BB Biotech — Picking growth at good value

BB Biotech (BION)

Last close As at 21/05/2024

CHF40.70

−1.00 (−2.40%)

Market capitalisation

CHF2,311m

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Research: Investment Companies

BB Biotech — Picking growth at good value

According to BB Biotech’s (BION’s) investment team, the biotech industry remains in a very good position. Following a sell-off in the last two years, valuations are still close to the levels seen three years ago, reflecting ongoing challenges and despite the fundamental industry strength. In the sector, BION is differentiated from the Nasdaq Biotechnology Index by its concentrated portfolio (c 30 stocks). The investment team anticipates that 2023 will include multiple catalysts for the sector and for BION portfolio companies, including product launches, important clinical trial results, licensing deals and renewed M&A activity. During 2022 the investment manager, Bellevue Asset Management, strengthened the investment team with three new members (two data scientists and one neurologist).

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Investment Companies

BB Biotech

Picking growth at good value

Investment companies
Biotechnology equities

3 March 2023

Price

CHF54.40

Market cap

CHF3,014m

AUM**

CHF2,517.9m

NAV*

CHF45.45

Premium to NAV

19.7%

*Including income. At 2 March 2023.

Yield

5.2%

Ordinary shares in issue

55.4m

Code/ISIN

BION/CH0038389992

Primary exchange

SIX

AIC sector

N/A

52-week high/low

CHF70.10

CHF51.00

NAV* high/low

CHF39.10

CHF56.00

*Including income

Gearing (at 31 December 2022)

113.6%

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 managed on a bottom-up basis, with a focused c 20–35 stock portfolio.

Bull points

BION has high return potential, having recently increased exposure to new and existing holdings at much lower valuations, compared to two years ago).

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

Fundamentals for the sector remain strong.

Bear points

Biotech can be vulnerable to swings in market sentiment as generalist investors retrench.

The past 24 months has shown underperformance by biotech-focused versus broader healthcare listed funds amid high inflation and rising interest rates.

While the US political backdrop seems benign, there is always a risk of intervention on drug pricing.

Analyst

Victoria Chernykh

+44 (0)20 3077 5700

BB Biotech is a research client of Edison Investment Research Limited

According to BB Biotech’s (BION’s) investment team, the biotech industry remains in a very good position. Following a sell-off in the last two years, valuations are still close to the levels seen three years ago, reflecting ongoing challenges and despite the fundamental industry strength. In the sector, BION is differentiated from the Nasdaq Biotechnology Index by its concentrated portfolio (c 30 stocks). The investment team anticipates that 2023 will include multiple catalysts for the sector and for BION portfolio companies, including product launches, important clinical trial results, licensing deals and renewed M&A activity. During 2022 the investment manager, Bellevue Asset Management, strengthened the investment team with three new members (two data scientists and one neurologist).

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

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

Why invest in BION now?

As small- and mid-cap companies (<$30bn market cap, c 84% of BION’s portfolio) sold off more than large caps over the past two years, BION’s team believes there are plenty of compelling opportunities. The top 10 mid-cap portfolio companies, including Ionis Pharmaceuticals, Neurocrine and Incyte (combined, c 28% of the portfolio at 31 January 2023), own attractive assets and technology, which could trigger renewed interest from investors or from strategic partners as M&A targets.

The analyst’s view

BION is a large and well-established (since 1993) player in biotech investment, with a positive long-term track record (annualised CHF 10-year NAV and share price total returns of c 13% and c 17%, respectively, versus c 12% for the Nasdaq Biotechnology Index). BION’s high-conviction portfolio of quality stocks (c 80% of the profitable or at breakeven portfolio companies) outperformed most of the peers over the 12 months to end December 2022 (see page 6), as high-growth stocks began gaining momentum. Whilst risks remain, BION with its focus on innovative companies should appeal to long-term investors.

Valuation and dividends

BION’s current 19.7% premium to NAV is close to its historical average of c 19% over one year and above 14% over five years. On 20 January 2023 the company announced that the board will propose a regular dividend of CHF2.85 per share at the annual general meeting on 23 March, corresponding to 5% of the average volume weighted share price of December 2022, consistent with the dividend policy introduced in 2013.

