Biotech sector still attractively valued despite its rally

Thursday, 24. January 2013 07:00

BB BIOTECH AG / Biotech sector still attractively valued despite its rally . Processed and transmitted by Thomson Reuters ONE. The issuer is solely responsible for the content of this announcement.

Portfolio of BB Biotech AG as of December 31, 2012

BB Biotech achieved significant outperformance in 2012

BB Biotech's portfolio holdings performed very well in 2012 and the investment company looks back on an extremely successful fiscal year. Thanks to active stock picking and clearly defined investment priorities, BB Biotech outperformed the broader market indices. Its shares gained 42.7% in CHF and 42.3% in EUR during the course of the year. A rebalancing of portfolio investments with a greater focus on mid-cap biotech companies made a tangible contribution to this good performance. BB Biotech continues to have a positive outlook for the non-cyclical biotech sector. Clinical newsflow and operating results from the companies within the portfolio should continue to be positive fundamental value drivers in 2013. After 10 years on the Board of Directors of BB Biotech AG, 9 of which as Chairman, Prof. Dr. Thomas Szucs will not be standing for re-election at the next Annual General Meeting. Dr. Erich Hunziker is proposed as the designated Chairman of the Board of Directors. The Board of Directors will propose Prof. Dr. Dr. Klaus Strein as a new director.

2012 sector review
The biotechnology sector has shown impressive growth this past year. The industry experienced successes on many levels including major new product approvals and promising clinical news. The final quarter alone saw five new drug approvals by the United States Food and Drug Administration (FDA). This brings the total number of new approvals for drugs developed by biotech companies to 14 in 2012, making it an excellent year for the industry. The continuing flow of approvals is also the basis for the industry's sustained double-digit growth. Fourth-quarter approvals included a new drug in BB Biotech's portfolio: ponatinib, Ariad's leukemia drug with high sales potential. The latest addition brings the number of newly approved drugs in the portfolio to a total of seven in 2012.

M&A activity in the biotech sector moderated somewhat in the fourth quarter: the number of takeovers was slightly below the high levels seen during the previous three quarters of 2012. That, in addition to profit-taking and uncertainty around the outcome of the US presidential elections, caused a mild correction and the sector was unable to regain its year-to-date highs from the previous quarter.

Performance overview for the year
Stock markets performed surprisingly well despite a number of worries such as the smoldering debt crisis in the euro zone, the fiscal cliff in the US, and the lackluster pace of world economic growth. The MSCI World Equity Index advanced 15.8% in USD in 2012. European indices also made good gains with the DAX, for example, up 29.1% for the year (in EUR) and the SMI up 14.9% (in CHF).

The biotech sector as measured by the Nasdaq Biotech Index performed better than other segments of the stock market. It rose by 31.9% over the course of the year. BB Biotech shareholders benefited even more thanks to astute stock selection, Net Asset Value (NAV) accretion, and a high degree of investment. BB Biotech's NAV increased 46.5% in USD, 43.7% in EUR and 42.8% in CHF. BB Biotech shares reached a high for the year of CHF 96.80 and EUR 80.24 at the beginning of October and ended the year at CHF 88.50 and EUR 72.55, which corresponded to a gain of 42.7% in CHF and 42.3% in EUR for the year.

Profit for the year amounted to CHF 368 mn and was largely attributable to the good performance of the portfolio companies. These gains were augmented by dividend income from Novo Nordisk, Actelion and the Indian investments and interest income on a loan issued to Intercell.  

Performance and portfolio changes in the fourth quarter of 2012
In the fourth quarter the portfolio companies made further progress but this was no longer acknowledged by investors. BB Biotech's NAV corrected by 7.0% in USD, 9.5% in CHF and 9.5% in EUR. The stock price corrected by 6.6% in CHF and 7.8% in EUR during the final quarter of the year. As a result, a loss of CHF 134 mn was incurred in the fourth quarter, which led to a reduction in NAV per share of CHF 11.45 compared to the third-quarter figure.

