The local biotech sector is fall of landmines able to blow up your capital at any time as most biotech businesses still at the clinical trial stage have no sales revenue and huge clinical trial research costs with no guarantee of ever commercialising a product.
High costs and low revenues are not a good investing combination, but if you do buy a biotech business prior to it getting a blockbuster drug approved you could be onto some eye-watering 1,000%+ returns.
One widely tipped candidate as a potential real deal biotech is Paradigm Biopharmaceuticals Ltd (ASX: PAR).
It has successfully completed two Phase II clinical trials for drugs to treat osteoarthritis and Ross River virus.
However, generally passing Phase II trial stage is the easy part as these trials are generally around proving safety, among other things.
The larger and more expensive Phase III trials designed to meet the onerous demands and standards of healthcare regulators are the real test of any speculative biotech research business.
Paradigm does have the option to partner with “big-pharma” in running its trials and potentially sharing future trial, marketing, and distribution costs or revenues under some kind of joint venture agreements. Recently, it flagged it’s currently in discussions with multiple potential partners.
It reported no sales and an operating cash loss of A$2.45 million for the quarter ending June 30, 2019 and is well funded by ASX biotech standards with $78.3 million cash on hand.
The strong balance sheet suggesting this is a well supported credible clinical research business, with plenty of investor support. However, its Phase III trials are likely to prove very expensive.
It already has a market value of $292 million based on a $1.52 share price and 192.2 million shares on issue, with the future offering a wide set of potential outcomes. From the company being worth nothing more than its cash or asset backing if the trials fail, to it being worth many times today’s valuation if it succeeds in commercialising products.
As I don’t punt on companies with no revenue however “attractive” the potential upside, I’m not a buyer of Paradigm shares and to be honest I have little idea how likely its chances of commercial success are.
However, for anyone who likes a punt it looks worth some in-depth research to get a better handle on the company and its market opportunity. Other speccy biotechs to consider include Mesoblast Limited (ASX: MSB), Next Science Ltd (ASX: NXS) and Telix Pharmaceuticals Ltd (ASX: TLX).
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You can find Tom on Twitter @tommyr345
The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.