Partner insight: There was a positive flow of capital into the biotech sector during the third quarter.BB Biotech is actively increasing its exposure to new drug development technology such as RNA-based therapeutic agents, and gene and cell-based therapies.
After a disappointing performance in the first half, healthcare stocks headed north in the third quarter and the Nasdaq Biotechnology Index advanced 11.2% in USD. The sub-sectors life sciences tools, medtech and healthcare services were particularly strong performers.
Innovation leaders in the drug industry benefited from new regulatory guidelines. Both the US FDA and its parent organization, the Department of Health and Human Services, are increasing their oversight of trading partners in the pharmaceutical supply chain. Wall Street (or biotech stocks at least) welcomed the news. There was a positive flow of capital into the biotech sector during the third quarter, after at least a year of outflows. Renewed investor appetite encouraged IPOs and secondary placements.
Most investors in the sector continued to show a preference for short-term investment strategies. Positive news events precipitated brisk upward trading, whereas arguably minor setbacks led to even sharper downward moves. Meantime, BB Biotech remains firmly committed to its long-term, value-based strategy and to continuous portfolio rebalancing.
Investment idea: next-generation drugs
Next-generation drugs offer a host of compelling investment opportunities, which induced BB Biotech's investment team to give small and mid caps a larger weighting in the portfolio than large caps and to increase its exposure to novel treatment modalities and approaches. This rebalancing is in keeping with the continuous active management of its portfolio assets. BB Biotech's portfolio managers are gradually shifting their focus from classic pharmaceutical chemistry and recombinant protein therapies to sophisticated monoclonal antibodies, RNA-based therapeutic agents, and gene and cell-based therapies. Some of these novel treatment avenues have shown lasting benefits that improve treatment outcomes and produce greater economic value relative to older modalities.
BB Biotech is investing in new technologies
The top portfolio positions reflect BB Biotech's expectations of significant growth for RNA-based drugs that could transform the drug industry. Janssen's recently announced huge investment in Arrowhead Pharmaceuticals' RNAi technology supports this claim. BB Biotech is also following firms specializing in neurological disorders and are seeking to treat conditions affecting large patient populations. Another focus is on success stories such as Vertex, which is now well established company with tried-and-tested technologies and products for treating cystic fibrosis.
The targeted restructuring of BB Biotech's portfolio as announced in the summer is successfully under way. Portfolio assets are being carefully reallocated from large caps to promising small and mid-cap stocks. Long-standing portfolio holdings such as Celgene, Gilead and Novo Nordisk made an outstanding contribution to portfolio performance over the years but, looking ahead, these bellwether stocks are likely to relinquish their status as preeminent growth drivers. BB Biotech initially focused on astute profit-taking during the third quarter and reinvested the proceeds to build up positions in Argenx, Alnylam, Voyager Therapeutics, Wave Life Sciences and other stocks.
Scholar Rock was also added to the portfolio as a new position. It is focusing its drug development activities on the extracellular activation of growth factors and spinal muscular atrophy is its initial targeted indication. Positions in Probiodrug and Five Prime Therapeutics were closed, bringing the total number of positions in the portfolio to 34.
Admission to index lifts the share price
BB Biotech shares delivered a total return of 9.4% in EUR in the third quarter of 2018. The Net Asset Value of the portfolio rose by 8.9% in EUR, which widened this year's gap between its market price and NAV. BB Biotech's admission to the SMIM index of stocks (with a weighting of about 2.6%) and the SPI Index (about 0.3%) as of September 24, 2018 bolstered demand for its stock.
Outlook for the final three months of the year
The momentum behind BB Biotech's portfolio is expected to remain strong during the final quarter of 2018 and well into 2019. Multiple late-stage clinical trial results and product approvals are expected. As the market cap of large pharma companies grow, M&A activity may pick up. The giant pharma firms will only acquire best-of-breed biotech firms, the same ones BB Biotech likes to invest in.