Regardless of how many vaccines against Covid-19 are approved, it can already be stated: The fight against the corona pandemic will change the public perception of the pharmaceutical and biotech industry in a positive way. Diagnostic specialists as well as vaccine and drug developers see it as their top priority in the context of the Corona crisis to make a contribution to solving a social emergency. For the biotech sector in which BB Biotech has been investing for almost 27 years, the Corona crisis opens up an opportunity to demonstrate its innovative strength. In the past few months, companies and state authorities have developed a hitherto unique level of cooperation on a health topic. The biotech industry can build on this in the future when it comes to getting products based on new technologies through clinical trials and approval processes in a timely manner.
Dr. Daniel Koller, Head of Investment Team, BB Biotech
The author has been with Bellevue Asset Management since 2004 and has headed the BB Biotech investment team since 2010. After studying biochemistry, he did his doctorate in biotechnology at the ETH Zurich.
Breakthrough for new therapeutic approaches
A current example is mRNA technology, for which there is as yet no market-ready therapy. That could soon change if the Covid-19 vaccine developed by the portfolio company Moderna receives approval this year. The mRNA process enables the production of proteins that patients cannot produce themselves due to genetic defects in their genome. In mRNA therapies against Covid-19, healthy people are injected with a messenger RNA from the coronavirus. The organism reacts to this by producing individual proteins that trigger an immune response against these viral proteins. At the end of July, Moderna started a registration-related study that is supposed to include around 30,000 healthy people. In the ideal scenario, the results will be available in the fourth quarter of 2020 and will then form the basis for rapid approval.
Billion markets apart from Corona
BB Biotech has invested in Moderna since 2018 because the managers believe in the long-term commercial success of the mRNA technology platform as a whole. The other ongoing clinical trials against Covid-19 are no reason to invest in individual stocks. Many biotech companies will hardly have sustainable, profitable business success with products against the coronavirus. A major reason for this is that the corona therapies are sold at low costs due to social pressure. The expected low margins can best be compensated for by high production volumes. At the latest when the global pandemic is under control, the progress in chronic and previously untreatable or hardly treatable diseases will once again move into the focus of investors. Individualized cancer medicine will produce a number of new products in the near future. Thanks to genetically determined mutation patterns, new drugs can precisely address individual patient groups. In the rare hereditary diseases, specific proteins or molecules can permanently repair genetic defects. The message that medical innovations are making a growing contribution to social prosperity has reached the financial markets. For the first time in five years, the biotech industry is registering larger inflows of funds from broader groups of investors. The biotech stock market proved to be very robust in the difficult first half of 2020.
Solid price gains
The BB Biotech share also rose by 13.2 percent in the first half of the year (in euros). The portfolio currently consists of 37 percent companies that are active in the field of rare diseases, i.e. indications with often genetic origins. Another 30 percent of our holdings develop new therapies and drugs in oncology. For three of the companies – Alnylam, Macrogenics and Myovant – decisions by the US FDA are pending for drug approval in December. To this end, results from efficacy studies and approval-relevant studies are expected for 16 clinical candidates from the investment portfolio in the second half of 2020.
Key figures for biotech investments
BB Biotech pursues a benchmark-independent investment approach that is fundamentally bottom-up-driven. In order to control the very concentrated portfolio with a maximum of 35 positions, the portfolio manager orients himself on the S-curve strategy. Active ingredients from newcomers to the portfolio are mostly still in clinical development. They are therefore weighted lower in order to minimize the risk of default. Vertex Pharma is again a prime example of the success story of one of the current core holdings. With three drugs approved for cystic fibrosis, the US company occupies a niche for a metabolic disorder in the lung tissue that, if left untreated, leads to death. The billions in sales flow into the clinical development of substances for pain, rare blood diseases and kidney diseases.
15 percent growth
With increasing maturity, the companies become profitable and increase their cash flow through more and more approved products. It is therefore crucial for long-term outperformance to always keep an eye on the sales development of products and technologies. This also applies to the long-term potential for value growth. The central question for the portfolio strategy is whether and for how long the companies comply with the internal target of delivering annual profit growth of 15 percent. If the outlook solidifies that the growth dynamics of a portfolio investment will decrease or the future potential for appreciation is factored into the valuation, the position is reduced. For example, the stake in the US company Moderna was reduced after major price gains, and the proceeds were invested in newcomers such as Molecular Templates – true to the belief that the sector’s continued dynamic growth will drive the number of IPOs and capital increases in the coming months and quarters. Added to this is the continued low sector valuation. With all of these factors in mind, this is a very good time for investors to invest in biotech.