The realignment of the investment portfolio with core investments being scaled back in favor of greater exposure to promising, mid-cap biotech stocks was initiated in 2010 and actively pursued until the summer of 2011. The changes made in 2012 were therefore consistent with a normalized, long-term level of portfolio turnover. There were five additions to the portfolio in 2012: Medivation, Onyx, The Medicines Company, Intercell and IPCA, a fast growing Indian company. These new portfolio holdings had an aggregate weighting of 11.1% at the end of 2012.
Most of the capital to open these new positions stemmed from the sale of all shareholdings in Pharmasset, Micromet, Human Genome Sciences and Amylin. These four companies were taken over at attractive valuations and premiums during the course of 2012. Pharmasset was bought by Gilead in March 2012 after a public takeover bid was issued in November 2011. In March 2012 Amgen acquired Micromet, a developer of antibiotics. In June a consortium of companies consisting of AstraZeneca and Bristol-Myers Squibb acquired Amylin at a premium of more than 100% and this deal was followed by GSK's bid for Human Genome Sciences. BB Biotech recorded a total cash inflow of CHF 183.6 mn from these four transactions.

Other events in 2012
In the first half of 2012 the Board of Directors undertook, with the assistance of independent financial and legal advisors, a detailed review of all strategic options available to BB Biotech. This strategic review also included an in-depth analysis of the transaction proposed by the Vontobel Group of converting BB Biotech from an investment company into a Luxemburg-based fund. In the course of this strategic review, the Board of Directors concluded that BB Biotech's corporate strategy - which includes being a listed investment company - is in the best interests of the company and its shareholders. In mid-November, the Vontobel Group withdrew its proposal made in July. This reconfirms BB Biotech's own conclusion. Temporary uncertainty caused by the company's exclusion, and subsequent reinclusion, in the TecDax Index along with the convertible bond issue that matured in May, led to a briefly wider range of fluctuation between the share price and Net Asset Value.

The lawsuit filed by Orbimed against BB Biotech in June was settled out of court in mid-October 2012. Orbimed has withdrawn its claim for damages.    

Legal and consulting expenses increased in 2012 due to the strategic corporate review, and the Vontobel and Orbimed cases.

First cash distribution from paid-in capital reserves to shareholders planned
After a thorough review of the overall strategy, the Board of Directors announced in July 2012 that it was revising the company's capital allocation strategy and would return capital to shareholders in a tax-efficient manner so as to ensure an annual return of 5%. At the general meeting of shareholders on March 18, 2013, the Board will propose a cash distribution of CHF 4.50 per share. Moreover, the equivalent of up to 5% of equity capital will be expended annually on share buyback programs.

Quarterly update on top portfolio holdings
Celgene (+2.7%, in USD) closed the year at a price just slightly lower than its high for year after the company reported positive clinical data on Abraxane. Promising Phase III clinical trial outcomes have been announced both for metastatic skin cancer and pancreatic cancer. Abraxane in combination with gemcitabine displayed a survival benefit versus the current standard of care - gemcitabine - in subjects with advanced pancreatic cancer. These two indications could significantly expand the sales and growth potential of Abraxane from its currently approved indications.

Actelion (-7.5%, in CHF) presented Macitentan clinical data to PAH experts at this year's CHEST. The company also announced positive Phase II results for ponesimod in psoriasis and cadazolid in the treatment of clostridium difficile infections. Actelion plans to start regulatory studies for both drug candidates this coming year.  

Gilead (+10.7%, in USD) confirmed promising results for its hepatitis C virus drug, sofosbuvir (GS-7977), which has placed the company in a dominant position in the HCV development race. The recently approved HIV drugs Stribild and Complera have been successfully launched. In October, Gilead announced promising data for GS-7340 in treating HIV. GS-7340 succeeds Viread and achieves similarly effective control of virus load with fewer side effects at a much lower dose.

Novo Nordisk (+0.0%, in DKK) continued to impress investors with very solid business execution and robust sales and profit figures. An advisory panel voted in favor of potential US approval for Tresiba (insulin degludec) for managing type 1 and type 2 diabetes. Following a delay of several months, the FDA's decision is expected during in the first half of 2013.

Vertex (-25.0%, in USD) fell short of its all-time high because of uncertainty regarding its combination study in cystic fibrosis for patients carrying the F508del mutation. In addition, the market was taken by surprise by the announcement in October that Kalydeco had already reached peak US sales within just a few short months in the currently accessible patient population carrying the G551D mutation. Incivek, one of the two first-generation protease inhibitors for treating HCV, is coming under increasing pressure because more and more patients are waiting for the next generations of HCV product candidates.

