Biotech update: several companies trading below fundamental value
INDUSTRY VOICE: Despite market volatility in Q1, BB Biotech performed very well with an overall return of 8.8% in CHF. Several large biotech companies are currently trading below their fundamental value,and offer an attractive entry level for investors.
Volatility has returned to the markets, staging a revival in the first quarter of 2018. Healthcare followed broader US equity indices. The drug space was subject to speculative discussions about lower drug pricing. New ideas, such as payers sharing rebates with patients and more debate about value-based pricing continue to fuel intermittent anxieties about drug and other healthcare sub-sector stocks.
Despite these headwinds, BB Biotech shares gained 8.8% in CHF and 7.3% in EUR in the first quarter and paid out a record dividend of CHF 3.30 per share.
Portfolio adjustments - 2 new companies
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. A second new portfolio position was initiated with Argenx being an antibody platform company with a range of mid-to-late stage clinical candidates.
Solid progress of the portfolio holdings
BB Biotech also saw key late-stage clinical trials data during the first quarter of 2018. Novo Nordisk (Type 2 diabetes), Alder (chronic migraine), Alexion (PNH) Esperion (cholesterol) and Neurocrine's partner Abbvie (endometriosis). Gilead (HIV) and Vertex (cystic fibrosis) scored FDA approvals in Q1.
Despite some Wall Street expectations, M&A activities have not accelerated yet - even in the wake of cash repatriation and tax reform. BB Biotech continues to enjoy and anticipates attractive exits such as Kite - sold to Gilead for USD 12 bn in 2017, and Juno - sold to Celgene for USD 9 bn in January 2018 - realizing a net profit for BB Biotech of USD 96 mn. With this transaction, both BB Biotech holdings focusing on cell-based therapies were taken over by large cap biotechnology companies.
Outlook
Important milestones are expected in biotech for 2018 - and we believe 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. BB Biotech's longstanding commitment to invest in leading technologies, addressing unmet medical needs with sustainable economic value continues to underpin its strong and optimistic commitment to the sector. We will continue to add promising new smaller and mid-cap positions to the investment portfolio and manage the portfolio actively to produce the best results for the shareholders.
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 result.
