BB Biotech — A cutting-edge sector and a high dividend

BB Biotech (BION)

Currency in CHF

Last close As at 06/12/2023

CHF38.30

0.15 (0.39%)

Market capitalisation

CHF2,122m

More on this equity

Research: Investment Companies

BB Biotech — A cutting-edge sector and a high dividend

BB Biotech (BION) offers investors exposure to the innovative, rapidly expanding biotech sector. BION is the largest biotech investor among its investment company peers. It invests in high-quality biotech assets that target substantial market opportunities. BION’s managers are optimistic about the outlook for the sector. They believe sentiment towards the sector should improve as interest rates peak and begin to decline. Meanwhile, they expect to see ongoing fundamental progress by portfolio holdings, with several due to reach key regulatory, clinical or commercial milestones over coming months. In addition, historically low valuations have created opportunities to add or top up exposure to interesting companies at attractive prices. BION differentiates itself from its peers by its highly competitive dividend policy – it pays a dividend equivalent to 5% of the average share price over December each year.

Joanne Collins

Written by

Joanne Collins

Analyst, Investment Trusts

Healthcare business concept, Medical examination and growth graph data of business on tablet with doctor's health report clipboard on background.

Investment Companies

BB Biotech

A cutting-edge sector and a high dividend

Investment companies
Biotechnology equities

25 October 2023

Price

CHF36.80

Market cap

CHF2,038.7m

AUM**

CHF1,994.9m

NAV*

CHF36.00

Premium to NAV

2.2%

*Including income. At 23 October 2023.

Yield

5.0%

Ordinary shares in issue

55.4m

Code/ISIN

BION/CH0038389992

Primary exchange

SIX

AIC sector

N/A

52-week high/low

CHF60.70

CHF38.96

NAV* high/low

CHF56.00

CHF36.00

*Including income

Gearing (at 30 September 2023)

13.8%

Fund objective

BB Biotech, a Switzerland-based investment company, targets long-term capital growth from biotechnology companies developing and marketing innovative drugs. At least 90% of the portfolio is held in listed companies, primarily those that already have products on the market or promising drug candidates in advanced stages of development. BION is benchmarked against the Nasdaq Biotech Index (in CHF) but is managed on a bottom-up basis, with a focused c 20–35 stock portfolio.

Bull points

BION’s exposure to the innovative, high growth biotech sector gives it potential for high returns over the long term.

Proven expertise in backing innovative companies, such as Moderna (bought pre-IPO).

The fundamentals of the biotech sector remain strong.

Bear points

Biotech stocks can be volatile, as the development process for new drugs and therapies is very uncertain and some will fail or otherwise disappoint expectations.

Gearing increases exposure to these downside risks.

Biotech stocks have underperformed broader healthcare focused listed funds over the past two years amid high inflation and rising interest rates.

Analyst

Joanne Collins

+44 (0)20 3077 5700

BB Biotech is a research client of Edison Investment Research Limited

BB Biotech (BION) offers investors exposure to the innovative, rapidly expanding biotech sector. BION is the largest biotech investor among its investment company peers. It invests in high-quality biotech assets that target substantial market opportunities. BION’s managers are optimistic about the outlook for the sector. They believe sentiment towards the sector should improve as interest rates peak and begin to decline. Meanwhile, they expect to see ongoing fundamental progress by portfolio holdings, with several due to reach key regulatory, clinical or commercial milestones over coming months. In addition, historically low valuations have created opportunities to add or top up exposure to interesting companies at attractive prices. BION differentiates itself from its peers by its highly competitive dividend policy – it pays a dividend equivalent to 5% of the average share price over December each year.

BION’s performance relative to Nasdaq Biotech Index (CHF) over 10 years

Source: Refinitiv, Edison Investment Research. Note: Total returns in Swiss francs.

The analyst’s view

Investors may be attracted to BION given its position as the largest investment trust focused on the biotech sector, which gives it scope to fund a well-resourced research team and to access high-quality deal flow.