The fund manager: Bellevue Asset Management

The manager’s view: Expecting a pick-up in biotech in 2023

Bellevue believes that the public market sell-off has been overdone and the biotech sector is currently undervalued. In this environment, the team has been identifying new potential portfolio holdings as well as adding to existing holdings at attractive prices.

The investment manager highlights that 2022 was a turbulent year for the world, characterised by increasing inflation, rising interest rates, the war in Ukraine, economic slowdown in China and heightened geopolitical uncertainty. The broader stock market had a rough year in 2022, with European and US stock indices down by double-digit percentage points, driven by devaluation of high-growth, and particularly technology, stocks. The manager believes that flight from growth into value sectors and into diversified, large profitable companies was a major theme for 2022. The biotech sector also sold off in 2022. Small- and mid-cap stocks were hit hardest, while most large-cap companies have held up better in a turbulent macro environment.

Nevertheless, in Q422 the picture for the biotech sector brightened. BION’s portfolio holdings demonstrated increased activity, including clinical results and regulatory decisions announcements, licensing deals and some takeovers.

As a result of lower valuations amid the 2022 market sell-off, the BION team believes that the current volatile market provides it with attractive investment opportunities. Fundamentals in the biotech sector remain strong and the team is seeing many positive developments across BION’s portfolio of companies. The manager, Bellevue, gained timely exposure to a number of companies making clinical and commercial progress with autoimmune therapies. For example, BION had achieved a paper gain of $277.6m (as at the end of September 2022, on its now second top holding Argenx, an investment. There are currently three companies focused on autoimmune disease indications in the portfolio, including Argenx, which has further scope for growth with the immunomodulatory activity success of its drug Vyvgart.

The team remains optimistic that growth equities will come back into favour and the progress within innovative portfolio companies will continue to support BION’s performance. While higher capital costs are becoming the new reality for biotech companies, the manager notes that the industry is adapting, as platform companies with multiple product lines run hybrid models that are a mix of partnerships and fully owned assets, to keep costs under control.

Bellevue says that with M&A activity still at low levels, some opportunistic takeover activity in Q422 was focused on commercial-stage companies and, according to the manager, lifted the acquisition targets’ prices towards all-time highs thanks to the premiums offered. The investment manager anticipates more M&A deals with biotech by large pharma companies.

BION’s investment team head, Daniel Koller, believes that technology remains the basis to transform many disease areas. This also applies to the COVID-19 pandemic. He believes that from now on, the world will be balancing between the pandemic and endemic stages in terms of COVID-19. Hence the focus on vaccine development continues, given the emergence of virus mutations, which may necessitate more frequent vaccine boosters than had initially been expected. Vaccines from Moderna, BioNTech/Pfizer, Novavax and Janssen have largely been founded on biotech innovation, even when they have been developed using the capabilities of major pharma companies. Further developments in the space also led to new additions to BION’s portfolio.

Investment management team

Bellevue’s investment management team, headed by Dr Daniel Koller, comprises nine biotech specialists with a successful track record. The team’s academic expertise and extensive experience, its long history of collaboration and interest in all fields of medicine as well as in biochemistry and business fundamentals ensure an inspiring and constructive interdisciplinary dialogue within the team and with the board of directors as well as with external experts such as physicians and analysts.

During 2022 Bellevue strengthened the team with three new members, adding to the scientific as well as artificial intelligence (AI) and digital expertise. Dr Can Buldun, who joined the company as data scientist, was a computational scientist at Roche, focusing on data science and software solutions for next-generation antibody engineering. Dr Olivia Woolley also joined as data scientist. Previously she worked at Novartis’ technical research and development team. Prior to that she was a postdoctoral researcher at the Swiss Federal Institute of Technology (ETH), Zurich, in the area of digital epidemiology and complex networks. Dr Leonidas Georgiou, who joined as a portfolio manager, previously worked as a biotechnology VC analyst at Hadean Ventures in Norway, covering European startups in pharma, medical device, diagnostic and digital health verticals, and holds a PhD in neuroscience.

Portfolio

The portfolio had 31 holdings at 31 January 2023, unchanged from 31 July 2022. Eight of the top 10 holdings retained their positions during the past six months, with the top 10 concentration at 74.3% at 31 January 2023. This indicates the manager’s strong conviction in key positions, which have been in the portfolio for some time (more than three years for most). Two-thirds of the portfolio is invested in eight revenue-generating companies, four of which have shown sustained profits for many years; the remainder have strong balance sheets and the team expects them to be cash flow positive in the near future.

