Are these the best ASX biotech stocks to watch?

Biotech — or Life Sciences — stocks are shares in companies involved in the research, development, and commercialisation of technology driving advances in areas such as genetics, biology, healthcare and agriculture. Those listed on the Australian stock exchange are known as ASX biotech stocks.

Biotechs explained

Biotechs typically spend money developing new drugs, vaccines or diagnostic tools that are either completely novel, or more commonly an improvement on the current standard of care. Naturally, this is R&D intensive — and accordingly, most biotechs have high levels of cash burn.

Further to this, even larger biotechs are usually relatively volatile, as their value fluctuates according to various criteria including patent expirations, ongoing clinical trial success and regulatory approvals. In particular, biotechs with a weak pipeline of new treatments, and whose current treatments are close to expiry, will often see huge volatility.

This volatility is enhanced by market speculation — especially when an ASX biotech company has a flagship asset going through clinical trials which will either deliver huge financial rewards in the event of success or share price collapse if not.

Due to this inherent volatility, investors sometimes prefer the relative safety of the larger blue chip ASX biotech shares, which can often be classed as defensive due to the inelasticity of demand for their proven treatments, and their constantly developing treatment pipelines.

However, it’s worth remembering that the sector itself is more volatile than several others, and further, that past performance is not an indicator of future returns.

Best ASX biotech stocks to watch

The following five companies are currently the largest biotech stocks on the ASX. While there is some debate about the line between healthcare and biotech companies, all five spend significant amounts on research and development.

1. CSL Limited
2. Cochlear Limited
3. ResMed
4. Fisher & Paykel Healthcare Corporation
5. Sonic Healthcare

CSL Limited

CSL is by far the largest ASX biotech stock — akin to AstraZeneca in the UK. The company is a global behemoth, with a focus on vaccines and novel biotherapies.

In particular, CSL has carefully carved out a niche in plasma-derived therapies to produce human-use molecules such as immunoglobulins, albumin, or clotting factors. These are then used to treat patients for whom there are currently few treatments, such as those with haemophilia or immune system disorders.

Unlike small cap ASX biotechs, CSL can usually as a defensive stock for its oversized market position and captive market for its patented treatments.

In recent half-year results, CSL saw revenue rise by 11% year-over-year to $8.05 billion at constant currency rates, while its net profit after tax rose by 20% to $1.9 billion. CEO and MD DR Paul McKenzie enthused that the result was ‘driven by CSL Behring’s exceptional performance across its portfolio, especially immunoglobulins. The plasma initiatives we have implemented are starting to drive gross margin recovery.’

Market Capitalisation: $134.9 billion

Cochlear Limited

Cochlear is a medical device company that offers electronic implantable hearing solutions to customers, usually people with hearing loss caused by ear nerve damage.

In H1 2024 results, Cochlear saw revenue rise by 20% year-over-year in constant currency terms to over $1.1 billion, with underlying net profit up by 21% to $192 million. Units shipped rose by 14%, while services revenue increased by 35% — driven by ‘strong upgrade demand for the recently released Cochlear Nucleus 8 Sound Processor.’

Management notes that ‘Cochlear implant trading conditions continue to be strong across most markets, with an improving trend in adult referral rates in many developed countries. We have maintained the market share gains made in FY23, with strong market growth across the first half.’

The company now expects underlying net profits to rise by between 21% and 24% for the full financial year — with the company protected by a strong economic moat.

Market Capitalisation: $21 billion

ResMed

ResMed provides cloud-connectable medical devices for the treatment of sleep apnoea, chronic obstructive pulmonary disease (COPD), and other respiratory conditions. As a global leader in sleep and respiratory care, its product lines include continuous positive airway pressure (CPAP) devices which allow users to breathe properly when they sleep.

Moreover, its cloud-connected platforms allow users to monitor their devices and also adjust them to suit individual needs.

In Q3 2024 results, revenue increased by 7% year-over-year to $1.2 billion, while gross margin oproved by 260bps to an impressive 57.9% driving non-GAAP operating profit up by 23%.

Chairman and CEO Mick Farrell enthused that 'ResMed’s strong third-quarter fiscal year 2024 results reflect robust patient and customer demand for our products and software solutions...Over 2 billion people worldwide can benefit from a ResMed solution to help them sleep better, breathe better, and receive best-in-class healthcare right where they live. We remain laser-focused on bringing market-leading innovation to customers.'

Market Capitalisation: $20.6 billion

Fisher & Paykel Healthcare Corporation

Fisher & Paykel Healthcare Corporation works in the respiratory care and sleep disorder space, manufacturing advanced devices including ventilators, masks and advanced humification systems designed to improve the lives and sleep of users.

These devices are predominantly used to help patients with COPD or sleep apnoea, sleep better — and are sold in 120 countries around the world.

In half-year results, the company saw net profit after tax rise by 22% in constant currency terms to NZ$107.3 million, while operating revenue rose by 16% to NZ$803.7 million. Meanwhile, gross margin rose to an impressive 60.5%.

And CEO Lewis Gradon enthuses that ‘we remain confident in our ability to return to our long-term target of 65% within three to four years.

Market Capitalisation: $15.3 billion

Sonic Healthcare

Sonic Healthcare is one of the world's leading healthcare providers, with a global reputation for excellence in laboratory medicine, pathology, radiology and primary care medical services. It has operations across Australasia, Europe and North America.

Half-year results saw Sonic’s net profit fall to $202 million on revenues of $4.3 billion. While this was far less in past periods, CEO Dr Colin Goldschmidt notes that ‘whilst our headline numbers for the half-year show significantly lower earnings versus the comparative period, this is the result of having 90% less COVID-related revenue in the current period.’

For context, base revenue excluding COVID-related services rose by 15%, and included contributions from the three synergistic acquisitions that were completed in the half, being Medical Laboratories Duesseldorf and Diagnosticum Laboratory Group, both in Germany, and Synlab Suisse in Switzerland.

Market Capitalisation: $12.9 billion

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