Sector rotation and fund outflows weigh on biotech stocks, but positive developments allow fund raising to strengthen industry

During the second quarter, the Nasdaq Biotech Index (NBI) was unable to keep pace with global bellwether indexes such as the Dow Jones or Euro Stoxx 50 index, which showed gains in the low- to mid-single-digit percentage range. Meanwhile the NBI was almost unchanged, down 1.0% in USD, and thus ended the first half of 2023 with a negative return of 2.8% in USD. This is mainly a reflection of the massive sector rotation witnessed during the second quarter, triggered by investor buying of tech titans offering AI exposure.

For the second quarter, BB Biotech’s portfolio delivered a small gain of 1.6% in USD, slightly ahead of the Nasdaq Biotech Index. A devaluation of the US Dollar against the Swiss Franc resulted in a small loss of 0.6% in CHF for the second quarter 2023 for the Net Asset Value (NAV), corresponding to a net loss of CHF 13 mn. This compares to a net loss of CHF 233 mn for the same period in 2022. In stark contrast to the portfolio evolution, the share price of BB Biotech corrected by 21.8% in CHF in the second quarter. 
BB Biotech’s shares, having traded for an extended period at a double-digit premium, traded at 5% discount to the NAV per share at the end of the second quarter.

For the first half of 2023, BB Biotech’s NAV total return is a negative 9.8% in CHF, 8.6% in EUR and 6.9% in USD, all values including the dividend payment of CHF 2.85 per share, paid out on March 29, 2023. This resulted in a net loss of CHF 267 mn for the first half of 2023 compared to a net loss of CHF 533 mn in the same period last year.

During a relatively calm three-month period in terms of portfolio activity, the investment team executed minor reallocations within the portfolio. The generated cash enabled participation in a capital increase and extending of existing positions in open market transactions without further increasing the investment degree. BB Biotech ended the second quarter with an investment level of 113.7%, close to 114% at the end of the first quarter and 113.6% at the end of 2022.

Minimal profit taking in Vertex, Ionis and Incyte financed additions in select development stage companies like Black Diamond Therapeutics and Mersana Therapeutics. The investment management team increased the position in Black Diamond Therapeutics through open market transactions and opportunistically increased the position in Mersana Therapeutics after its price correction.

For the second quarter Agios announced positive results of achieving significant hemoglobin responses by treating patients with sickle cell disease with mitapivat. Moderna and its development partner Merck presented positive and intriguing proof of concept data for the individualized cancer vaccine MRNA-4157. Patients with high-risk melanoma following a complete resection were randomized to receive either Keytruda alone or Keytruda in combination with MRNA-4157. A significant risk reduction of 65% for development of distant metastasis and survival was reported.

Black Diamond Therapeutics updated investors on its dose escalation study for BDTX-1535, demonstrating which showed anti-tumor activity in non-small cell lung cancer (NSCLC) patients across multiple EGFR mutation families.

Relay Therapeutics presented an early update for RLY-2608, an inhibitor targeting multiple PI3K alpha mutations. Albeit that the drug profile for RLY-2608 achieved goals such as substantial inhibition of PI3K alpha, ctDNA reduction and a good tolerability profile avoiding more severe hyperglycemia, rash and diarrhea, investors were underwhelmed by the efficacy in terms of response rate so far presented.

Vertex presented positive early proof of concept for its stem cell program VX-880 for type I diabetes patients. VX-880 is an allogenic stem-cell derived, insulin producing islet cell therapy. Glucose sensing insulin production was shown for all six patients treated with VX-880, showing improved glycemic control while reducing or eliminating insulin use.

On the approval and regulatory level, Ionis and its cooperation partner Biogen should be highlighted who have been granted accelerated approval of Qalsody for the treatment of ALS patients who are SOD1 carriers. Further, Argenx announced the US FDA's approval of Vyvgart Hytrulo injection for subcutaneous use in patients suffering from generalized myasthenia gravis. This novel formulation presents an alternative delivery method and additional choice for patients. In another significant development, Argenx's Chinese partner, Zai Lab, announced the approval of Vyvgart in China.

BB Biotech’s existing portfolio comprises two well-established large-cap corporations, a substantial number of companies of both mid-cap baskets that possess a robust business case, and a broad diversification into entities with smaller market capitalization. The top holdings, representing the majority of our invested capital, predominantly reside within the large and mid-cap sectors. These holdings are projected to significantly influence our short to mid-term performance. Small-cap companies account for a less substantial portion of the portfolio's total weight. Investments in these entities may experience heightened volatility following key disclosures. However, due to their lesser portfolio representation, their performance impact is anticipated to be more pronounced over mid to long-term periods. Given recent milestones demonstrating both, positive and negative stock movements, the investment management team eagerly anticipates significant clinical milestones in our portfolio holdings by the end of 2023.

In addition to the forces of innovation and business strategies within the biotechnology industry, healthcare policies and politics will persistently influence and shape the sector and drug development field. The United States, being the primary market for biotechnology, places significant emphasis on policy implementations, such as the Inflation Reduction Act, which aims to lower out-of-pocket expenses for prescription drugs and benefits patients. Investors eagerly anticipate the publication of the CMS' drug negotiation basket on September 1, 2023.

Due to the very low trading volumes of BB Biotech shares on the Milan Stock Exchange and the exclusion from the FTSE Italia STAR Index as at June 16, 2023, the Board of Directors of 
BB Biotech has decided to have the company’s shares – subject to the approval of Italian regulators – delisted from the Italian stock exchange. This delisting will lower BB Biotech’s administrative costs and BB Biotech shareholders will still be able to buy and sell BB Biotech shares in EUR on the Frankfurt Stock Exchange. BB Biotech’s listing on the SIX Swiss Exchange will also not be affected by the delisting in Italy.

The quarterly report of BB Biotech AG as at June 30, 2023, can be downloaded at report.bbbiotech.ch/Q223 or www.bbbiotech.com.

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