The managers’ preference for mid- and small-cap companies has seen relative returns lag over the past couple of years, despite the ‘exceptional’ performance and resilience of most of BION’s portfolio holdings. However, BION’s track record of outright gains and outperformance of its benchmark, and most of its peers, over 10 years is likely to appeal to investors seeking exposure to this sector.

Most biotech companies do not pay substantial dividends, preferring to invest cash flows in further growth, so BION’s 5% dividend policy may be welcomed by investors seeking regular income.

BION’s shares usually trade at a substantial premium to its NAV, but its premium has been on a narrowing trend and shares slipped into discount territory at the end of September, consistent with the experience of investment companies across many sectors. It is currently trading at a small premium. With the share price presently near seven-year lows relative to the company’s NAV, this may represent an opportunity for investors to acquire BION shares at an especially attractive level.

BION: Providing exposure to an exciting growth sector

Biotech sector set to maintain current rapid advancement

Biotechnology is the exploration of biological processes, systems or living organisms, especially the genetic manipulation of microorganisms, for the development of products, including antibiotics and therapeutic drugs. Biotech is one of the most important technologies of the 21st century and makes a significant contribution to society – the new, innovative drugs and technologies it is developing are helping to meet the growing demand for healthcare products and services as life expectancy rises and chronic diseases become more prevalent. These products help improve quality of life for many people and in some cases, may save lives.

The biotech industry ranks among the most attractive of all fast-growing sectors, with an estimated annual growth rate of more than 10%. According to BION’s managers, sector revenues are forecast to reach around $290bn in 2024 and they expect demographic trends and lifestyle changes to sustain this growth momentum over the long term, to the extent that by 2026, more than half the 100 bestselling drugs, and almost 40% of total global drug sales, will come from biotech labs.

Largest listed biotech fund, with a highly qualified team

BION offers investors a rare opportunity to gain exposure to this cutting-edge, expanding industry. The company invests in high-quality biotech assets that target substantial market opportunities by developing drugs for unmet medical needs, and many of these businesses are otherwise difficult for individual investors to access. BION is the largest biotech investor among its peers (see Exhibit 6), with 30 years of experience since the company was founded in Switzerland in 1993. The fund invests for the long term and adopts a fundamental, active, benchmark-independent investment strategy based on the scientific, medical and financial expertise of the management team and research analysts based in New York and Zurich. BION’s board members are all renowned and highly experienced practitioners within the biotech sector.

AI employed to improve the efficacy of the investment process

While many investment managers pursuing a variety of growth and tech-focused strategies are now trying to identify companies set to benefit from the expansion of AI tools, BION’s managers are a step ahead. As is perhaps fitting for investors in a cutting-edge industry, they are making increasing use of AI technology to improve the efficacy of their investment process. AI tools provide valuable insights during the due diligence process, by synthesising a broad range of data and helping to answer complex questions about patient journeys and the benefits of medication and therapies. The technology also has a key role in computer-assisted drug-hunting. To further support its research in these areas, BION has expanded the portfolio management team with the addition of three data scientists.

Performance: Strong long term, including against peers

Biotechnology is a growth sector, and as such has been hurt over the past 18 months or so by the aggressive interest rate policies implemented by the US Federal Reserve and other central banks, as they try to quash persistent inflation. The rapid rise in rates has raised concerns about the cost of capital and the financial stability of both the biotech sector overall and individual companies. This has fostered a general tendency to broadly overestimate risk within the sector, and underestimate opportunities, so that positive developments, such as encouraging trial results and regulatory approvals, have been dismissed by investors, while any whiff of bad news, such as missed milestones, has triggered selling. This mindset has been particularly detrimental to small- and mid-cap companies, which together comprise more than 80% of BION’s portfolio. In addition, investor attention has been drawn away from the growth potential of biotech by recent developments in the field of AI, most notably the launch of ChatGPT. This AI-powered language tool is capable of human-like conversation and simple research tasks and has sparked excitement about AI’s capacity to disrupt many established industries and drive productivity growth. As a result, there has been some sector rotation away from biotech, in favour of so-called ‘tech titans’ offering exposure to AI.

