BB Biotech AG: Profitable And Late-Stage Biotech

BB Biotech AG (BION) is a Swiss-based investment company investing in mid- to large-capitalisation biotech companies. Over the past, year BION’s net asset value beat comparable indices and was more than 10% ahead of its benchmark, the NASDAQ Biotechnology Index. In 2012, BION resisted an attempt to unitise the company and implemented a strategy to reduce its discount. The managers believe their stocks are attractively valued and see the prospect of M&A activity, driven by patent expirations in the pharmaceutical industry. BION’s portfolio contains a number of drugs in the later stages of development and these could help drive further NAV growth.

Investment strategy: Profitable and late-stage biotech
BION aims to generate a total return of 15% pa over the long term by investing in a focused (20-35 stocks) global portfolio of biotech companies whose products address areas of significant unmet medical need and are capable of generating above-average sales and profit growth. These tend to be either already profitable or have drugs in the late stages of development.

Sector outlook: Positive on M&A and new developments
In 2012, 14 new drugs were approved by the FDA and the managers are optimistic that 2013 will be at least as good a year for product approvals. The managers believe regulators are taking less time to approve products. They see a number of promising therapies on the horizon, including oral treatments for Hepatitis C, drugs to tackle aggressive cancers and drugs aimed at rare diseases, and they are optimistic about new technology platforms based on RNA interference and antibody drug conjugates to tackle malignant cells.

Valuation: Unitisation rejected, capital return reinstated
At 21.8%, BION’s discount is narrower than its three-year average of 22.1%, but wider than its UK-listed peer group. In November 2012, an unsolicited approach from Vontobel offering to unitise the fund (for a substantial fee) was withdrawn as it would have had adverse tax consequences for BION shareholders. BION’s investment approach could also have been compromised in an open-ended structure. It would have hindered the managers’ ability to take long-term views and might have necessitated the maintenance of large cash balances causing a cash drag on returns. In March 2013, BION will reinstate its programme of capital distributions, targeting 5% per annum, and aims to buy back an additional 5% of its share capital each year.

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