Exhibit 1: Top 10 holdings

Company

Country

Main clinical focus

Portfolio weight %

31 January 2023

31 July 2022*

Change (pp)

Ionis Pharmaceuticals

US

Genetic diseases

11.0

11.8

(0.8)

Argenx (ADR)

Netherlands

Orphan diseases

10.2

11.5

(1.3)

Neurocrine Biosciences

US

Neurological diseases/women's health

9.9

9.1

0.8

Moderna Therapeutics

US

mRNA platform

8.2

7.3

0.9

Vertex Pharmaceuticals

US

Orphan diseases

8.1

9.0

(0.9)

Incyte

US

Oncology

7.0

6.8

0.2

Alnylam Pharmaceuticals

US

Genetic diseases

6.4

5.0

1.4

Intra-Cellular Therapies 

US

Neurological diseases

5.3

6.3

(1.0)

Myovant Sciences

US

Oncology

4.8

N/A

N/A

Revolution Medicines

US

Oncology

3.4

N/A

N/A

Top 10 (% of holdings)

74.3

73.0

1.3

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

As shown in Exhibit 2, BION’s portfolio exposure by technology is led by the small molecule category followed by RNA, antibody and gene and cell therapy.

The team is increasingly focused on emerging technologies that could lead to novel treatment methods, with attractive therapeutic profiles and substantial economic rewards. These technologies include RNA platforms and cell and gene therapies. While the small molecule and antibody areas of biotechnology have been around the longest, the team has been finding exciting new opportunities in these areas, such as targeted oncology player Black Diamond Therapeutics in small molecules and antibody-focused Relay Therapeutics. Both companies are deploying massive computational power and machine learning to deepen the understanding of disease processes and speed up the identification and development of new treatments.

Exhibit 2: Portfolio breakdown by technology

Exhibit 3: Portfolio breakdown by market cap

Source: BB Biotech, at 31 January 2023

Source: BB Biotech, at 31 December 2022

Exhibit 2: Portfolio breakdown by technology

Source: BB Biotech, at 31 January 2023

Exhibit 3: Portfolio breakdown by market cap

Source: BB Biotech, at 31 December 2022

The proportion of the portfolio in large-cap companies ($30bn+) was 16.3% of the total (at end June 2022). The bulk of the portfolio consists of the $5–30bn mid-cap segment (51.2%) and small (up to $5bn market cap) companies (32.6%) (Exhibit 3). Whilst 34.5% of portfolio companies are already profitable, 45.6% are financed to break even and have at least one product on the market. 19.3% of companies have drugs at an early stage of development and a strong pipeline of new products ready to be introduced to the market.

During Q422, the investment team made no new investments, but added to existing portfolio positions. These included top 10 holding Moderna, an example of a growth story with a strong balance sheet, which has become a core portfolio holding over the last two years. Following its SARS-CoV-2 vaccine success, Moderna obtained the funds to continue developing its mRNA-based technology platform for use in many more indications. The manager retains a strong conviction in the business and added to its position as the share price weakened on the investor community’s assumption that success in its mRNA vaccine for SARS-CoV-2 would be hard to repeat.

During Q222 the team initiated a position in Celldex Therapeutics, a US company. Celldex is exciting for the team because of its most advanced clinical candidate, antibody agent barzolvolimab (CDX-0159). Barzolvolimab is the first antibody agent designed to inhibit mast cell activation, the body’s reaction that can cause allergies, angioedema and hives (urticaria). Barzolvolimab is currently in Phase II clinical trials for the treatment of chronic urticaria. If clinical trial outcomes are favourable, the drug might be approved for other skin conditions and for some gastrointestinal disorders as well.

Most portfolio additions in FY22 focused on oncology companies, such as Revolution Medicines, Fate Therapeutics, Black Diamond Therapeutics and Essa Pharma, all topped up by the team following valuation dislocations. Additions in Macrogenics and Mersana followed significant pipeline deals strengthening the companies’ balance sheets. The team added to its holding in Relay Therapeutics following positive clinical data reports for the firm’s FGFR2 asset. BION also added to its positions in Incyte and genetic medicine company Ionis (both are top 10 holdings). The investment management team took profits in Neurocrine following a rebound in sales of one of the company’s products, Ingrezza, and from Alnylam and Vertex, each trading close to their all-time high share prices.