BION’s managers believe that the financial strength and resilience of companies in the portfolio are ‘exceptional’ and ‘clearly better’ than before the COVID-19 pandemic. At the end of Q323, more than 80% of portfolio holdings, mostly mid-cap companies, were either profitable or financed to reach profitability, and offer a ‘highly attractive risk/return profile’, according to the managers. The remaining holdings are earlier and mid-stage pipeline companies requiring additional financing in coming years. Several of BION’s holdings have seen positive developments this year (see details in the Portfolio section below).

Yet, the generally bearish sentiment overhanging the biotech sector, especially the small- and mid-caps that are BION’s focus, and the sustained selling pressure in equity markets more broadly, meant that the portfolio’s NAV declined 11.8% (in CHF) in the first nine months of 2023, while the share price dropped 20.8%. This compares with the 6.3% decline in the benchmark, the Nasdaq Biotech Index (NBI).

However, BION invests for the long term, so it is more meaningful to look through short-term fluctuations in market sentiment and instead assess the company’s performance over a longer time frame. BION’s performance has been good on this basis. It has delivered outright returns and outperformed the NBI: over the 10 years to end September 2023, it delivered an average annualised return of +7.0% on an NAV basis and +10.3% in share price terms, compared to a benchmark return of 6.8%. In addition, BION has been one of the top long-term performers among the selection of peers illustrated in Exhibit 6.

Managers upbeat about the sector’s outlook

Just as it is more meaningful to look through short-term market fluctuations when judging performance, equally, BION’s managers are not allowing these machinations, negative or positive, to cloud their assessment of the portfolio’s prospects. And in their view, there are good reasons to be optimistic. Firstly, as mentioned above, they are very upbeat about the sector’s ability to maintain its current growth momentum over the medium term. This ‘rising tide’ should support ‘all ships’, especially BION’s carefully curated portfolio holdings. Meanwhile, the sell-off over the past year or more means valuations, especially among small and mid-cap companies, are now depressed relative to historical levels. For example, in the period since 2001, assessing company valuations relative to the net cash on their balance sheets, valuations are at an all-time low – below the levels seen in the dot-com bust and the global financial crisis. Within the biotech universe, the percentage of companies trading at less than the net cash on their balance sheets is at an unprecedented high of 20–25% (100 to 120 companies). Such historically low valuations mean that the market offers many interesting investment opportunities, which will allow the managers to gain exposure to this rapid growth, at attractive levels.

Furthermore, the managers expect to see several key regulatory, clinical and commercial milestones before the year-end, which should support the performance of several portfolio holdings. Aside from important pipeline updates, forthcoming news on clinical outcomes includes an update on Vertex Pharmaceuticals’ VX-548 treatment for acute pain. In addition, Ionis Pharmaceuticals, in partnership with AstraZeneca, is awaiting approval from the US Food and Drug Administration (FDA) on its application for approval of Eplontersen, aimed at treating patients with nerve disorders, while CRISPR Therapeutics (partnered with Vertex) expects an FDA decision on its CTX001 treatment of sickle cell disease. Neurocrine, Incyte and Celldex, three other portfolio holdings, should also release news on milestone developments during Q4.

On the broader regulatory front, the news is likely to be more mixed. There are signs that US agencies such as the Federal Trade Commission are becoming more accommodating in their stance on large takeovers. However, the US government recently published a list of the first 10 drugs that will be subject to price negotiations under the provisions of the Biden administration’s Inflation Reduction Act. Nine of these drugs are produced by major pharmaceutical entities and one is from the biotech company, Amgen (not held in BION’s portfolio). These negotiations are aimed at reducing the cost of drugs used regularly by people in the government’s Medicare scheme. This program is scheduled to begin in 2026 and is estimated to save the US government $237bn over the following 10 years, so drug manufacturers and investors in the sector will be watching the progress of talks carefully.

