Biotech sector continues to perform well / valuations still at attractive levels despite strong sector gains

Thursday, 18. July 2013 07:00

BB BIOTECH AG / Biotech sector continues to perform well / valuations still at attractive levels despite strong sector gains . Processed and transmitted by Thomson Reuters ONE. The issuer is solely responsible for the content of this announcement.

Interim Report of BB Biotech AG as of June 30, 2013

Strong sector fundamentals propelled biotech stocks to higher ground in the second quarter of 2013 and BB Biotech AG again achieved positive performance, gaining 6.4% in CHF and 6.2% in EUR for the quarter. The shares year-to-date gain now stands at 33.8% in CHF and 33.2% in EUR. As a listed investment company, BB Biotech has the advantage of a highly flexible investment strategy. The company's well balanced portfolio consisting of large, mid and small cap stocks with clearly defined priorities produced gratifying results during the period under review. There has been no slow-down in new product launches and three of the companies in BB Biotech's portfolio received marketing approvals from the US or European regulatory authorities during the quarter. Four new companies were added to the portfolio during the past quarter. These added to BB Biotech's exposure in the fields of RNA-based medicines, leukemia, rare diseases and infectious diseases. Despite the markup in biotech stocks, the average price/earnings ratio for the sector is reasonable at around 22 times estimated 2013 earnings.

The primarily US-driven biotech sector continued its upward move in the second quarter of 2013 and outpaced the broader market. While the S&P 500 gained 2.4% in USD during the second quarter of 2013, most European and emerging equity markets retreated. The Nasdaq Biotech Index (NBI) shrugged off the recent market turmoil, gaining 8.6% (in USD) and lifting its year-to-date performance to 26.7% (in USD).

Following a new all-time high in mid-May 2013 for the NBI and other equity markets, profit-taking accelerated into June as concerns surfaced related to US Federal Reserve and Japanese monetary policies. Interestingly, bonds and commodities sold off in addition to equities, as investors increased cash allocations at the end of Q2 2013.

BB Biotech continues its strong performance
Since the beginning of 2013, BB Biotech's Net Asset Value (NAV) has increased by more than a third (36.0% in USD, 40.4% in CHF and 37.8% in EUR). BB Biotech closed the second quarter with another strong quarterly share price performance - gaining 6.4% in CHF, and 6.2% in EUR. For HY1 2013, BB Biotech achieved an attractive gain of 33.8% in CHF and 33.2% in EUR, including the cash distribution of CHF 4.50 per share. Continued outperformance of the portfolio combined with an investment ratio of over 100% (104% as of end of june) resulted in a HY1 2013 profit of CHF 492.7 mn.

Assets under management grew to CHF 1.68 bn driven by the performance of portfolio holdings. The cash distribution of CHF 4.50 led to a reduction in assets of CHF 51.0 mn and the share buyback program utilized CHF 32.4 mn of cash in HY1 2013. On June 17, BB Biotech cancelled its closed share repurchase program and reduced the number of outstanding shares by 1.15 mn from 13.0 mn, bringing the new fully diluted number of shares outstanding to 11.85 mn shares. The company currently holds 459'323 BB Biotech shares, consisting of 311'823 treasury shares and 147'500 shares bought under the current share repurchase program, in total 3.9% of outstanding shares.  

Well positioned portfolio following a few selected changes
The portfolio holdings continue to perform well, both in absolute and relative terms. The investment flexibility of an investment company proved to be a key factor for successful HY1 performance. The investment in Isis is an example of this. BB Biotech invested approximately 3% of the NAV into the company over the 2010/11 timeframe and - the Isis share price appreciated significantly over the following 1.5 years, turning Isis into a core position, which now represents more than 10% of the NAV.

A significant value driver for the shareholders of BB Biotech is the constant flow of product approvals of portfolio companies. Following a very successful Q1, three more companies gained a product approval either in the US or Europe during Q2.

