View from Vox: biotech picks and shovels offer a low-risk route into the rewards of drug discovery
Biotechnology is a notoriously tricky sector for investors to navigate. The development of new novel treatments usually takes many years and lots of money, and with only 5% of new drugs making it through the rigorous approval process, that investment – estimated at as much as $12bn per approved drug - offers no guarantee of success in the end.
Markets are littered with the remains of small companies that have wrestled with these odds and lost, and many private investors will bear the scars as a result. And yet because the rewards of backing a healthcare winner can be vast, the sector remains a tempting one for adventurous investors to target.
However, even the most risk-hardy investors still need to tread carefully, making sure that would be investments have the funding in place to meet their ambitions. Running out of money to fund expensive lab work and clinical trials is a perennial risk in the biotech game, especially now given the difficulties in raising new money in the current market conditions.
Biotech picks and shovels
That risk may always be too much for many cautious investors. But there is an alternative for those wishing to tap into the ever-increasing expenditure on healthcare, which is forecast to rise from $1,482 per person a year in 2019 to hit $2,050 per person by 2050: instead of targeting drug developers directly, invest in the companies selling the industry the tools it needs to develop new treatment and get them through trials.
One notable difference of such companies is that having developed their solutions, they can often be sold over and over again at very little extra cost. And the good news is that the UK market is very well represented when it comes to such healthcare ‘picks and shovels’.
Most prominent among them is (), which specialises in the development and commercial supply of high-affinity monoclonal antibodies used in blood tests for common illnesses such as cancer, heart disease and vitamin D deficiency, and in drug and fertility testing. Its customers are typically the big diagnostic machine manufacturers that dominate the world’s laboratories, which pay it a small royalty every time a test is conducted on one of their machines.
The company was founded in 2003 and was already profitable when it joined Aim in 2014. Since then, the shares have generated a total return of 1,430%, from both a steadily rising share price and the dividends its high-margin, high-free cash flow business allows it to pay. And it means it remains debt-free, even as it continues to invest in R&D, with projects underway to develop solutions for Alzheimer’s and industrial pollution.
The company has grown sales at a compound annual growth rate of over 17% over the last decade, despite which it still only employs just 17 people, and as a result enjoys operating margins approaching 80%. The problem with Bioventix, from an investor’s perspective, is that the price tag on the shares reflects the quality of the business – a forecast PE ratio of 25x in fact.
That’s not to say the shares aren’t still a good investment – quality should come at a price – but that much of the foreseeable growth potential may be in the price for now. Earnings are expected to grow of 4.5% in 2023 and 8.6% in 2024, steady and safe but unspectacular.
Luckily, there are other biotech picks and shovels business which appear to be at a similar stage of corporate development as Bioventix was a decade ago. (), for example, is a specialist in contract research services that has developed a series of what it calls human challenge models to help its customers develop treatments including vaccines and antivirals for various infectious diseases, including RSV, Covid 19 and influenza.
Put simply, human challenge models allow drug developers to test their treatments on safely infected volunteers in controlled clinical environments where the complicated behaviours of diseases and treatment responses can be more quickly and accurately evaluated. In this way, efficacy can be evaluated quickly, and field trials optimised to allow drug developers to either “succeed fast or fail fast”, as hVIVO puts it.
For hVIVO that’s translating into accelerating contract momentum, and an orderbook worth in excess of £76m at the end of 2022. Since then, it’s picked up its first wins in Asia Pacific, a region of growing importance in the development of treatments for respiratory diseases and has expanded its portfolio of challenge models to 11, with more under development. That growth is forecast to deliver profits and positive free cash flow this year, and a rising cash balance.
Another London-listed ‘picks and shovels’ biotech business is lesser-known (), which supplies contract proteomics services to enable drug discovery, development and protein and peptide biomarker identification. Identifying biomarkers is important, because these ‘flags’ in patient samples can correlate with the progression of diseases but are much easier to observe than the often-complex nature of the diseases themselves.
Founded nearly a quarter of a century ago, Proteome has developed an impressive arsenal of solutions to support research and clinical trials, which is now translating into strong growth as the industry increasingly recognises the effectiveness of protein biomarker identification in accelerating drug development.
In its latest AGM statement, it said that total revenues for 2022 had grown by 52% to £7.78m, driving adjusted EBITDA 79% higher to £2.43m and more than doubling the cash position to £3.99m – a similar financial profile to other picks and shovels biotechs. The company pointed to a strong order book driven by the introduction of its single cell proteomics platform in 2023 and further advances to its proprietary reagents.
Alongside the recently announced expansion into the US, such developments certainly point to what Proteome describes as “a step-change in growth”. And the good news for would-be investors is that progress so far hasn’t been fully recognised by the market, with the shares trading on a trailing PE of just 10.6x.
Investors looking for the next Bioventix would do well to take a closer look.
Disclaimer & Declaration of Interest
The information, investment views and recommendations in this article are provided for general information purposes only. Nothing in this article should be construed as a solicitation to buy or sell any financial product relating to any companies under discussion or to engage in or refrain from doing so or engaging in any other transaction. Any opinions or comments are made to the best of the knowledge and belief of the writer but no responsibility is accepted for actions based on such opinions or comments. Vox Markets may receive payment from companies mentioned for enhanced profiling or publication presence. The writer may or may not hold investments in the companies under discussion.