Also on a more cautionary note, BION’s managers are monitoring developments in numerous lawsuits initiated by pharmaceutical and industry bodies against the US Department of Health and Human Services and they say they are ‘poised to integrate potential consequences into [their] assumptions and future estimates.

An attractive and highly competitive dividend policy

As well as providing exposure to a rapidly growing, innovative sector, investors may also be attracted to BION for its highly competitive dividend policy. Since 2013, it has paid a dividend equivalent to 5% of the average share price during December each year. A dividend of CHF2.85 per share was paid with respect to the year ended 31 December 2022 (2021: CHF3.85 per share) and the company is expected to announce the dividend for the year ended December 2023 in January 2024, for approval at the AGM in March 2024.

This compares very favourably with BION’s peers in the biotech and healthcare sectors, as all other investment companies in this group pay no, or very low, dividends. This is the case because many biotech companies are at a relatively early stage of development and thus prefer to reinvest cash to fund future growth. However, BION’s directors recognise shareholders’ appetite for income and BION has accordingly adopted a different approach to that of its peers. This high distribution policy appears to be appreciated by shareholders – it is arguably one of the factors underlying the share price move from discount to premium over the past seven years. However, it is important for shareholders to be aware that the company’s dividend payments may in part represent a return of their capital.

Narrower premium offers a rare buying opportunity

Until early 2016, BION’s shares traded at a double-digit discount to NAV. However, for the last seven years BION’s shares have generally traded at a premium. The move to a premium was arguably underpinned by strong investor interest in the biotech sector, buying by passive investors following index inclusion and BION’s high distribution policy (discussed above). BION reached a record-high premium to NAV of c 40% in January 2022, but the premium subsequently fell to single digits in Q422. It has since trended lower, and recently dipped briefly into discount territory (Exhibit 1).

Exhibit 1: Premium/discount over five years

Source: Refinitiv, Bloomberg, Edison Investment Research

The narrowing trend in BION’s premium over the past year should not be perceived as a reflection of BION individually. On the contrary, most investment companies have seen their premiums narrow or discounts widen recently. There are several possible explanations for this, including the higher interest rate environment, which means that for the first time in many years cash and bonds are offering relatively attractive, low-risk returns. This provides a viable alternative to investments in equities and investment companies. In addition, the cost-of-living crisis may well have had a detrimental effect on the appetite for investment companies and other investment vehicles, as individuals and households have less cash available to allocate to savings products.

Whatever the reasons for the decline in BION’s premium, the situation arguably provides an opportunity for investors to gain or add exposure to the company at a relatively attractive level, especially given that the valuations of biotech companies are at all-time lows, as discussed above.

Performance: ‘Disappointing’ this year, good long term

Exhibit 2: Five-year discrete performance data

12 months ending

Share price
(%)

NAV
(%)

Nasdaq Biotech CHF (%)

MSCI World Health Care CHF (%)

CBOE UK All Cos CHF (%)

MSCI World CHF
(%)

30/09/19

(10.6)

(14.1)

(16.3)

0.7

(0.9)

4.6

30/09/20

15.9

20.4

26.1

11.9

(20.7)

2.3

30/09/21

31.1

24.4

22.1

21.0

36.1

31.4

30/09/22

(33.7)

(22.8)

(21.1)

(4.4)

(15.7)

(14.8)

30/09/23

(17.1)

(13.1)

(1.7)

3.6

16.4

13.9

Source: Refinitiv, Bloomberg. Note: All % on a total return basis in Swiss francs.

Returns down so far in 2023…

As discussed above, BION lagged its benchmark over the financial half-year ended June 2023, although performance improved in Q323. The relative underperformance in H123 was due in large part to the company’s bias in favour of small- and mid-cap companies, which have fared worst in the current environment. The depreciation of the dollar versus the Swiss franc also detracted from returns in H123, although the subsequent appreciation of the dollar against the Swiss currency has been one contributing factor to BION’s improved performance during Q323.

