like CSL’s 1388% return? We’re looking for the next biotech star

As the chart below shows, blood plasma product and vaccine manufacturer CSL (ASX: CSL) has provided outstanding investment returns to long-term shareholders. Since April 1999, the share price of CSL has risen 1388%, compared with the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO), which is up 60%.

Buying CSL and continuing to hold the stock through the inevitable ups and downs of the market over the years proves the benefit of a buy-and-hold investment strategy. The proof is in the pudding as they say. Of course there is another critically important ingredient in this ‘pudding’ apart from being patient enough to hold the stock long-term and that is identifying early the potential of CSL to continuously grow its profits.

TMCHart

Source: Google Finance

While in hindsight it might appear obvious, identifying that potential at an early stage is not easy.  However, just because it is hard to identify companies that could provide huge long-run gains does not mean investors shouldn’t try. The potential for more CSL products to be sold in more places, to more people means the outlook for growth is still good. Given CSL’s size though, repeating the past 14 years performance over the next 14 years certainly won’t be easy.

For investors hunting for big returns, looking at smaller companies that have the potential to grow into future market leaders is the key.

Future contenders?

The following companies are all progressing along the road to commercialisation and backed by interesting science. It is impossible to know what the future holds for them but they could be worthy additions to a speculative watch list.

The $280 million Starpharma Holdings (ASX: SPL) is developing a wide array of products for the prevention and treatment of sexually transmitted diseases, as well as products to improve drug delivery and products for wider application in agrochemicals and cosmetics.

Acrux (ASX: ACR) has a market capitalisation of $575 million and specialises in the development of drugs delivered through the skin. These drugs provide innovative therapies for a range of issues including contraception, menopause and pain.

Mesoblast (ASX: MSB) is already a $1.8 billion company with an exciting suite of products. The company is utilising its stem cell intellectual property to develop therapies to treat a range of conditions which could benefit from tissue regeneration including cardiovascular disease and orthopaedic diseases of the spine.

Foolish takeaway

CSL’s 1388% return is a tough act to follow. Investors certainly shouldn’t expect these types of returns, however acknowledging that ‘fishing in the right pool can help you catch a fish’, makes the health and biotech sectors worth following.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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