Incyte (-8.0%, in USD) consolidated after its significant correction during the third quarter. However, steadily rising sales figures coupled with a slight increase in the company's guidance for 2012 sales gave the stock price some support. Another positive factor was Eli Lilly's launch of regulatory studies to test baricitinib in rheumatoid arthritis.  

BB Biotech believes Isis' share price (-25.8%, in USD) was punished too severely in the fourth quarter after the Mipomersen advisory panel voted 9-6 in favor of an approval recommendation while the European Medicines Agency recommended not to approve the drug. During the final quarter, Isis successfully expanded its neuroscience collaboration with Biogen Idec and formed an alliance with AstraZeneca to discover and develop antisense therapeutics for cancer targets.

Quarterly update on mid-cap portfolio holdings
Swedish Orphan Biovitrum, SOBI (-0.5%, in SEK) and its partner Biogen Idec announced positive data on the company's long-acting factor VIII for hemophilia A. A Phase III study demonstrated the product's efficacy and safety in controlling and preventing bleeding, for prophylaxis and perioperative planning. The associated smaller number of injections versus existing factor VIII products is a definite advantage for the factor VIII product developed by SOBI.  

Despite accelerated approval of Iclusig (ponatinib) for treating CML and ALL patients unable to tolerate, or no longer respond to, existing TKI therapies, Ariad (-20.8%, in USD) was not rewarded by investors. The label warning about arterial thrombosis and hepatotoxicity came as an unpleasant surprise to the market.      

The Medicines Company (-7.1%, in USD) achieved all endpoints with its single-dose, long-acting antibiotic oritavancin. In a Phase III study, oritavancin achieved results similar to those of vancomycin, the current standard of care, in the treatment of severe bacterial skin infections. Results of the second Phase III study are expected to come out in mid-2013.

The share prices of Indian companies once again showed very satisfactory final-quarter growth, with Glenmark (+25.1%, in INR) turning in good quarterly results. Strides (+24.1%, in INR) was increasingly viewed as a takeover candidate. Lupin (+2.9%, in INR) and newcomer IPCA (+7.1%, in INR) likewise saw their market value rise and closed 2012 on a successful note.

Positioning and outlook
BB Biotech's portfolio continues to present an attractive mix of profitable large, fast growing biotech companies with a careful selection of mid-cap stocks. Exposure to biotech stocks from emerging markets continues to be pursued in a mindful manner. Additionally, the increasing interest in platform technology companies that we witnessed during 2012 is expected to be even more pronounced in the portfolio in 2013.

A host of share price-driving milestones lie ahead in 2013, including:

  • FDA approval for Novo Nordisk's Tresiba (insulin degludec) for treating type 1 and type 2 diabetes  

  • Revlimid data on multiple myeloma treatment and new therapeutic indications for Abraxane  

  • Marketing authorization for Actelion's macitentan and possible interim data on selexipag in the treatment of PAH   

  • Potential FDA approval for Isis' Kynamro (mipomersen) to treat homozygous hypercholesterolemia  

  • Medivation's successful launch of Xtandi for treating advanced prostate cancer and clinical data for pre-chemotherapy prostate cancer patients   

  • Further clinical data on oral Sofosbuvir-containing combination regimens for treating people with HCV  

This is an attractive setting and valuation levels are still reasonable. BB Biotech remains confident in its selection of portfolio investments which should allow to meet the long-term goal of achieving a sustained increase in value for BB Biotech shareholders over the coming years.

Changes in the Board of Directors at the upcoming Annual General Meeting in March 2013
After 10 years on the Board of Directors of BB Biotech AG, 9 of which as Chairman, Prof. Dr. Thomas Szucs will not be standing for re-election at the next Annual General Meeting on March 18, 2013. Thomas Szucs had a profound impact on the strategy and the success of the investment company during the past 10 years and helped to steer it through challenging times. The Board of Directors is deeply grateful to Thomas Szucs for his tireless efforts and many accomplishments on behalf of BB Biotech. Thomas Szucs will actively contribute to the festive celebration of BB Biotech's 20-year anniversary in November 2013, where he will be a featured speaker.
Dr. Erich Hunziker is proposed as the designated Chairman of the Board of Directors. Erich Hunziker has been on the Board of Directors of BB Biotech since March 2011.