…but most portfolio companies have been performing well

Positive news on several portfolio holdings has also supported recent returns. For example, Ionis, BION’s largest position, representing c 13% of the portfolio, was one contributor. Ionis is a leading player in antisense technology (genetic-based drug design for administration in vitro to regulate gene expression by binding target RNA molecules in sequence-specific manners). Ionis has a diversified pipeline with candidates in many different disease areas, including rare diseases, cardiac and metabolic conditions, and neurology. The company has delivered a relative return of c 18% pa for BION over its 13-year holding period. Ionis’s latest positive milestones were the approval in May 2023 of its drug Qalsody, a treatment for amyotrophic lateral sclerosis, while Eplontersen (mentioned above) is expected to be approved later this year. The company also reported a positive outcome for Olezarsen in people with familial chylomicronaemia syndrome and has agreed a licensing deal with Roche for two pre-clinical candidates for the treatment of Alzheimer’s disease and Huntington’s disease. Ionis’s share price has risen significantly in recent months and BION’s managers believe the company is well-financed and well-positioned to become a multi-product company with growing profitability.

Argenx, BION’s second largest holding, was one contributor. Argenx develops treatments for autoimmune diseases. It has made an annualised relative return of c 40% since acquisition in 2018. In Q2 it received FDA approval to inject Vyvgart Hytrulo, for use in patients suffering from generalised myasthenia gravis. This decision provides an alternative delivery option and additional choice for patients, facilitating the expanded use of this drug. Argenx’s share price jumped c 29% (in US dollars) in July after the company announced positive top-line results from a further study on Vyvgart Hytrulo. The company’s mid- and long-term revenue and profit outlook improved further with the success of its registrational trial for subcutaneous efgartigimod to treat chronic inflammatory demyelinating polyneuropathy patients.

In September, the share price of Neurocrine Biosciences, another top 10 holding rose following several positive announcements, including encouraging top-line results from a Phase III study on Crinecerfont for treating patients with congenital adrenal hyperplasia. This takes the company a step closer to adding a second large commercial product, alongside Ingrezza, its treatment for chorea associated with Huntington’s disease. Neurocrine also received FDA approval of a new drug application for Ingrezza – a sprinkle granule formulation for patients who have difficulty swallowing capsules.

The shares of Revolution Medicines, which focuses on precision oncology drugs, saw gains following the announcement of an agreement to acquire EQRx in an all-stock transaction intended to add $1.0bn to Revolution’s balance sheet. One of BION’s smaller holdings, Exelixis, announced positive results for its pivotal trail evaluating Cabozantinib in advanced pancreatic and extra-pancreatic neuroendocrine (NET) tumours.

The favourable performance impact of these developments has been partially offset by adverse news on other holdings. One notable detractor from recent returns was Sage Therapeutics, a top 10 holding. This company, which focuses on developing treatments for neurological disorders, saw its share price drop by more than 42% (in US dollars) in August after the FDA disappointed expectations by only partially approving the use of Sage’s drug, Zuranolone. Approval was granted for its use for postpartum depression, but not for use by the broader cohort of patients with major depressive disorder. The FDA requested additional studies to support the case for Zuranolone’s wider use. Sage and its partner Biogen have since laid off staff and are reassessing the direction of their research efforts. BION’s minor exposure to Mersana Therapeutics also detracted. Its share price declined 61% (in US dollars) in Q3 following news that a clinical trial of upifitamab rilsodotin, designed for the treatment of ovarian cancer, did not meet its primary target.

Exhibit 3: Investment company performance to 30 September 2023

Price, NAV and benchmark total return performance, 10-year rebased

Price, NAV and benchmark total return performance (%)

Source: Refinitiv, Bloomberg, Edison Investment Research. Note: Three-, five- and 10-year performance figures annualised.

