Portfolio restructuring

We are increasing our exposure to novel treatment methods

In the third quarter further action was taken to realign the portfolio. Smaller and mid-sized firms represent a growing percentage of the portfolio, while the weighting of large cap stocks is declining. The latter segment made an outstanding contribution to portfolio performance in past years, but it is likely to relinquish its status as the sector's preeminent growth driver going forward. Through its active investment style, BB Biotech is increasing its exposure to novel treatment methods and thereby gradually shifting away from small molecule and recombinant protein treatment avenues. Challenging monoclonal antibodies, RNA-based therapeutic agents, and gene and cell-based therapies offer greater potential.

Next-generation investment opportunities are remarkable and so we have rebalanced large caps into mid and smaller cap companies and moved positively towards new drug modalities and approaches. This rebalance is part of the perpetual active management of portfolio assets and it marks a move away from small molecules and recombinant human proteins to sophisticated monoclonal antibodies, RNA-based therapeutics, gene therapies and cell therapies. Some of these provide long-lasting effects which can improve product performance and economic value relative to older modalities.

Portfolio restructuring planned in the summer is progressing well. The long-term holdings such as Celgene, Gilead and Novo Nordisk, have been historically superb performers for the portfolio. But these bellwethers may no longer lead growth trends. Portfolio re-adjustment therefore began with careful profit-taking throughout the third quarter. Some shares of Regeneron and Neurocrine were also sold for tactical reasons.

Profits were invested in Scholar Rock, a new holding initiated in this reporting period, and added to existing recent positions taken in Argenx, Exelixis and Nektar Therapeutics. Existing positions in Alnylam, Macrogenics, Voyager Therapeutics, Wave Life Sciences and Radius Health were also increased since their market valuations are substantially below intrinsic value.

The top portfolio positions reflect expectations of significant growth for RNA-based medicines which will transform drug markets. Supporting this view, a post-quarter note should highlight Janssen’s enormous investment in RNAi technology at Arrowhead Pharmaceuticals. We are also interested in neurology companies which address broad patient populations and companies such as Vertex, which is well established now with winning technologies and products for cystic fibrosis.