3 Top Stock Picks in the Biotech Sector

Let’s start with a question: which sector of the ASX do you think is currently flying under the radar yet full of potential? If you said Healthcare, you’re on the right track. However, with recent advancements in AI and robotics, Australia’s Biotech sector is gaining significant momentum, making now the perfect time to explore the key players leading this charge.

Identifying the right companies at the right price can yield exponential returns, especially in a sector historically characterised by volatility. But before diving into our top stock picks in the Biotech sector, let’s take a step back and examine the broader landscape to appreciate the real value potential at hand.

What makes the Biotech sector so appealing?

Currently valued at $1.2 billion, Australia’s biotech sector ranks fifth worldwide in research and innovation. It has experienced a steady annual growth rate of 2.4 per cent over the past five years, and analysts anticipate that demand for precision therapies, digital health solutions, and affordable medical advancements will continue to propel this growth. This rapid expansion positions Australian biotech as an attractive investment opportunity for those eager to engage in a sector that is crucial for both global health and economic development.

Adding to the potential is the fact that Australia has already made a substantial impact on the global stage, with notable breakthroughs such as the bionic ear and the Gardasil cervical cancer vaccine. However, bringing a biotech product to market is no small feat, often fraught with regulatory hurdles and lengthy development cycles that can span a decade or more. This reality underscores the appeal of investing in established companies, which have navigated these challenges and built strong partnerships, robust networks, and the expertise necessary to overcome regulatory obstacles.

Here are three Australian biotech companies to watch.

CSL (ASX: CSL)

CSL, the third-largest company on the ASX by market capitalisation—behind only CBA and BHP—it stands as a global leader in innovative therapies, with a focus on plasma-based products and vaccines. Since 2020, CSL’s stock has fluctuated between $240 and $320. However, after bouncing back from $250 in October 2023, the share price has experienced its strongest upswing since March 2020, gaining 37 per cent. While this growth is encouraging, significant resistance remains at $320, indicating that the stock must clear this level to establish a sustained long-term upward trend.

ResMed (ASX: RMD)

ResMed is a pioneer in sleep apnea treatments and respiratory care, with a solid presence in digital health technologies. After experiencing a sharp decline of 30 per cent from August 2023, ResMed rebounded, surging over 70 per cent by the end of October 2024. This recovery reflects the company’s resilience, and as the stock nears its all-time high, a retest of this level looks to be on the horizon. A breakout above this peak might signal the beginning of a new long term bullish trend.

Sonic Healthcare (ASX: SHL)

Sonic Healthcare provides vital pathology, imaging, and clinical services globally. Following a steady decline since its 2021 peak, Sonic is now trading at a crucial level. If it maintains support above $26, there’s potential for a rally toward $36, with a longer-term objective of reaching its all-time high. Conversely, a drop below $26 could prompt a retest of the $23 level.

What were the best and worst-performing sectors last week?

The best-performing sectors included Information Technology, up 2.48 per cent, followed by Materials, up 0.42 per cent and Consumer Discretionary, down 0.15 per cent. The worst-performing sectors included Consumer Staples, down 5.47 per cent, followed by Utilities, down 3.10 per cent and Health Care, down 2.75 per cent.

The best performing stocks in the ASX top 100 included Mineral Resources, up 19.02 per cent, followed by WiseTech Global, up 5.80 per cent and Pro Medicus, up 5.67 per cent. The worst-performing stocks included Paladin Energy, down 16.93 per cent, followed by AGL Energy, down 9.07 per cent, and Woolworths Group, down 8.84 per cent.

What's next for the Australian stock market?

The All-Ordinaries index dropped over one percent last week, marking a second consecutive week of selling pressure. As noted in my previous report, this decline was anticipated, and the 8,300-point level should be monitored for potential buyer support.

I also mentioned that November is likely to bring heightened volatility, especially with the US elections approaching. Additionally, the Reserve Bank of Australia's upcoming interest rate decision this week has already caused significant movement in various sectors, particularly the consumer staples sector. Known for its stability, the consumer staples sector has seen a sharp decline of five per cent this week. The intriguing question is: why such a drastic drop?

One contributing factor is that higher interest rates typically lead to increased borrowing costs, which can dampen consumer spending. This trend is especially relevant for the consumer staples sector, which depends on consistent demand for essential goods. Notably, on September 23rd, just before the last rate decision, the consumer staples sector plummeted nearly three per cent in a single day.

Now that we are just days away from the next RBA decision, we are witnessing another uncharacteristic decline in this sector, indicating that the market may be anticipating that the RBA won’t cut rates on Tuesday.

If this scenario unfolds, it may be wise to shift focus back to the banking sector, which tends to benefit from a higher interest rate environment. Looking ahead to November, historical trends suggest that prices typically rise. If last week represented the extent of sellers' influence during what is usually their strongest month, we might be positioned for a significant rally as we approach the end of the calendar year.

For now, good luck and good trading.

Dale Gillham is the Chief Analyst at Wealth Within and the international bestselling author of How to Beat the Managed Funds by 20%. He is also the author of the bestselling and award-winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good bookstores and online.