BB Biotech : investment trust review highlights long t...

Launched in 1993, BB Biotech (BION) is one of the largest specialist funds investing in the fast-growing sector of
biotechnology. It is managed by Bellevue Asset Management, a healthcare investment manager headquartered in Switzerland, and has an executive board of industry experts who oversee major investment decisions. BION has a strong focus on innovation, and primarily aims to achieve capital growth for its investors with a total return target of around 15% per annum.

BB Biotech - Key Stats
Price	CHF 84.40
Market cap	CHF 4,675m
NAV*	CHF 75.10
Premium to NAV	12.4%
Yield	4.3%

* Including income. As at 26 February 2021.

Although returns can be volatile, as biotech companies' share prices can move significantly on positive or negative clinical developments, the fund's long-term track record vindicates its approach, with sector-beating net asset value (NAV) total returns of more than 630% in Swiss franc terms over 10 years.

BION is incorporated and listed in Switzerland, and also has listings on German and Italian exchanges. The fund measures its performance against the Nasdaq Biotechnology Index, although its concentrated portfolio of 30-35 stocks, with an official range of 20-35, and greater focus on mid-caps means its performance is likely to differ significantly from that of the benchmark.

The portfolio blends earlier stage biotech companies with those that already have products on the market and are profitable. It has five to eight core holdings.

The current five are: Ionis, Moderna, Neurocrine, Argenx and Incyte. Up to 10% of assets may be invested in unquoted companies, although none are currently held, following the IPO of Moderna Therapeutics in December 2018.

Performance

BION outperformed the Nasdaq Biotechnology Index in both share price and NAV terms in three of the past five discrete 12 month periods to 31 January, all in Swiss francs. This was particularly notable in the most recent 12 months, when the index posted gains of over 30% despite the widespread market volatility caused by the pandemic.

Drivers of performance in 2020 included positive clinical readouts from the likes of Moderna, whose innovative MRNA vaccine for Sars-Cov-2ˑ drove the share price to more than double in November 2020 alone.

While it subsequently fell back in December, perhaps as a result of investor tendency to 'buy the rumour, sell the news', January 2021 was another strong month after the vaccine gained approval for emergency use on both sides of the Atlantic.

Notwithstanding these periods of volatility, moderna's share price has risen by more than 500% in U­S dollar terms over the 12 months to February 2021.

The continued pace of M&A activity was also a boon for BION's portfolio. The managers tendered their position in Myokardia in November 2020 following a $13.1ːbn (£9.4bn) takeover bid by Bristol-Myers Squibb, with the $248m proceeds from the sale representing a profit of $205m over the life of the holding.

With both clinical innovation and corporate activity set to continue in 2021, BION's 2020 results - share price and NAV total returns of 19.3% and 24.3% respectively - and recent portfolio activity boosting investment in innovative earlier-stage companies should provide it with a solid platform from which to benefit from the positive fundamentals of the biotechnology sector.

However, investors must bear in mind the potential for further equity market volatility remains elevated given the ongoing pandemic and the generally high level of stock market valuations.

Investment strategy - where science and tech meets market potential

The universe of established and developing biotech companies globally, from which BION's managers construct the portfolio, has grown to more than 1,000 stocks, so a variety of filters are employed to arrive at the final list of 30-35 companies.

The team begins by focusing on clinical areas where advances in science and technology co-exist with strong market potential, looking at factors such as indication and mechanism of action. While the clinical side is the main driver of investment decisions, companies considered for inclusion in the portfolio should also have the potential to achieve above average sales and profits growth.

The team produces an investment proposal for each potential holding that passes through the due diligence process, which is then presented to BION's executive board. The proposal includes financial models, clinical data, recommendations on purchase price and position size (new positions tend to come into the portfolio at 0.5-4.0% of NAV), and estimates of potential upside and downside. The executive board signs off on all new positions, complete exits and major changes in weightings.

While the investment universe is global, BION has a bias towards the US, as this is where the majority of the world's biotechnology companies are based. The portfolio tends to focus away from the large-cap 'evergreen' stocks that dominate the Nasdaq Biotechnology Index, preferring mid-cap companies that have greater growth potential, but are not necessarily higher risk, as many have products on the market already and may be less exposed to patent expiries.

The team actively manages the fund, trimming positions to lock in gains and keep them from becoming too large, and topping up underperforming holdings. Complete exits may occur where a stock has reached its valuation target, or if poor clinical data or regulatory outcomes call the original investment thesis into question.

The manager's view - 'A springboard for future growth'

BION investment team head Daniel Koller argues 2020 was the year in which the biotechnology sector really proved
its worth, with multiple innovative technologies driving the development of safe and effective Covid-19 vaccines in record-breaking time.

However, while the rollout of vaccination programmes means we can begin to look to life beyond lockdown, Koller warns the strain on global healthcare systems as a result of the pandemic will lead to consequences in the form of late diagnosis and delayed treatment of other disorders. In such a situation, the development of innovative new treatments for conditions such as cancer is more important than ever.

Despite the enormous efforts deployed by the biotech sector in combatting coronavirus, the pace of innovation in other areas has remained robust, with 53 new treatments, not including emergency use authorisations for Covid-19 vaccines, approved by the US Food and Drug Administration (FDA) during 2020, only a little behind the record 59 approvals in 2018, and an increase on the 48 seen in 2019. These included the go-ahead for 12 products developed by BION portfolio companies.

A further 10 treatments from portfolio companies could get the green light from the FDA in 2021, with Exelixis's cabozantinib already having received approval for use in renal cell carcinoma. Looking ahead, Koller expects further proof of the worth of new technologies, on which BION has increasingly focused in recent years. These include gene editing, where a one-time treatment developed by Vertex and CRISPR Therapeutics has provided a functional cure for beta thalassaemia and sickle cell disease in all trial patients so far.

A recently added holding, Beam Therapeutics, is also targeting beta thalassaemia and sickle cell disease, although it is still at the preclinical stage of development. While the Vertex/ CRISPR Therapeutics approach is rather invasive and would be expensive to administer, the promise of an effective cure for the millions of people worldwide affected by these disorders is hard to ignore. Koller says further technological advancements will be key in improving ease of use and administration routes, and lowering manufacturing and treatment costs.

Vertex has already had commercial success with its treatments for cystic fibrosis, which have revolutionised the
lives of many people affected by this life-limiting condition.

Moderna's rapid development of its Covid-19 vaccine was the standout story for BION in 2020, validating the investment case for a stock that the team bought in 2018 when it was a tiny, unlisted company, and providing Moderna with the funds to continue developing its MRNA-based technology platform for use in many more indications.

However, the team continues to see many new opportunities in emerging technologies targeting a broad range of clinical indications, providing a springboard for future growth as we move - hopefully - beyond the crisis
stage of the pandemic.

Source: Sarah Godfrey and Mel Jenner at researchers Edison Group

Previous review: BB Boiotech 'different' from other biotech funds