In May, Theravance with its partner GlaxoSmithKline received US approval of Breo Ellipta, a combination of an inhaled corticosteroid (fluticasone furoate) and a long-acting beta2 agonist (LABA, vilanterol) as a once-daily maintenance treatment for airflow obstruction in patients with chronic obstructive pulmonary disease (COPD). Importantly, Breo Ellipta is also indicated for reducing exacerbations of COPD in patients with a such history. Following the 2012 US approval of Xtandi for the treatment of patients with metastatic castration-resistant prostate cancer (mCRPC) who have previously received docetaxel, Medivation and its partner Astellas received a positive opinion from the CHMP (Committee for Medical Products for Human Use) in April 2013 and full marketing authorization for Xtandi (enzalutamide) in late June 2013. Halozyme will receive royalty payments from Baxter post HyQvia's approval in all European Union (EU) member states in late May 2013. HyQvia offers patients with primary and secondary immunodeficiencies the ability to administer their treatment in a single subcutaneous site every three to four weeks, representing a convenience benefit for patients managing a chronic disease. Additionally, Halozyme's partner Roche received a positive opinion from the CHMP for SQ Herceptin, for the treatment of early and metastatic HER2+ breast cancer, with full approval expected in Q3 2013. BB Biotech believes that this approval bodes well for another product partnered with Roche, SQ MabThera, with a CHMP opinion expected in late 2013 or early 2014 for patients with follicular non-Hodgkin's lymphoma.

On the downside, Novo Nordisk continues to underperform the market due to increasing worries around the incretin class of drugs (GLP's and DPP IV's) and the continued debate about the company's valuation if the Tresiba US opportunity is excluded. The company received a complete response letter in February 2013 for Tresiba from the US FDA, in which the regulatory authorities asking for a cardiovascular (CV) outcome study, most likely in patients at higher CV risk.    

The board, together with the portfolio management team, regularly reviews each individual holding and overall portfolio composition. The portfolio is well-balanced between established, large, profitable biotech companies with attractive growth trajectory forecasts, and a significant number of mid-cap companies with even stronger growth prospects albeit at slightly higher risk. Given this effective balance, few changes have been made in the portfolio throughout the second quarter of 2013. Four new investments were initiated as smaller holdings.

The addition of companies focused on developing RNA-based medicines has so far been successful - driven by the substantial value appreciation of Isis over the last two years. In addition to Isis, which is developing antisense RNA molecules, Alnylam is developing RNAi molecules targeting various liver disorders. With the addition of Alnylam to the portfolio in Q2 2013, BB Biotech is now covering the leaders in the antisense and RNAi drug development space, both of which enjoy strong intellectual property positions.

Infinity was added given current developments in leukemia such as chronic lymphocytic leukemia (CLL), the most common type of adulthood leukemias (cancers affecting white blood cells). Significant developments in targeting new cellular pathways are being made and therapeutic advances are anticipated in CLL and other lymphatic indications. As more effective treatment options become available, BB Biotech expects that CLL and other indications such as DLBCL, the most common type of non-Hodgkin lymphoma among adults, will become important therapeutic markets. Promising compounds include emerging BTK inhibitors and PI3K inhibitors, which are currently furthest along in clinical studies.

Synageva is developing enzyme replacement therapies for severe and rare conditions. Sebelipase alfa, their lead molecule currently undergoing a registration study, is an active enzyme replacement therapy for Lysosomal Acid Lipase (LAL) deficiency. The goal for sebelipase alfa is the correction of disease abnormalities associated with the deficiency of the LAL enzyme, including growth failure and liver dysfunction. The early onset form of the disease is fatal in the first year of life for infants, while patients suffering from the late onset form progress to liver fibrosis, liver failure and death.

BB Biotech successfully invested in virology (HIV and HCV). Another anti-infective area, antibiotic development, has been less prominently in the portfolio over the last few years. Now, with the addition of Trius, which is developing a next generation oxazolidine, BB Biotech is selectively increasing its exposure to the antibiotic field. Trius is developing Tedizolid (TR-701) as a second generation oxazolidinone with improved properties over the blockbuster Zyvox (linezolid, Pfizer) for different indications such as skin infections, lung infections and endocarditis.

Attractive valuations despite continued outperformance
With biotechnology valuations expanding in the second half of 2012 and in HY1 2013, the current PE multiples of the profitable large cap names range from the high teens to mid-twenties. Anticipated revenue growth rates for these companies are in the mid-teens or higher and their projected compound four year earnings growth rates exceed 20%, clearly above most other healthcare segments. The average PEG ratio (PE divided by EPS Growth) for the established profitable biotechnology companies is attractive at around 1 - particularly since large pharmaceutical companies trade around 2.

