BB Biotech — Lower rates and news flow to support recovery

After a strong start to 2024, the biotech sector consolidated in the second quarter, lagging global equity markets, which extended the strong rally that began in late 2023. Small-cap biotech companies in the under US$1bn market cap space experienced some correction in their share prices during Q224, and M&A activity in the sector, which often contributes to performance, was muted.

Against this subdued backdrop, BB Biotech’s recent performance has been mixed. In the six months ended 31 July 2024, the company returned 8.6% (in CHF in NAV terms), behind the 13.9% return of its benchmark, the Nasdaq Biotechnology Index (NBI). BION’s share price declined 2.1%. However, over the year to end July 2024, performance was stronger in absolute terms (+19.9% in NAV terms), and very close to the benchmark return of 20.1%, although BION’s share price dropped 3.1% over the period, widening the discount at which the company’s share price trades relative to its NAV. Its longer-term performance remains robust in absolute and relative terms. In the 10 years to end July 2024, BION made an average annual return of 6.9% in NAV terms and 8.0% on a share price basis, slightly above the benchmark return of 6.6%.

BION’s managers believe that many of the company’s portfolio holdings have strengthened their financial positions and de-risked their growth trajectories over recent months. They cite developments related to three of BION’s largest holdings, Alnylam Pharmaceuticals, Intra-Cellular Therapies and Agios Pharmaceuticals, which all saw substantial improvements in their medium- to long-term revenue and growth prospects following positive Phase III readouts. The most significant of these was Alnylam’s positive clinical trial result for vutrisiran, which we covered in a flash note in June 2024. BION’s managers believe that the multi-billion-dollar revenue opportunity for vutrisiran to treat cardio TTR patients places Alnylam on the path to become a large, high-growth, profitable biotech company. The stock has risen by over 50% since the results were publicised.

Other significant positive developments among portfolio holdings included:

The second quarter also saw one product approval and a notable product label addition for BION investments. Moderna gained US Food and Drug Administration (FDA) approval and a recommendation from the Centers for Disease Control and Prevention (CDC) of its RSV vaccine mRESVIA, while Argenx’s VYVGART Hytrulo, the subcutaneously administered version of Vyvgart, was approved by the FDA to treat patients with chronic inflammatory demyelinating polyneuropathy (CIDP).

BION’s returns were also bolstered to a modest extent by the devaluation of the Swiss franc against the US dollar in H124.

However, several of the company’s other small-cap holdings have detracted from performance in Q224. The most significant detractor from performance over recent months was MacroGenics, following a disappointing update for the TAMARACK study of vobra duo in prostate cancer patients. The stock subsequently lost two-thirds of its value, resulting in a 4% decline in BION’s NAV. Further safety and efficacy data are due in H224 and updates on a next-generation drug delivery program against the same target are expected in 2025. BION still holds this name in anticipation of more promising developments.

In addition:

Since our May 2024 review, BION’s main portfolio changes have involved capitalising on gains from several larger, established long-term holdings. The team took some profits on Vertex Pharmaceuticals, Argenx, Intra-Cellular Therapies, Moderna, Neurocrine Biosciences and Agios Pharmaceuticals. They also added to existing positions in several newer holdings, including Annexon Biosciences, a Q124 acquisition, and Biohaven and Immunocore, both purchased in Q423. The team also topped up a position in Celldex Therapeutics, following pipeline progress and an improvement in its balance sheet, and made one new acquisition: Edgewise Therapeutics, which focuses on developing therapeutic candidates aimed at regulating key muscle proteins, for both skeletal and cardiac muscles.

Looking ahead, BION’s managers expect several key factors to play a significant role in shaping the biotech landscape and the company’s performance. Key among these is the trajectory of interest rates, as the long-term nature of biotech investments makes their valuations especially sensitive to interest rate moves. Once US interest rates begin to track lower, biotech stock valuations are expected to benefit, and the sector is likely to attract new capital inflows.

After a slow start to the year, BION’s managers are expecting a pick-up in M&A activity in H224 and beyond. This will be driven in part by the expiry of several drug patents in coming years, which will allow generic versions of these drugs to be sold by competitors at potentially much lower prices. Large pharmaceutical companies will therefore need to seek replacement income from new patented products, including via strategic acquisitions of smaller, attractively priced biotech companies with innovative technologies and promising pipelines. Many, if not all, of BION’s portfolio holdings are potential targets for such activity.

In terms of forthcoming key milestones for BION’s portfolio holdings, in addition to the MacroGenics update mentioned above, updates are due from:

Looking further ahead, Moderna is making a significant investment in a respiratory virus vaccine franchise. Its Phase III data for the combination vaccine against influenza and COVID-19 was positive and the company is developing single injections covering double and triple combinations of influenza, RSV and SARS-CoV2, with double vaccines available in 2025 and the triple vaccine expected in 2026.

Product approvals expected in H224 include:

On the political front, the outcome of November’s US presidential election may have important implications for the healthcare sector, especially drug pricing, so investors will be monitoring developments closely.

However, overall, the managers are positive on the outlook for the sector, and their portfolio, thanks to the combination of ‘strengthening fundamentals, anticipated clinical milestones and supportive capital market dynamics’. Their confidence is manifest in the current level of portfolio gearing, which stood at 13.5% at end-Q124. This is at the high end of the company’s defined range.

The other important recent news from BION is that its lead portfolio manager, Dr Daniel Koller, has informed the board of his intention to retire at the end of 2024, after 20 years in the company’s investment management team, including 14 years as its head. Dr Christian Koch, one of the two deputy heads of the investment management team and a portfolio manager at Bellevue Asset Management since 2014, will take over from Dr Koller as head of the team at the beginning of 2025. Before joining Bellevue, Dr Koch was a sell-side pharma and biotech equity analyst at Bank am Bellevue in Küsnacht and spent three years as a research associate at the Institute of Pharmaceutical Sciences at the ETH Zurich. He holds a PhD in computer-assisted drug design from the ETH Zurich and studied bioinformatics at the Goethe University Frankfurt.

For more Edison research on the life sciences sector, please see Outlook for 2024: Life sciences – Where has the conviction gone?