Exhibit 4: Share price and NAV total return performance, relative to indices (%)

 

One month

Three months

Six months

One year

Three years

Five years

10 years

Price relative to Nasdaq Biotech TR CHF

1.1

6.6

(14.1)

(15.7)

(23.9)

(25.3)

38.0

NAV relative to Nasdaq Biotech TR CHF

0.7

(1.6)

0.9

(11.6)

(11.8)

(13.6)

0.9

Price relative to MSCI World Health Care TR CHF

0.5

6.4

(17.2)

(19.9)

(39.9)

(44.7)

2.6

NAV relative to MSCI World Health Care TR CHF

0.0

(1.7)

(2.7)

(16.1)

(30.3)

(36.1)

(25.0)

Price relative to MSCI World CHF

1.6

7.2

(20.1)

(27.2)

(43.5)

(45.3)

12.6

NAV relative to MSCI World CHF

1.1

(1.0)

(6.1)

(23.7)

(34.5)

(36.7)

(17.6)

Source: Refinitiv, Bloomberg, Edison Investment Research. Note: Data to end September 2023. Geometric calculation.

BION outperforms on the upside and lags on downside

Exhibit 5 shows how BION has performed in months when the benchmark has risen and fallen. Over the last decade, the trust’s cumulative upside and downside capture were 118% and 107%, respectively. As these readings are both above 100%, they suggest that BION outperforms on the upside, but loses more than the benchmark on the downside. While the upside capture has been stable for several years, the downside capture has been on a gently increasing trend over the past few years, until recently, consistent with BION’s underperformance over this period, as discussed above. The more recent dip in the downside capture reflects the company’s outperformance in Q323. The trust’s use of gearing has served to amplify both gains in times of market strength, and losses when the market is weak. 

Exhibit 5: BION’s upside/downside capture over the last 10 years

Source: Refinitiv, Bloomberg, Edison Investment Research. Note: Cumulative upside (downside) capture calculated as the geometric average NAV total return (TR) of the fund during months with positive (negative) benchmark total returns, divided by the geometric average benchmark total return during these months. A 100% upside (downside) indicates that the fund's TR was in line with the benchmark’s during months with positive (negative) returns.)

Peer group comparison

BION is not included in the AIC’s Biotechnology & Healthcare sector as its primary listing is in Switzerland, but in Exhibit 6 we present it and another Swiss company, HBM Healthcare Investments (HBMN), alongside members of the AIC peer group, to provide a relevant comparison. This group includes four funds (BION, Biotech Growth Trust, International Biotechnology Trust and the relatively recently launched RTW Biotech Opportunities) that focus primarily on biotech stocks, and four funds (BB Healthcare, HBMN, Polar Capital Global Healthcare and Worldwide Healthcare Trust) that are focused on healthcare more broadly and generally include some biotech stocks alongside stocks from other sectors. The last fund, Syncona, is a venture capital/growth capital investor focusing on backing and building early-stage companies, mainly in the biotech space.

Exhibit 6: Selected peer group at 23 October 2023 (in CHF terms)*

% unless stated

Market cap £m

NAV TR
1 year

NAV TR
3 year

NAV TR
5 year

NAV TR
10 year

Ongoing
charge (%)

Perf.
fee

Disc/prem
(cum-fair)

Net gearing (%)

Dividend
yield (%)

BB Biotech

2,038.7

(12.8)

(15.9)

(12.4)

125.8

1.10

No

2.2

114

5.0

BB Healthcare

750.7

(10.4)

(7.0)

3.8

-

1.04

No

(8.6)

100

0.0

Biotech Growth

281.9

(21.6)

(44.5)

(20.0)

41.9

1.08

Yes

(6.3)

103

0.0

HBM Healthcare Investments

1,051.9

(9.7)

(0.7)

51.7

287.4

1.03

Yes

(33.9)

