October 30, 2020 4 min read
ASX health sector trails tech sector in a number of regards
One venture capitalist thinks companies need to focus more on what’s important to investors
Thinks investors need to ‘think like venture capitalists’
The ASX health sector is one of the bourse’s largest and home to several long term growth stories.
But in a number of regards it trails the tech sector. While the combined market capitalisation of all health companies is well ahead of tech at $246.6 billion – more than half of this from blood products giant CSL (ASX:CSL).
The tech sector is home to more 12-month winners and has a higher average return than the health sector.
For a first hand perspective Stockhead spoke with venture capitalist Dr Geoff Waring – partner at Stoic Venture Capital.
He believes health companies both listed and at startup stage are losing out to software companies in attracting funding – estimating 70 per cent of venture capital funding goes to software while only 15 per cent is to health.
So what must be done? Dr Waring reckons communication of their key advantages is critical but it must be done in the right way.
Virtually all companies in the ASX health sector are trying to solve problems and some have key advantages. But investors are an entirely different audience than scientists.
“Making clear these issues to small cap investors would obviously be valuable because the technology is hard to find,” he told Stockhead.
“Biotechnology is quite complex in how these things [technologies] work with blocking receptors and all this kind of quite complex biology.
“That scares a lot of investors away I think. But when you look at the fact that if these drugs work – they have blockbuster applications where they’ve got over $1 billion in sales.”
But Dr Waring thinks the applications of technologies or opportunities aren’t often made succinct enough for investors.
Most particularly the advantages biotechs had over tech. One example is as the advantage of being able to sell at an earlier stage than you would for a software company.
“To the health companies themselves how they communicate these issues to small cap investors is something they need to get better at.
“Because when they do their press releases they don’t emphasise on the things small cap investors pick up on I guess.
“Like how easy an exit is or the multiple applications or the strength of their patents. They don’t always emphasise them.
“Because their problem is, as CEO, they’re trying to explain their technology [and it] is fairly hard to do. You need to be a scientist a lot of the time to understand how these things work and that does scare people away.
“But we see in CSL as the role model, if they can replicate something like that, then the potential is there.”
For an additional perspective Stockhead spoke with 4DMedical (ASX:4DM) founder Andreas Fouras. Fouras’ company makes lung imaging software and has more than doubled since its ASX debut.
“Investors like that we have a software business model which I think a lot of the investment community understands,” Fouras explained.
“And we can apply that business model to a healthcare market. The business model isn’t wrapped up in the complexity health business models often have to have. I think that’s the secret to us.”
Nevertheless, Dr Waring argues the ASX health sector could be in worse shape.
He noted entire industries were falling off the big indices, particularly in energies. They are being replaced by companies in newer industries.
“If you look at the stock market and the ones that falling out of the top indices and the ones coming up, you see the pattern where its software, biotechnology, clean energy, data science and AI,” he said.
“These are the things that are getting the big valuation whereas the ones going into decline like Exxon Mobil (NYSE:XOM) in the US or coal companies in Australia are obviously getting hammered at the moment.
Dr Waring says investors need to think as if they’re investing in the company at an earlier stage of its life, particularly when the broader sector is likewise at an early stage.
“And so if you’re a small investor and ask what companies you’re going to have in your portfolio I think you have to be like a venture capitalist,” he said.
“Where you can’t look at the whole stock market and try and pick one winner.
“You’ve got to think of the highest potential sectors and focus your attention on them. Because that narrows down your search dramatically, then there’s only a limited number of companies.”
“It just narrows the problem of a small cap investor down so it becomes feasible for them.”
AboutStoic Venture Capital
StoicVenture Capital provides financing for early-stage companies, particularlythose arising from university research. Stoic is unconditionally registered asan Early Stage Venture Capital Limited Partnership (ESVCLP) and takes acollaborative approach to investing in the highest potential companies. Atlas Advisors Australia AFOF is the majorlimited partner for the Fund. www.stoicvc.com.au
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