BB Biotech profits from M&A transactions

Intro

BB Biotech performed well in 2019 in a generally favorable market environment. The biotech sector made significant strides, with improving fundamentals driving M&A activity and generating a solid performance as the year came to a close. Alone in the fourth quarter, the portfolio gain for BB Biotech was 17.5% in CHF, 17.7% in EUR and 21.1% in USD – reflecting a net gain of CHF 505 mn. During the same period, the share price gained 7.7% in CHF and 8.5% in EUR. The investment team continued the process of realigning the portfolio that was initiated in 2018 to capture the sector’s future growth opportunities. BB Biotech exited four holdings and added one new holding in the last three months of 2019. For the full year, total share return was 18.5% in CHF and 23.4% in EUR, slightly behind the portfolio performance of 23.4% in CHF, 28.1% in EUR and 25.1% in USD. The net gain for BB Biotech in 2019 was CHF 677 mn. In line with the stated dividend policy of past years, the Board of Directors’ dividend proposal at the Annual General Meeting on March 19, 2020 will be an ordinary dividend of CHF 3.40 per share – which corresponds to a 5% return on the volume-weighted average closing price of BB Biotech shares in December of 2019. BB Biotech plans to expand its Board of Directors. Shareholders will therefore be asked to elect Susan Galbraith and Mads Krogsgaard Thomsen at the upcoming Annual General Meeting.

Performance

Performance Q4 

01.10.2019-31.12.2019 USD CHF EUR
BB Biotech NAV +21.1% +17.5% +17.7%
BB Biotech Share +8.3% +7.7% +8.5%
       

Performance 2019 

01.01.2019-31.12.2019 USD CHF EUR
BB Biotech NAV +25.1% +23.4% +28.1%
BB Biotech Share   +18.5% +23.4%
       

Portfolio

In the fourth quarter, BB Biotech exited four holdings: Audentes Therapeutics was acquired by Astellas at USD 60 per share, a 110% premium over the prior’s day closing price (approximately USD 3 bn for the company). The position was sold in the last weeks of December 2019, generating approximately USD 85 mn in cash for the portfolio, and a profit of more than USD 50 mn for a one year investment. Celgene’s acquisition by BMS was completed in November 2019. BB Biotech will manage the BMS shares it received through this transaction from a tactical standpoint. Alder Biopharmaceuticals was acquired by Lundbeck for USD 18 per share in cash, a 79% premium over the prior day’s closing price, plus a non-tradeable CVR of USD 2 per share. The remaining position in Gilead was sold. While Gilead continues to assert leadership in HIV treatment, the mis-step in its NASH program and the need for new pipeline assets leave its new leadership team with work to do. BB Biotech’s historical success investing in Gilead remains one of the highlights of the last 15 years.

During the fourth quarter, profits were also taken on investments such as Incyte, Crispr Therapeutics and Intracellular. The cash was reinvested in targets associated with the strategic portfolio reallocation – focusing more on smaller and mid cap portfolio companies. BB Biotech took advantage of market conditions by investing more in Agios, Arvinas, Macrogenics, Scholar Rock, Wave Life Sciences and Kezar.

A new investment was made in Molecular Templates – a company which focuses on engineered toxin bodies (ETB), a potential next generation of immunotoxins. The company’s lead program, MT-3724, is a first-generation ETB targeting CD20 and is in clinical development for B-cell malignancies. The company, together with its development partner Takeda, is also developing TAK-169, a second-generation de-immunized toxin linked CD38 targeting molecule for multiple myeloma patients.

Dividend

Stocks with high dividend yields are usually found in the more defensive sectors of the stock market that have little upside potential. And then there’s BB Biotech, the holding company that combines fast growth with a hefty dividend yield.

For 2020 a dividend of CHF 3.40 is proposed to the Annual General Meeting on March 19, 2020. This corresponds to a 5% return on the weighted average share price for  December 2016. In times of lower interest rates, BB Biotech certainly offers an attractive alternative for investors.

Outlook

BB Biotech believes that 2020 will bring significant technology progress including new drug modalities to address many unmet medical needs. The investment team’s asset allocation will not only focus on established areas – such as oncology, orphan diseases and neurological indications – but will also look at rapidly emerging technologies which promise the best therapeutic profile and economic value. 

Set against exciting technological developments, the team expects continued debate around value assessment and structural change in the US healthcare system during the 2020 presidential election year. Attractive valuations of smaller and mid cap biotech firms will likely continue to enable M&A activity in the sector. The takeover of Celgene by BMS for USD 70 bn demonstrates that large cap firms may also be in play at these valuation levels. As with Gilead, BB Biotech has enjoyed a highly successful run of stock ownership and gains in Celgene for 15+ years.

Investing in leading bioscience and the resulting healthcare innovation is a costly, lengthy and – for the uninitiated – risky process. BB Biotech’s long-term horizon makes us an attractive investor and partner for many biotechnology firms – and the investment team believes that the growth case for biotechnology and for BB Biotech is as compelling as ever. The investment team anticipates that 2020 will be another banner year for new products worldwide and looks forward to more exciting news flow from our portfolio companies.