BB BIOTECH AG /
Pleasing progress in BB BIOTECH AG's portfolio
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Third-quarter report of BB BIOTECH AG as of September 30, 2010
The Net Asset Value of BB BIOTECH surged 13.4% (in USD) during the third
quarter. Numerous acquisitions of small and mid-sized biotech companies by
pharma companies led share prices higher during the quarter. Two of the
companies in BB BIOTECH's portfolio, ZymoGenetics and Genzyme, were the targets
of takeover bids. Takeover speculation also lifted our core investment Actelion
after the third quarter ended. Biotech companies gave an impressive display of
their operating strength and innovative skills during the past quarter despite
healthcare reform in the USA and austerity drives in Europe. In the coming
quarter biotech firms worldwide are expected to publish data on as many as 80
Phase III studies or regulatory events. More M&A activity can be expected since
valuations are still inexpensive. BB BIOTECH has participated in several capital
increases, providing promising companies with the necessary capital to expedite
their drug development programs. This shows that BB BIOTECH is steadfastly
moving forward with its plans to give small and mid-sized companies a greater
weighting in the portfolio. After serving almost two decades as a director for
BB BIOTECH, Prof. Dr. David Baltimore has announced that he is stepping down
from the Board of Directors at the next annual general meeting of shareholders
on March 21, 2011 for reasons of age. The Board of Directors thanks David
Baltimore for his untiring services on behalf of the company.
Biotech sector buoyed by takeovers
The historically low valuations of biotech companies led to a flurry of takeover
activity in the third quarter, which gave the entire sector a strong boost. This
brightening environment helped the Nasdaq Biotechnology Index to climb 11.9% (in
USD) as it recovered during the course of the third quarter. The Net Asset Value
(NAV) of BB BIOTECH AG shares showed an even better gain of 13.4% (in USD)
during the period. Due to the weakness of the dollar, NAV in Swiss francs rose
by only 3.5%. BB BIOTECH shares have not yet fully benefited from these positive
developments. Investors in Europe are still shying away from the healthcare
sector, which is reflected in the correction of BB BIOTECH AG's share price,
which was down 3.7% in CHF and 3.2% in EUR at the end of the third quarter.
In our interim report as per mid-year we wrote that acquisition activity could
be expected to pick up if the valuations of biotech companies stayed at
historically low levels. The most recent wave of acquisitions was triggered by
the long acknowledged structural problems within the pharma industry, which is
confronted with expiring patent protection, pressure on prices and an innovation
logjam. Because of this situation, particularly innovative biotech companies
with promising products have become takeover candidates. In the third quarter
takeover bids were announced for two of the companies in BB BIOTECH's portfolio.
First Sanofi-Aventis offered USD 18.5 bn for Genzyme, which represented a
takeover premium of about 40%. This was followed by Bristol-Myers Squibb's (BMS)
bid for ZymoGenetics. BB BIOTECH was the third-largest shareholder of
ZymoGenetics when the bid was announced and benefited accordingly from the
proposed takeover, which was priced about 85% above ZymoGenetics' previous
closing price. ZymoGenetics has a promising product candidate for the treatment
of hepatitis C that it licensed in from BMS about two years ago. It has now been
completely integrated into the company through this transaction.
During the course of the third quarter BB BIOTECH AG continued its share buyback
program and bought back 226'978 shares through a second line of trading, which
represents about 60% of the number authorized under the share buyback program.
Solid progress by core participations - greater portfolio diversification
Diversification of the portfolio continued in the third quarter. The portfolio
weighting of Actelion was reduced in view of the risks in its development
pipeline while investments were made in several mid-cap companies. The sale of
the ZymoGenetics shares and the reduction of the position held in Arena
Pharmaceutical ultimately lowered the percentage of invested portfolio assets
from 114.6% to 105.3%. BB BIOTECH participated in the share offering announced
by Halozyme, the fifth such transaction it has participated in so far this year.
Capital increases are an ideal means of building up a position in companies with
a small market capitalization. Our investment allows these companies to press
ahead with promising development projects on their own and to generate more
value for all stakeholders. Besides the transaction in ZymoGenetics at the
beginning of the year we participated in the capital increases conducted by
Micromet, Optimer, Immunogen and, most recently, Halozyme.
Actelion (-2.8%, in CHF) published negative news about Clazosentan, which was
being tested as a treatment for severe complications following vasospasm and did
not meet the primary endpoint. As a result, there are still no drug treatments
available for this medical need. The setback with Clazosentan increases the
pressure on Actelion to develop new products and bring them to the market before
Tracleer loses patent protection in 2015/16. BB BIOTECH reduced its exposure to
Actelion during the course of the quarter in anticipation of the deterioration
in the risk profile associated with this clinical study.
Celgene's (+13.4%, in USD) quarterly results clearly confirmed the growth
momentum of the company's hematology franchise. Revlimid, Celgene's product for
treating multiple myeloma, will generate further significant sales growth in the
coming years thanks to a broader label and its launch in the Japanese market.