103

0.0

International Biotechnology

248.3

(3.6)

(14.3)

(0.8)

97.9

1.32

Yes

(4.5)

110

0.0

Polar Capital Glb Healthcare

399.2

5.8

23.5

29.8

110.5

0.92

Yes

(8.2)

109

0.6

RTW Biotech Opportunities

213.0

2.6

15.6

-

-

2.08

Yes

(28.9)

97

0.0

Syncona

917.0

(7.6)

(14.7)

(21.4)

40.5

0.92

No

(32.0)

100

0.0

Worldwide Healthcare

1,864.8

(2.6)

(7.0)

7.7

141.4

0.83

Yes

(10.0)

107

0.9

Simple average (nine funds)

862.8

(6.7)

(7.2)

4.8

120.8

1.15

(14.5)

105

0.7

BION rank in peer group

1

8

8

6

3

3

1

1

1

Source: Morningstar, Bloomberg, Edison Investment Research. Note: *Performance at 30 September 2023 based on ex-par NAV. TR, total return. Net gearing is total assets less cash and equivalents as a percentage of net assets.

BION is the largest fund in this grouping. The performance of most members of the group has struggled over the past year as biotech and healthcare more generally have been out of favour with investors. Over the longer term, the funds with a broader healthcare remit have done best in NAV total return terms over the past few years, as the biotech sector devalued faster than healthcare. BION’s recent performance has lagged due to its mid- and small-cap bias, as these sectors have underperformed the market, but long-term performance remains strong BION ranks third among its peers and has outperformed the average over 10 years on an NAV total return basis. One key differentiator for BION is that it is the only company among its peers to pay a substantial dividend, which is set at 5% of the average share price over December each year. The company’s ongoing charge is close to the average of its peers, and it is the only fund currently trading at a premium. BION has the highest level of gearing among its cohort.

Portfolio allocation

BION is differentiated from its NBI benchmark by its concentrated portfolio of c 30 stocks. At end-September 2023, the company’s top 10 holdings comprised 78% of its NAV (Exhibit 7). The company also differs from the NBI by being able to hold up to 10% of its assets in private equity. Investments are chosen according to a multi-level due diligence process with a focus on standard financial parameters, as well as the competitive environment, development pipelines, patents and end-user perception.

BION’s managers have adopted a more defensive investment stance over the past year, given the high interest rate environment and the generally poor investor sentiment towards the sector. Specifically, they have focused on well-financed, profitable companies, and eschewed more risky ventures, which are more vulnerable in the ‘risk-off’ climate. However, a defensive stance does not mean an inactive one. On the contrary, the low valuations of the biotech sector in general, and in small- and mid-cap names particularly, have presented the team with opportunities to add to existing holdings at attractive prices and consider potential new portfolio holdings, although no new names were added to the portfolio in Q2 or Q3 and BION has not participated in any takeover activities year-to-date.

Notable recent transactions include an addition to the company’s holding in Black Diamond Therapeutics, a targeted oncology player. Promising clinical data on BDTX-1535, a treatment for lung cancer, allowed Black Diamond to undertake a capital raising. BION made an additional investment to maintain its 15% ownership stake in the company. Exposure to Black Diamond was raised further via open market transactions. The managers like this company in part due to its deployment of massive computational power and machine learning to deepen its understanding of disease processes and speed up the identification and development of new treatments. BION also participated in the US$40m private placement of Molecular Templates, allowing the company to fund its pipeline into 2024.

The BION team took advantage of the sharp sell-off in Mersana mentioned above to increase its position, as it maintains its high conviction in the company’s longer-term prospects. They also added to positions in Relay Therapeutics, Celldex, Macrogenics and Sage. These transactions were funded by some modest profit-taking on Vertex, Ionis and Incyte.