Several holding companies have released promising clinical trial data. Esperion announced positive cardiovascular outcomes for its drug Nexletol. Moderna announced that its novel mRNA vaccines achieved strong neutralising antibody titers against multiple Omicron variants. Trial outcomes from top holding Ionis showed that treatment with bepirovirsen resulted in sustained clearance of hepatitis B surface antigen and virus. Other positive clinical trial announcements came from Arvinas, Neurocrine and Celldex Therapeutics.

Multiple BION portfolio companies also received product approvals during the past three years. Bellevie expects more approvals during 2023, including mRNA seasonal flu and RSV infection – both from Moderna, Zuranolon post parfum depression and major depressive disorder – both from Sage and Tofersen drug against lateral sclerosis from Ionis.

Performance: Gaining momentum

Exhibit 4: 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 (%)

28/02/19

6.1

6.0

10.5

15.5

3.4

6.5

29/02/20

(12.2)

(12.1)

(1.1)

3.1

(8.7)

2.2

28/02/21

52.4

47.1

29.6

14.2

5.2

21.6

28/02/22

(21.3)

(30.9)

(17.4)

14.4

13.5

12.7

28/02/23

(9.9)

(0.2)

5.0

0.4

(0.3)

(4.9)

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

As shown in Exhibit 4, BION has outperformed the Nasdaq Biotechnology Index in share price terms and NAV terms in two of the last five discrete 12-month periods to 31 January (all in Swiss franc terms). The last 24 months to end-February 2023 were very challenging for the biotech sector as investors preferred to reduce exposure to a sector they perceived as risky and volatile. As a concentrated fund (31 positions), BION lagged the index during that period, but increased appetite for risk over the past few months saw BION’s NAV outperforming the index. Exhibit 5 (right-hand side) shows that BION has outperformed the index over the long term, with its share price and NAV generating annualised returns of c 17% pa and c 13% pa, respectively, over the last 10 years.

Exhibit 5: Investment company performance to 28 February 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.

During the falling market of 2021 and 2022 investors switched to larger companies, de-risking their exposure, and BION’s focus on small and mid-sized businesses contributed to its underperformance relative to the index during the past three and five years. An additional detractor from performance in the past three and five years (ended 28 February) was top 10 holding Moderna, which suffered from the market sell-off. The investment managers retain a strong conviction in Moderna’s stock.

More recent performance has been encouraging. As the biotech market began its recovery over the last few months, BION’s share price performed close to the Nasdaq Biotechnology Index over the past one- and three-month periods (Exhibit 6). A number of portfolio companies, including the top 10 holdings Ionis Pharmaceuticals, Vertex Pharmaceuticals and Argenx (c 29% of the portfolio at 31 January 2023), two of which are growth mid-cap companies, outperformed the index.

Exhibit 6: 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

(2.6)

(1.1)

(5.9)

(14.3)

(4.0)

(18.0)

54.0

NAV relative to Nasdaq Biotech TR CHF

(2.6)

(6.2)

(10.0)

(5.0)

(9.9)

(23.1)

6.4

Price relative to MSCI World Health Care TR CHF

(5.0)

(1.4)

(3.9)

(10.3)

(17.6)

(35.5)

48.5

NAV relative to MSCI World Health Care TR CHF

(5.0)

(6.4)

(8.1)

(0.6)

(22.7)

(39.5)

2.6

Price relative to MSCI World CHF

(6.7)

(7.2)

(4.4)

(5.3)

(17.1)

(29.0)

75.0

NAV relative to MSCI World CHF

(6.7)

(11.9)

(8.5)

4.9

(22.2)

(33.4)

