Quarterly update Q3 2019

Video interview with Dr. Daniel Koller (English subtitles)

Political factors weigh on biotech equity markets

After trending higher during the first half of the year, healthcare markets reversed direction in the third quarter. The MSCI World Healthcare Index retreated 1.1% and the Nasdaq Biotech Index shed 8.6%. BB Biotech was unable to shrug off the general headwinds and its shares ended the quarter 8.9% lower (all performance data in USD). Primary election campaigns in the US pressured the sector given all the talk of government intervention to lower drug prices. Similar trends had already been observed prior to the 2016 presidential election. Cash outflows from biotech investment funds continue to be balanced by inflows from M&A transactions. The FDA’s stated commitment to promoting innovation and shortening regulatory pathways has been supportive.

YTD performance still positive despite Q3 2019 setback
BB Biotech's stock price declined by 6.9% in CHF and 4.7% in EUR, while Net Asset Value fell 11.6% in CHF and 9.8% in EUR. Its net loss for the third quarter was CHF 382 mn, compared to a net profit of CHF 242 mn for the same period in 2018. Year to date, however, BB Biotech shares are still in positive territory. The nine-month total return of 10.0% in CHF and 13.7% in EUR and corresponding increase in Net Asset Value of 5.0% in CHF and 8.8% in EUR reflect the strong first-quarter performance. Net profit for the first nine months amounted to CHF 172 mn, matching the figure reported for the prior-year period.

Portfolio highlights for the third quarter 2019
Several portfolio companies delivered solid second-quarter results, including Neurocrine and Alnylam. Radius and G1 Therapeutics reported favorable pipeline events while the licensing partners from Alnylam and Ionis announced positive data from registration-enabling clinical trials. The Medicines Company, development partner for Alnylam’s inclisiran, presented excellent Phase III data for patients with high LDL-cholesterol levels. Akcea, a subsidiary of Ionis, announced positive results for volanesorsen in patients with familial partial lipodystrophy (FPL). Quarterly results from Myovant and Akcea were less impressive, a consequence of poor management decisions. Need for capital is holding back some R&D-intensive companies such as Agios.

New portfolio position
The rebalancing of BB Biotech’s portfolio toward next-generation smaller and mid caps has largely been completed. Only one new position was opened during the third quarter. Market volatility was used to realize further profits in Celgene, Gilead and Neurocrine. Some of the proceeds were invested in Arvinas, a new portfolio position, and in existing smaller and mid cap portfolio companies that are trading substantially below fair value.

Arvinas is a biopharmaceutical company focused on developing first-in-class protein degradation therapeutics for cancers and other difficult-to-treat diseases.

Positions in in Intra-Cellular and Myovant and the oncology companies Agios, Nektar and Macrogenics were increased. The Investment Team also repurchased some of the shares of Ionis which it had sold at substantially higher levels in the first quarter 2019. Adjusting for positions to be sold near term, the end of third quarter investment level of 112% resides de facto closer to 105%.

Outlook up to early 2020
BB Biotech expects portfolio companies to report substantial pipeline progress during the fourth quarter. Attention here will be focused on Sage, Halozyme, Myovant, Myokardia, Homology, Crispr Therapeutics and Incyte. Regulatory approval is expected for Intra-Cellular’s lumateperone and Alexion’s ultomiris.

The Investment Team will closely monitor the increasing valuation gaps between biotechnology and other sectors of the healthcare industry and the broader stock market. BB Biotech believes the significant scientific, medical and commercial progress the biotechnology sector is making will continue to provide attractive investment opportunities for the benefit of the shareholders.

Political and policy wrangling will continue to have a considerable impact – particularly with respect to drug pricing and reimbursement. The numerous trade conflicts between the US and its trade partners and the 2020 US presidential election race will both remain front and center. Pricing legislation, healthcare policies and possible executive orders will remain of interest – even though some aspects may turn out to be just electioneering rhetoric. 

BB Biotech will continue to monitor the short-term gyrations on Wall Street and eschew risky strategies that follow momentum more than fundamental approaches to investment in biotechnology. The Investment Team will remain focused on authentic innovation, value for patients and payers, and real-world valuation methodologies to pinpoint investment targets that offer attractive returns over the long term.


Performance 2019

01.01.2019-30.09.2019 USD CHF EUR
Nasdaq Biotech Index +2.8% n.a. n.a.
BB Biotech NAV +3.3% +5.0% +8.8%
BB Biotech Aktie +8.3% +10.0% +13.7%