During the second quarter of 2023, the broader equity markets persistently ascended amidst a climate of uncertainty. Despite looming concerns about potential central bank activities possibly steering the global economy towards a recession, investors remained undeterred. During this quarter, key indices like the Dow Jones, Euro Stoxx 50, Dax Index, and the Swiss Index SPI experienced gains ranging from low to mid-single digit percentages, reflecting their robust performance in local currencies. Furthermore, the valuations of large US tech companies surged, driven by the sustained momentum in the field of artificial intelligence. This trend significantly influenced the S&P 500, which saw an increase of 8.7%, and was even more pronounced in the Nasdaq 100, which rose by a staggering 15.4% during this period. This upward trajectory perpetuated the vigorous growth trends observed in the robust first quarter of the year.
In a departure from the first quarter, healthcare markets paralleled the performance of non-tech equity markets during Q2, with the MSCI World Healthcare Index securing a 2.6% total return. However, year-to-date analysis reveals a clear underperformance by healthcare markets relative to broader equity markets due to the challenging first quarter of 2023. With a total return of only 1.1%, the MSCI World Healthcare Index remained relatively stagnant throughout the first half of the year, a significant deviation from broader equity markets, which experienced high single-digit to mid-teen percentage gains. Meanwhile, the performance of large tech sectors notably boosted the Nasdaq 100 Index, propelling it up 39.4% during the first six months of 2023. This surge brought the index within striking distance of its late 2021 all-time highs. However, the Nasdaq Biotech Index (NBI) presented a rather underwhelming performance in the second quarter, remaining essentially flat (–1.0% in USD) and kept it in negative territory for the first half of 2023, down 2.8% in USD.
There is a glimmer of hope in the biotech capital market context, as fundraising activities have seen a resurgence.
In general, 2023 has brought disappointment for biotech investors, as a significant rotation out of the sector was observed towards the latter half of the second quarter. While this has been challenging, we remain patient, resolute, and more importantly, optimistic due to the industry's solid fundamentals and substance. The sector continues to offer positive developments, such as acquisitions, FDA approvals, and successful trial results, which have often led to significant stock appreciation. However, the sector's sideways performance indicates a balance of companies reporting unsuccessful trials or missed milestones, which resulted in substantial market penalties. Nonetheless, there is a glimmer of hope in the biotech capital market context, as fundraising activities have seen a resurgence. Selected companies have managed to raise considerable funds on the back of positive news, hinting at a potentially brighter future ahead.
BB Biotech’s performance for the second quarter and first half of 2023
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 compared to a net loss of CHF 533 mn last year. Recovering some of the underperformance in the second quarter, we are about 4% behind the benchmark NBI since the beginning of 2023. More than half of the underperformance is due to not participating in any of the announced take-over targets in the first half of 2023. The remainder is due to our overweight in mid-cap companies, with some of them not keeping up with the benchmark in the first six months of 2023. The challenge for such mid-cap companies, albeit having established a high value single asset business/franchise are to repeat the initial success, and if taking longer and more resources to mature into multi product companies can result in intermittent underperformance. BB Biotech’s share price, impacted substantially by the second quarter sell off, has lost around a quarter of its value since the beginning of 2023 (total return of –22.8% in USD; –25.2% in CHF, all values including the dividend payment).
Second quarter portfolio activity
During a relatively calm three-month period in terms of portfolio activity, the investment management 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 our investment degree. We 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.
The investment management team’s convicting in the core holdings and the smaller positions, offering substantial upside versus the internal discounted cash flow models, is reflected in the below average turnover in the portfolio during the second quarter.
Minimal profit taking in Vertex, Ionis and Incyte financed additions in select development stage companies. Black Diamond Therapeutics presented early but promising clinical data for BDTX-1535 from a dose escalation trial. We maintained a 15% ownership in the company by participating in the company’s capital increase as well as by increasing the position through open market transactions. The investment management team decided to opportunistically increase our position in Mersana following the correction due to a surprise partial clinical hold for their lead program UpRi to treat late line ovarian cancer patients.
Portfolio Update Q2 2023
An overall eventful second quarter for our portfolio resulted in a small gain in USD. Positive outliers include Black Diamond Therapeutics (+167%) rallying post early clinical results for BDTX-1535, Revolution Medicines (+24%) following an update on its pan RAS inhibitor RMC-6236, Agios Pharmaceuticals (+23% in USD) with a positive Phase II trial in sickle cell patients for mitapivat, Intra-Cellular Therapies (+17%) on positive Q1 23 results with strong Caplyta revenues, and Ionis (+15%) on an accelerated approval for Qalsody. Negative contributors in the same quarter have been Macrogenics (–25%) giving up previous gains post the royalty deal, Relay Therapeutics (–24%) following its PI3k alpha inhibitor update, Moderna (–21%) on its first quarter results and spending guidance, Mersana Therapeutics (–20%) on the partial clinical hold for UpRi, and Incyte (–14%) following underwhelming Q1 23 results that were mostly related to the recently launched Opzelura.