Exhibit 7: Top 10 holdings

Company

Country

Main clinical focus

Portfolio weight %

31 September 2023

31 September 2022*

Change (pp)

Ionis Pharmaceuticals

US

Genetic diseases

13.3

11.8

1.5

Argenx (ADR)

Netherlands

Orphan diseases

11.7

11.5

0.2

Vertex Pharmaceuticals

US

Orphan diseases

10.4

9.0

1.4

Neurocrine Biosciences

US

Neurological diseases/women's health

8.5

9.1

(0.6)

Intra-Cellular Therapies 

US

Neurological diseases

6.9

6.3

0.6

Moderna Therapeutics

US

mRNA platform

6.2

7.3

(1.1)

Alnylam Pharmaceuticals

US

Genetic diseases

5.8

5.0

0.8

Incyte

US

Oncology

5.7

6.8

(1.1)

Sage Therapeutics

US

Neurological diseases

5.0

3.2

1.8

Revolution Medicines

US

Oncology

4.4

N/A

N/A

Top 10 (% of holdings)

78.0

73.0

-5.0

Source: BB Biotech, Edison Investment Research, Bloomberg, Morningstar. Note: *N/A where not in end-September 2022 portfolio.

Exhibit 8: Portfolio breakdown by technology

Exhibit 9: Portfolio breakdown by market cap

Source: BB Biotech, at 31 September 2023

Source: BB Biotech, at 30 June 2023

Exhibit 8: Portfolio breakdown by technology

Source: BB Biotech, at 31 September 2023

Exhibit 9: Portfolio breakdown by market cap

Source: BB Biotech, at 30 June 2023

These portfolio changes have not had a dramatic impact on portfolio structure. BION’s top 10 holdings are largely unchanged over the past year (Exhibit 7) – a strong indicator of the managers’ high conviction in the portfolio’s key positions. Most of these top 10 holdings are revenue-generating companies and the team expects the remainder to become cash flow-positive in the near future. As shown in Exhibit 8, BION’s portfolio exposure by technology is still led by the small molecule category, followed by RNA, antibody and gene and cell therapy. Mid-cap stocks ($5–30bn still dominate the portfolio, comprising 54.0%, followed by small caps (up to $5bn), totalling 29%. Large-cap stocks (>$30bn) make up the remaining 17.0% (Exhibit 9).

General disclaimer and copyright

This report has been commissioned by BB Biotech and prepared and issued by Edison, in consideration of a fee payable by BB Biotech. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2023 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

General disclaimer and copyright

This report has been commissioned by BB Biotech and prepared and issued by Edison, in consideration of a fee payable by BB Biotech. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2023 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

More on BB Biotech

View All
Healthcare business concept, Medical examination and growth graph data of business on tablet with doctor's health report clipboard on background.

Investment Companies

BB Biotech — A cutting-edge sector and a high dividend

Healthcare business concept, Medical examination and growth graph data of business on tablet with doctor's health report clipboard on background.

Investment Companies

BB Biotech — Picking growth at good value

Investment Companies

BB Biotech — Great valuation potential

Latest from the Investment Companies sector

View All Investment Companies content

Research: Healthcare

SIGA Technologies — EU gateway to tap into new international orders

SIGA Technologies has announced the formation by the European Commission of a joint procurement mechanism to source oral TPOXX initially involves 13 countries and is open to all countries in the EU and European Free Trade Association (EFTA). This is in anticipation of an initial $18m order of TPOXX in the next 60 days from EU/EFTA member countries; As such, management expects total (global) orders of $164m in FY23. This development allows participating EU/EFTA member countries to acquire courses of oral TPOXX in the near term and efficiently order additional quantities, provided the minimum quantity thresholds are met. While we expect the company’s near-term (H223 and FY24) revenues to be dominated by the replenishment of US government stockpiles, the announced European joint procurement mechanism establishes an important gateway to access an important market and creates longer-term upside revenue potential. Management maintains its FY23 pre-tax operating income guidance of $90–100m.

Continue Reading

Subscribe to Edison

Get access to the very latest content matched to your personal investment style.

Sign up for free