3 biotech stocks for a healthy portfolio

Wikipedia defines biotechnology as “use of living systems and organisms to develop or make useful products”. Listed biotechnology stocks are primarily focussed on finding medical applications for biological organisms or replacement of naturally occurring biological organisms with manmade substitutes.

Well known Australian biotech stocks include Starpharma Holdings (ASX: SPL) which has technology that reduces the toxicity of cancer drugs, and Nanosonics (ASX: NAN) which has developed a device to disinfect ultrasound probes more effectively.

The promise of Australian biotech companies is undoubtable; however they have been left behind by their US peers over the last 12 months. US biotechs in the Nasdaq composite have risen by over 50% in 2013, while Australian biotechs dropped 10% to July but have recovered strongly to now be up over 30% for the year, just ahead of the ASX 200.

Indeed, local and international investors are now moving to biotech stocks as a way of introducing growth into their portfolio at a time when well-priced growth in many other sectors is proving difficult to find. Australian investors, in particular, should consider increasing exposure to the industry as a number of currently tiny companies get close to commercial production. This is an important step in any biotech company’s history and usually produces a significant re-rating of the share price.

Starpharma has seen international investment in the company increase in recent years and now boasts two-thirds of its institutional investment from the US and Europe. Additionally, it’s well on its way to inking deals with cancer drug suppliers that will benefit from Starpharma’s technology that reduces treatment side-effects.

Similarly, Nanosonics is expected to deliver its maiden profit this financial year as demand increases for its device to disinfect ultrasound probes more effectively. Typically a biotech company’s maiden profit has been the catalyst for a strong share price rise in the months leading up to, and after the announcement.

Finally, Universal Biosensors (ASX: UBI) has some share price upside for investors willing to accept greater risk. Universal has developed blood glucose and coagulation testing devices licenced to Lifescan and Siemens. The company has lost a manufacturing contract for its glucose testing strips, however it continues to receive royalties for the use of the strips and the other licence deals remain in place.

Foolish takeaway

Investor demand for biotech stocks are increasing by the day, pushing the index price up nearly 40% in just a few months. Some analysts expect this to continue and foreign investment moves into Australia as international biotech stocks appear to be reaching full value.

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Motley Fool contributor Andrew Mudie does not own shares in any of the companies mentioned.

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