BB Biotech AG: Sentiment Improving, Valuations Rising

Performing biotech fund at a discount
BB Biotech AG, (BIONn) is a Switzerland-based investment company investing in mid- to large-cap biotech companies. Its strong performance has continued during the last 12 months (BION’s share price and NAV are c 16% and c 29% ahead of the benchmark NASDAQ Biotechnology Index respectively). The managers believe that new products being developed by portfolio companies could drive an acceleration of their average earnings, and M&A could enhance returns. BION’s significant discount and capital distribution policy (5% cash distribution, up to 5% buybacks per year) also merit attention (see page 7).



Investment strategy: Profitable and late-stage biotech
BION aims to generate a total return of 15% pa, over the long term (three to five years plus), by investing in a focused portfolio (20-35 stocks) of global biotech companies. The managers look for 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. A modest level of gearing (typically 5-8%) is used to enhance returns over the longer term. Natural turnover is relatively modest (15-20% a year).

Outlook: Sentiment improving, valuations rising
The healthcare and biotech sectors benefit from a favourable demographic backdrop with increasing demand from ageing populations, most noticeably in the western world, and growth in population and utilisation, particularly in emerging markets. Biotech has provided a strong performance during the last five years and has experienced a significant re-rating during the last two. Valuations multiples have expanded, potentially leaving the sector more open to a correction but, for those investors able to take a longer-term view, the manager believes valuations are attractive and large-cap biotech’s current P/E premium over large-cap pharma is justified because of biotech’s superior growth prospects.

Valuation: Comparable to long-term averages
BION’s discount of 24.4% is broadly in line with its three-year average of 21.3% and its five-year average of 22.4%. BION’s board has committed to return up to 10% of capital each year (5% capital distribution/ up to 5% share buy-backs). Given the strength of the portfolio performance both in absolute and relative terms, it is surprising that the discount has not already narrowed. BION’s discount is appreciably above the average for its peer group of 14.1% (3.3% excluding BION).