The Board of Directors will propose Prof. Dr. Dr. Klaus Strein as a new director. Klaus Strein is a Professor at the University of Heidelberg and holds post-graduate degrees in chemistry and medicine. During his more than 30-year career, Klaus Strein has held top-level research positions at Boehringer Mannheim and Roche. He was an executive at Boehringer Mannheim from 1979 to 1998, where he ultimately served as the Head of the Group's Pharma Division. During this time Klaus Strein was responsible for the company's drug research and development activities resulting in several approved and successfully marketed drugs. He then joined Roche in 1998, where he held various positions, including responsibility for the Roche therapeutic proteins/antibodies research and Global Head of Pharma Research. Later he was appointed Global Head Research Therapeutic Modalities (small and large molecule active agents). Klaus Strein currently sits on the Board of Directors of NovImmune in Geneva and also provides advisory services to companies active in the healthcare sector. Klaus Strein will clearly enhance the Board of Directors with his profound scientific knowledge and operational skills in drug research and development.

The complete annual report as of December 31, 2012 will be published on February 21, 2013.

For further information:

Bellevue Asset Management AG, Seestrasse 16, 8700 Küsnacht, Switzerland
Thomas Egger, Tel. +41 44 267 67 09,

Company profile       
BB Biotech invests in companies in the fast growing market of biotechnology and is one of the world's largest investors in this sector with CHF 1.3 billion in assets under management. BB Biotech is listed in Switzerland, Germany and Italy. Its investments are focused on listed companies that are developing and commercializing novel medical treatments and cures. BB Biotech's investment selection process is guided by the fundamental research and analysis of physicians and molecular biologists. Its Board of Directors has many years of experience in industry and science.

This release contains forward-looking statements and expectations as well as assessments, beliefs and assumptions. Such statements are based on the current expectations of BB Biotech, its directors and officers, and are, therefore, subject to risks and uncertainties that may change over time. As actual developments may significantly differ, BB Biotech and its directors and officers accept no responsibility in that regard. All forward-looking statements included in this release are made only as of the date of this release and BB Biotech and its directors and officers assume no obligation to update any forward-looking statements as a result of new information, future events or other factors.

Composition of BB Biotech's portfolio as of December 31, 2012
(in % of securities, rounded values)

Celgene 14.3%
Actelion 13.1%
Gilead 10.1%
Novo Nordisk 5.9%
Vertex Pharmaceuticals 5.8%
Incyte 5.8%
Isis Pharmaceuticals 5.7%
Ariad Pharmaceuticals 3.4%
Medivation 3.3%
Immunogen 3.1%
Alexion Pharmaceuticals 2.9%
Onyx Pharmaceuticals 2.8%
The Medicines Company 2.6%
Swedish Orphan Biovitrum 2.6%
Halozyme Therapeutics 2.5%
BioMarin Pharmaceutical 2.5%
Glenmark Pharmaceuticals 2.3%
Theravance 1.3%
Endocyte 1.3%
Lupin 1.2%
Ipca Laboratories 1.1%
Bavarian Nordic 1.0%
Probiodrug 1) 0.9%
Achillion Pharmaceuticals 0.9%
Optimer Pharmaceuticals 0.9%
Strides Arcolab 0.8%
Radius Health 1) 0.7%
Dendreon 0.6%
Idenix Pharmaceuticals 0.4%
Intercell 0.4%
Total securities CHF 1 343.7 mn
Other assets CHF 30.2 mn
Other payables CHF (139.9) mn
Total shareholder's equity CHF 1 234.0 mn
Treasury shares (in % of company) 2 12.6%

1) Unlisted company
2) Correspond to the total of all own shares held including the second trading line

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(i) the releases contained herein are protected by copyright and other applicable laws; and
(ii) they are solely responsible for the content, accuracy and originality of the
information contained therein.

Source: BB BIOTECH AG via Thomson Reuters ONE


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