Valuations also continue to look attractive from an M&A standpoint. Two companies in the portfolio support this investment thesis. Optimer is currently evaluating strategic transactions based on the value of its antibiotic, Dificid, for the treatment of C. difficile infections. In addition, Onyx recently received and rejected an unsolicited offer to be acquired from Amgen, Onyx have announced that they will evaluate their strategic options actively and we anticipate an auction process for the sale of the company may follow.

Major product approvals in the near term
BB Biotech expects the biotech sector to continue to outperform broader equity markets. With Gilead's Sofosbuvir launch approaching (the PDUFA date is in early December 2013) one of the largest biotech products ever launched will be at the center of attention for the coming months and quarters. Sofosbuvir will launch initially in combination with peginterferon and ribavirin for genotype 1 Hepatitis C Virus (HCV) infected patients, and as an all oral treatment in combination with ribavirin for genotype 2 and 3 patients. With a 'one tablet per day' regimen (combining sofosbuvir and ledipasvir) reporting the strongest clinical results to date, we expect that Gilead will build its market leading role within the HCV market even further. Actelion is expected to see the product label for Opsumit in pulmonary arterial hypertension (PAH) as well as the Phase III trial outcome of Selexipag in mid-2014 - and these events will inform the future for Actelion. Celgene's 2013 and 2014 product launch efforts will not only include Pomalyst for relapse/refractory multiple myeloma patients, but also Apremilast as a new oral treatment for several inflammatory disorders.

In addition to these important product updates, BB Biotech anticipates other platform companies to deliver attractive shareholder value in the coming years. These currently include targeted toxin delivery technologies, either through antibodies (Immunogen) or a small molecule carrier (Endocyte), the RNA-based drugs in development with antisense (Isis) and RNAi-based molecules (Alnylam), as well as through improved delivery of complex biologics (Halozyme).  

We believe that these and other significant milestones resulting in substantial product launches will continue to drive revenue and earnings growth rates for our portfolio holdings ahead of the biotechnology industry average and considerably ahead of other healthcare sectors.

The complete interim report as of June 30, 2013 and a webcast with Dr. Daniel Koller, Head Management Team BB Biotech, can be viewed at www.bbbiotech.com.

For further information:

Bellevue Asset Management AG, Seestrasse 16, 8700 Küsnacht, Switzerland
Thomas Egger, Tel. +41 44 267 67 09, teg@bellevue.ch
www.bbbiotech.com

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 1.7 bn 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.

Disclaimer
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 June 30, 2013
(in % of securities, rounded values)

Celgene 13.5%
Actelion 11.6%
Isis Pharmaceuticals 11.2%
Gilead 10.2%
Incyte 6.3%
Vertex Pharmaceuticals 6.1%
Novo Nordisk 4.3%
Alexion Pharmaceuticals 3.9%
Medivation 3.8%
Ariad Pharmaceuticals 2.9%
Immunogen 2.9%
Onyx Pharmaceuticals 2.6%
Halozyme Therapeutics 2.4%
Swedish Orphan Biovitrum 2.2%
Theravance 1.8%
Glenmark Pharmaceuticals 1.8%
Endocyte 1.7%
Lupin 1.3%
Ipca Laboratories 1.1%
Optimer Pharmaceuticals 1.1%
Infinity Pharmaceuticals 1.0%
Bavarian Nordic 0.9%
Alnylam Pharmaceuticals 0.8%
Achillion Pharmaceuticals 0.7%
Probiodrug 1) 0.7%
Radius Health 1) 0.7%
BioMarin Pharmaceutical 0.5%
The Medicines Company 0.5%
Strides Arcolab 0.4%
Idenix Pharmaceuticals 0.2%
Dendreon 0.2%
Valneva 0.2%
Synageva BioPharma 0.1%
Trius Therapeutics 0.1%
Novo Nordisk put options (short)  <(0.1%)
Radius Health warrants <0.1%
Total securities CHF 1 753.6 mn
Other assets CHF 30.0 mn
Other payables CHF (103.3) mn
Total shareholder's equity CHF 1 680.2 mn
Treasury shares (in % of company) 2 3.9%

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




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Source: BB BIOTECH AG via Thomson Reuters ONE

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BB BIOTECH AG
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WKN: AONFN3;ISIN: CH0038389992;


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