Quarterly update

Volatility has returned to the markets, staging a revival in the first quarter of 2018. Regardless of the cautious investor sentiment, the BB Biotech share performed very well with an overall return (including dividend) of 8.8% in CHF and 7.3% in EUR. The portfolio trended sideways on the market, generating a profit of CHF 28 mn (CHF 375 mn in the corresponding period of the previous year). At the AGM on March 13, 2018, the Board of Directors confirmed the continuation of the payout policy. A number of portfolio companies – including Novo Nordisk, Neurocrines Partner Abbvie, Esperion, Alexion and Alder – published encouraging study results. Several large biotech companies are currently trading at well below their fundamental value, with pipeline successes and additional takeovers likely to boost key ratios and valuations.

Performance

Performance Q1 2018

1.1.2018-31.3.2018USDCHFEUR
Nasdaq Biotech Index-0.1%%n.a.n.a.
BB Biotech NAV2.3%%+0.4%-0.1%
BB Biotech Sharen.a.8.8%7.3%

Portfolio adjustments in the first quarter

As always, existing portfolio positions were carefully adjusted amid choppy equity markets. BB Biotech re-invested profits from holdings in Agios, Neurocrine, Sage, Alnylam and Gilead into firms which offered attractive re-entry levels such as Tesaro, Ionis and Regeneron and built further stakes in Akcea Therapeutics and Voyager Therapeutics.

Continuing the strategy of investing in innovative smaller and mid-cap companies, Moderna Therapeutics, a private company which is pioneering a new class mRNA medicine, has been added to the portfolio. Their pipeline includes candidates for vaccines and treatments in diverse therapeutic areas. Moderna has ten clinical trials underway and has so far raised more than USD 1.5 bn in equity and USD 1 bn in smart strategic deals. BB Biotech invested USD 70 mn into Moderna’s Series G, broadening our RNA technology exposure which reached 19% of the portfolio by the end of the first quarter.

A second new portfolio position was initiated with Argenx being an antibody platform company with a range of mid-to-late stage clinical candidates – ARGX-113 being the most advanced. This molecule is being studied in three IgG-mediated autoimmune diseases. Important clinical trial read-outs are expected in the coming 12 months. A second candidate, ARGX-110, should begin proof-of-concept clinical trials for acute myeloid leukemia later in 2018.

Outlook

Important milestones are expected in biotech for 2018 – and the management team believes these will overcome the shortterm downturn in sentiment seen in the first quarter. Several large cap biotechnology companies currently trade well below fundamental value, so we expect pipeline successes and more takeovers to drive multiples and valuations higher.

In a highly anticipated study, Incyte reported that Epacadostat, tested in combination with Keytruda in patients with unresectable or metastatic melanoma, did not add benefit over Keytruda monotherapy. However, BB Biotech assumes that investor’s attention will shift towards the company’s remaining broad pipeline. For the rest of the year, further late stage clinical trial results and product approvals are expected to drive equity value. In addition, the management team anticipates M&A activities will continue. Pharmaceutical and large biotechnology companies have stated real interest in acquisition of leading technologies.

The US healthcare system – now largely influenced by the leadership of Alex Azar (HHS) and Scott Gottlieb (FDA) – will move towards improved price transparency driving changes in the somewhat testy relationships between payers, PBMs, providers and the drug industry.