Outlook for 2023
Cognizant of our disappointing shareholder returns in the aftermath of the pandemic, we have conducted a thorough review of our investment strategy and portfolio holdings. For this purpose, we grouped our 28 positions into four categories:
- Mature and sustainably profitable biotech companies that can deliver shareholder returns at least in line with their revenue and profit growth
- Mid-cap companies with product revenues and generating profits, offering attractive shareholder returns if they were to achieve the status of a multi-product company or were to be acquired
- Mid-cap companies with late stage clinical programs moving towards their first regulatory approval and market launch, offering attractive shareholder returns if they succeed to generate a strong product launch
- Earlier stage pipeline companies that can generate shareholder returns if they successfully develop earlier stage clinical assets or establish a next generation platform
Our 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, we eagerly anticipate significant clinical milestones in our portfolio holdings by the end of 2023 including, but not limited to.
- Argenx is expected to release findings from their Phase III trial investigating the use of efgartigimod for chronic inflammatory demyelinating polyneuropathy (CIDP). As efgartigimod is under evaluation in various other registrational trials, the forthcoming results are eagerly awaited by investors, given the sizable potential commercial opportunity it presents.
- Mersana Therapeutics has guided that their antibody-drug candidate upifitamab rilsodotin (UpRi) will present Phase III UPLIFT trial results in August 2023 for patients with platinum-resistant ovarian cancer. In addition to efficacy, an update on UpRi's safety profile will be of notable interest, particularly in light of the recent partial clinical hold.
- Neurocrine Biosciences is expected to report results for its two ongoing Phase III studies for crinecerfont for treating patients with congenital adrenal hyperplasia. The event is of high importance allowing Neurocrine to add a second large commercial product next to Ingrezza, if positive.
- Vertex is developing VX-548 for both acute and chronic pain management, with initial clinical outcomes for acute pain treatment anticipated by the end of 2023.
- Revolution Medicines has projected that they will present further findings on RMC-6236, a RAS multi-inhibitor with single agent activity, from the ongoing study by mid-2023. They expect to provide numerous updates throughout the year, starting from the third quarter in context of a mix of corporate presentations and scientific conferences.
Crucial regulatory decisions that could significantly influence future revenue and profit contributions from our portfolio holdings are anticipated for:
- Sage and partner Biogen announced an August 5 PDUFA action date for zuranolone, which would be indicated to treat patients with major depression disorder as well as postpartum depression.
- Alnylam anticipates feedback from the FDA by October 8, concerning Onpattro's use in treating cardiomyopathy in patients with ATTR amyloidosis. The company has announced that an FDA advisory panel meeting has been scheduled for September 13.
- Crispr Therapeutics and Vertex have announced the BLA filing for exa-cel for severe sickle cell disease (SCD) and transfusion dependent beta thalassemia (TDT). The PDUFA target action dates are set for December 8, 2023 for SCD and March 30, 2024 for TDT.
- Ionis, in partnership with AstraZeneca, anticipates a PDUFA action date for Eplontersen on December 22, 2023, aimed at treating polyneuropathy in patients with ATTR.
We remain optimistic that our commitment to high-quality assets that target substantial market opportunities, together with attractive valuations, will position us for active participation in future M&A activities. So far, take-over activity has not boosted our investment performance in 2023.
We remain optimistic that our commitment to high-quality assets that target substantial market opportunities, together with attractive valuations, will position us for active participation in future M&A activities.
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. However, ongoing legal actions initiated by pharmaceutical industry players like Merck and Bristol-Myers Squibb, as well as the Chamber of Commerce and the PhRMA organization, against the Department of Health and Human Services (HHS) have further complicated matters. Notably, for emerging and developmental stage companies, the complexity of rules and variability of commercial time windows present a real challenge. Small molecule protection for nine years compared to thirteen years for complex biologics has created unintended consequences, requiring adjustments to pipeline projects and reprioritization within the industry.
Broader capital markets will be closely watching for additional guidance regarding interest rates, which will have an impact on capital costs and the overall financial stability of both the sector and individual companies. Importantly, the financial strength and resilience on our overall portfolio are outstanding, surpassing pre-pandemic levels significantly.
We are actively engaging with our existing shareholders, and recently with an increasing number of prospective investors. The correction in the share price in combination with the share price trading close to NAV may offer attractive returns ahead.
We thank you for the trust you have placed in the Company. The Board of Directors of BB Biotech AG
Dr. Erich Hunziker
Dr. Clive Meanwell
Dr. Pearl Huang
Prof. Dr. Mads Krogsgaard Thomsen
Dr. Thomas von Planta