Two biotechnology companies caught my eye today, for vastly different reasons.
Alchemia Limited (ASX: ACL) saw its shares hammered down 83% to just 10.5 cents, while Clinuvel Pharmaceuticals Limited (ASX: CUV) gained 75%, rising $1.97 to $4.59.
Alchemia today reported very disappointing results for its Phase III trial into its drug HA-Irinotecan, which is meant to treat patients with metastatic colorectal cancer. Phase III trials are the final step many biotechs take before they have a commercially viable product.
Getting to Phase III is an achievement in itself, and take some companies as long as 10 ten years (or longer) to get to that stage. For Alchemia's trial to fail at the final hurdle is a massive blow to the company's (and shareholders') hopes of lovely profits flowing into the company.
Clinuvel, on the other hand, reported that it had received approval from the European Marketing Authorisation (EMA) for its SCENESSE drug. That means Clinuvel is now free to market its drug in 31 European states (countries). Scenesse is designed to treat patients that suffer from erythropoietic protoporphyria, or EPP, a disorder that means they are ultra-sensitive to light, particularly sunlight.
The results of both companies offers a poignant lesson for investors in biotech companies, developing drugs for the treatment of various diseases and health problems.
In many cases, it's either boom or bust, with several ASX-listed companies in recent times falling into the latter bucket. Pharmaxis Ltd (ASX: PXS), Prana Biotechnology Limited (ASX: PBT), QRxPharma Ltd (ASX: QRX) and Acrux Limited (ASX: ACR) have all experienced gut-wrenching drops in their share prices.
That highlights the risks involved in biotech stocks.
But there are a number of methods investors can employ to combat the risks.
- Adopting a portfolio investing approach, by investing across several companies, with the expectation that more than half could fail, but a winner (or winners) could make up for the expected losses more than handsomely.
- Investing only once the companies have become profitable. While huge gains might not be on offer, the risks are diminished. CSL Limited (ASX: CSL) is a classic example. The company has been profitable since listing on the ASX in 1994, with the share price rising 11,000% since. Resmed Inc (ASX: RMD) is another, rising 800% since listing in 1999 and profitable since.
- Indepth research into a small number of biotech stocks, where the investor can gain an advantage over those with less knowledge.
Alternatively, investors can bypass the biotech sector altogether. You don't have to pick every winner, and you don't even have to invest in the sector at all. There are plenty of other worthy companies in other sectors…