20.8

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

Peer group comparison

BION is not included in the AIC’s Biotechnology & Healthcare sector owing to its primary listing being in Switzerland, but in Exhibit 7 we present it and fellow Swiss company HBM Healthcare Investments (HBMN) alongside the members of the AIC peer group, which provides a relevant comparison. Within this group there are four funds (BION, Biotech Growth Trust (BIOG), International Biotechnology Trust (IBT) and more recently launched RTW Venture (RTW)), that focus primarily on biotech stocks, and four (BB Healthcare, HBM Healthcare Investments (HBMN), Polar Capital Global Healthcare and Worldwide Healthcare Trust) that have a broader healthcare remit and generally include some biotech stocks alongside those 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 7: Selected peer group at 3 March 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

3,013.8

(0.1)

2.4

(4.5)

260.2

1.27

No

19.7

114

5.0

BB Healthcare

1,035.5

(6.8)

30.2

62.4

1.08

No

(6.0)

100

3.5

Biotech Growth Trust

411.0

(2.6)

(9.4)

12.1

133.1

1.06

Yes

(8.3)

108

0.0

HBM Healthcare Investments

1,547.9

(6.3)

35.5

100.4

503.2

1.03

Yes

(20.7)

103

0.0

International Biotechnology Trust

314.9

7.3

17.3

28.4

186.3

1.32

Yes

(7.2)

105

0.0

Polar Capital Global Healthcare

448.3

1.7

34.4

52.7

132.1

0.92

Yes

(5.3)

107

0.6

RTW Venture

262.9

15.6

31.5

1.89

Yes

(19.3)

97

0.0

Syncona

1,254.9

(6.1)

(6.4)

21.5

66.3

0.48

No

(17.9)

100

0.0

Worldwide Healthcare Trust

2,278.5

(4.0)

6.6

26.8

192.6

0.85

Yes

(9.1)

101

0.8

Simple average (nine funds)

1,174.2

(0.1)

15.8

37.5

210.5

1.10

(8.2)

104

1.0

BION rank in peer group

1

4

7

8

2

3

1

1

1

Source: Morningstar, Bloomberg, Edison Investment Research. Note: *Performance at 28 February 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 ranks top within nine funds over one year on the NAV TR basis. As investors began returning to the biotech sector during the second half of 2022, BION’s high-conviction portfolio of quality stocks outperformed five of nine peers. The portfolio managers trimmed a few positions at a profit and this contributed to outperformance relative to peers.

In general, 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. Three listed biotech companies lagged the peer group average in NAV total return terms over the past three and five years. Over three and five years, BION ranks sixth and eighth, respectively, among the peers.

Long-term performance remains strong. Over 10 years BION is one of the two funds to have effectively more than tripled investors’ money, while only HBMN has surpassed BION’s stellar 311.9% NAV total return over 10 years (to end January 2023). The two funds have historically looked quite different, with HBMN having a broader remit, as well as more stocks and private companies within the portfolio.

Discount: Still at a premium amid market volatility

Having historically stood at a double-digit discount to NAV until early 2016, for the last five years BION’s shares have traded at a premium on average. The move to a premium was arguably underpinned by strong investor interest in the biotech sector, buying by passive investors following index inclusion and the high distribution policy. As biotech stock valuations fell during 2021 and 2022, BION reached a record-high premium to NAV of c 40% in January 2022, and having fallen to single digits premium by Q422, has climbed back to stand at c 19.7% premium currently.

Exhibit 8: Premium/discount over five years

Source: Refinitiv, Bloomberg, Edison Investment Research

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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.

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General disclaimer and copyright

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United Kingdom

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Research: Metals & Mining

Wheaton Precious Metals — Adjusting for ‘major maintenance’ at Salobo in Q4

On 21 February 2023, Wheaton Precious Metals (WPM) announced that it had produced and sold 286,985oz and 293,234oz gold, respectively, and 23,979koz and 21,570koz silver, respectively in FY22. Subject to any historical restatements in its FY22 financial results next week (possible but unlikely and very unlikely to be material), this implies that it produced and sold 66,025oz and 68,996oz gold and 5,353koz and 4,935koz silver, respectively, in Q4. In the case of gold, in particular, this was below our prior forecast (see Exhibit 1), but is consistent with the 14.7% quarter-on-quarter decline in copper production at Salobo announced by Vale on 31 January on account of ‘major maintenance’. This note updates our forecasts for Q422 and FY22 in the light of WPM’s actual production and sales numbers and for FY23 in the light of maiden, detailed guidance.

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