Industry Voice: Biotechnology - new price triggers, low valuations

2017 has been a pivotal year for Ionis Pharma. The US biotech firm finally achieved a market breakthrough with its proprietary antisense technology. With this technology, doctors can inhibit the production of endogenous proteins in a patient that have been identified as disease-causing proteins.

Success stories such as Ionis Pharma could lift the stock prices of other biotech companies that are on the verge of a major breakthrough. Heightened volatility in biotech share prices is a reflection of the vast opportunities and risks that come with groundbreaking clinical developments. Besides the bottom-line growth of the biotech companies that are already profitable and clinical data readouts, regulatory approval of new drugs may represent the third major trigger for biotech stocks. In our view 2017 promises to be a stellar year in this regard: FDA had already approved 26 new drugs by mid-August, 15 of which from the biotech sector. That number already exceeds the new biotech drugs that had been approved in all of 2016.

The rising number of marketed biotech products has kept sector sales growing at a brisk pace. Unlike the pharma companies, we believe biotech firms are not threatened by precipitous drops in income as billion-dollar branded products come off patent. For investors, we believe the sustained strong earnings momentum is keeping biotech valuations at attractive levels. According to consensus earnings estimates published by Bloomberg, the six largest biotech companies by market cap are trading at around 15 times their estimated earnings per share for 2018, about the same as the major US pharma companies. A glance at PEG ratios, or the 2018 P/E ratios divided by estimated earnings growth for 2018, reveals a telling difference though. The average PEG for the biotech stocks is around 1, while the pharma stocks' current PEG valuation is around 1.9. 

Despite our view of the sector's very good fundamentals, many investors are still reluctant to allocate a significant amount of money to the biotech sector. Persisting uncertainty regarding the future course of federal healthcare policy in the US is currently the darkest cloud hanging over the sector. How to keep medical treatment and services at affordable levels for health insurance payers will continue to be a hot topic on the political agenda in Washington for the foreseeable future. In our view,  the greater the flow of positive news on the company front, the less biotech stocks will be held back by political noise. Looking at just four disease indications, we believe the regulatory approval of new therapeutic agents could unleash a very high sales potential in each of these four areas, which are immuno-oncology, liver diseases, orphan or rare genetic diseases, and neuro disorders such as Alzheimer's.

We believe that Biotech has superseded the pharma industry as the hotbed of innovation in drug development. The Swiss investment company with a market capitalization of EUR 2.9 billion is, in our view, one of the investment pioneers in this sector, having invested in biotech companies since 1993.

BB Biotech expects the companies in its portfolio to report a significant average top-line growth until  2020. Unlike actively managed equity funds, BB Biotech does not use any sector index as a benchmark. We attribute its strong performance versus the Nasdaq Biotechnology Index to its portfolio strategy, and believe core portfolio positions act as an anchor of stability. Companies that qualify for the portfolio's selection of smaller positions that can be gradually built up over time will have presented convincing clinical data on novel drug candidates and marketing authorization should not be too far off. What we believe also sets BB Biotech apart from conventional actively managed funds is its generous payout. Investors can expect an annual dividend yield of about 5%. In addition, up to 5% of share capital will be bought back every year through a continual share buyback program.

BB Biotech will publish its Q3 results on October 20, 2017.

Interview with Dr. Daniel Koller

For more information, please contact:

Claude Mikkelsen

[email protected], +44  203 326 29 83, www.bbbiotech.com

 

Disclaimer

Bellevue Advisors LLP is an appointed representative of Mirabella Advisers LLP, which is authorised and regulated by the Financial Conduct Authority. This advertisement is directed at professional clients and eligible counterparties as defined by the FCA in the UK only. Past performance is not indicative of future results.