Like a number of sectors in the Canadian markets, biotech stocks had a rough ride over the latter half of 2018, as investors fled for seemingly safer territories.
But while biotech does have its share of long-shots, there are plenty of defensive plays to be found, says portfolio manager Eden Rahim, who argues that biotech companies can often come with recession-proof revenue streams.
“It got thrown in with other high-beta risk-off sectors like tech and autos and retail and energy,” says Rahim, portfolio manager and options strategist at Next Edge Capital, in conversation with BNN Bloomberg, “which is somewhat perplexing because there are defensive attributes about this sector in that for the revenue-producing companies, there is very little economic sensitivity to them and yet they were lumped in with a lot of these other sectors when the market began to worry about recessions and so on.”
“I think that the beat-down has been so severe in the Canadian patch that there are some compelling companies that have a rapid trajectory of revenue growth over the next two years which, again, will have nothing to do with the economy,” he says.
Rahim singles out Microbix Biosystems (Microbix Systems Stock Quote, Chart TSX:MBX) and Opsens (Opsens Stock Quote, Chart TSX:OPS) as two names that should do well. Antigen-producing company Microbix has seen its share price stay relatively range-bound for a number of years, only to drift lower over the second half of 2018. But investors can expect more from MBX over the next two years, says Rahim.
“They are a leading supplier of antigens to infectious disease kits and testing kits and they do about a million dollars a month in revenue,” he says. “But in 2019-2020, you’re going to see a real increase in revenue growth and an increase in margins. The ace in the hole for them is that they own an FDA-approved clot-busting drug called Kinlytic that should they partner it —which is what they’re attempting to do right now— would be worth multiples of what their market cap is right now.”
Another company he likes is Quebec City-based Opsens, whose share price also fared poorly over 2018 even as the company is proving itself in terms of revenue —last quarter, OPS saw year-over-year revenue and gross profit margin increases of 46 per cent and 11 per cent, respectively.
“Opsens has the best-in-class fibre-optic technology that measures pressure around arterial clots,” says Rahim. “Their revenues are growing very rapidly; they’re around $24 million for this year and they grew at 35 per cent. I think that this could easily be a takeout candidate at some point.”
Rahim says that while early-stage biotech investing can be risky, there are companies out there with proven products that constitute a much surer bet.
“We tend to focus on the late-phase companies,” he says. “Ones that are post-Phase 2 and are in Phase 3, so they’ve overcome a lot of the obstacles to get to that point and they legitimately have a drug that should make it to commercialization and is highly likely to be successful.”