Despite all the good Phase III data on Telaprevir in the treatment of hepatitis
C, Vertex shares rose by only 5.1% (in USD). Lingering questions concerning the
drug's competitive situation should be addressed at this year's AASLD conference
when further details of clinical studies will be presented. Vertex plans to
initiate the filing process for Telaprevir in the fourth quarter, which means
regulatory approval could be granted in the second half of 2011.
Novo Nordisk (+9.8%, in DKK) continues to rise on the wings of the solid market
uptake of its diabetes drug Victoza, whose launch in both the USA and Europe has
so far gone well. What's more, Roche, a major potential competitor for its GLP
project, suffered a setback in its diabetes study due to side effects. The
estimated market potential of this class of drugs has been revised up in recent
months by market participants, which has brightened Novo Nordisk's growth
outlook.
Gilead Sciences shares rose 3.9% (in USD) over the course of the past three
months. It published another disappointing set of results in the second quarter
because the market had underestimated the pressure on HIV drug funding in the
USA as well as the effects of exchange-rate movements. The company published
more positive clinical data on its HIV drug pipeline. Nevertheless, there is
still some skepticism regarding the company's long-term growth prospects
considering the current valuation (P/E ratio of 10 times estimated 2010 EPS).
Gilead also initiated a major USD 5 bn share buyback program in the third
quarter.
M&A activity buoys small and mid-cap participations
The entire position in ZymoGenetics was sold at the end of September due to the
announcement of a takeover bid by BMS triggered by the company's progress in
developing its drug candidates.
The position in Arena was reduced significantly. An FDA advisory committee voted
9 to 5 against approval of its obesity drug, which now has very slim chances of
receiving market approval.
Some of the Genzyme shares were sold at a profit. The stock's next movements
will depend on the success of the takeover and the final price Sanofi-Aventis is
willing to pay.
The position in Halozyme was increased significantly through participation in
the company's capital increase. Halozyme is developing a promising technology
platform that enables protein-based drugs to be administered subcutaneously
instead of intravenously.
The remaining position in Biogen Idec was completely divested after we concluded
that the company's core business would come under pressure from the growing
number of competitive multiple sclerosis drugs in the coming years.
Positive signs going into Q4 2010
Looking ahead, we will devote particular attention to small and mid-cap stocks
as a complementary investment to our core holdings. Several of these companies
might have the resources and the potential to eventually become a core
investment. The current burst of takeover activity driven by the major drug
companies will continue in our opinion, especially since these drug makers are
coming under increasing pressure to strengthen their pipelines or else risk
becoming a victim of the consolidation process themselves.
Important news in the fourth quarter is expected from the following companies:
* Vertex will give an update on Telaprevir's profile at this year's AASLD
conference (American Association for the Study of Liver Diseases).
* The ASH conference (American Society of Hematology) will be an important
medical conference for Celgene, which is scheduled to present further
clinical results on Revlimid.
* Incyte will publish initial data on the registration program for its Jak-
1/2 inhibitor for the treatment of myelofibrosis.
* Amgen will publish clinical results on Denosumab for the prevention of bone
metastasis by the end of the year.
Predictions that US healthcare reform would knock -0.5% to -2.0% off top-line
revenues are likely to be confirmed in the upcoming publications of quarterly
and annual results. At the same time investors will have greater clarity
regarding the effects of government efforts in Europe to rein in spending, which
could diminish sector revenues by a similar amount.
We are confident that the improving investor sentiment in the USA on the
biotechnology sector will eventually spread to Europe. The latest acquisitions
are an initial sign pointing in this direction.
Prof. Dr. David Baltimore stepping down after 17 years on the Board of Directors
Prof. Dr. David Baltimore is resigning from the Board of Directors on the date
of the next general meeting, scheduled for March 21, 2011, citing reasons of
age. He has held a seat on the board of BB BIOTECH ever since the company was
founded in 1993 and he currently serves as Vice Chairman. The Board of Directors
thanks David Baltimore for his great dedication and extraordinary services on
behalf of the company over the past 17 years. He has made an invaluable
contribution to the successful development of BB BIOTECH. The Board of Directors
has initiated the evaluation process to select David Baltimore's successor and
will present a qualified candidate for election at the next general meeting of
shareholders on March 21, 2011.
The complete quarterly report as of September 30, 2010 and a video with Dr.
Daniel Koller can be viewed at www.bbbiotech.com
Biodays 2010 - Zurich, Frankfurt, Stuttgart, Munich, Hamburg and Milan. Sign up
at www.bbbiotech.com/biodays-2010
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 1.2 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.
Composition of BB BIOTECH's portfolio as of September 30, 2010
(in % of securities, rounded values)
  CORE HOLDINGS
  Celgene      19.8%
  Actelion      17.6%
  Gilead      15.8%
  Vertex Pharmaceuticals      13.7%
  SMALL PARTICIPATIONS
  Novo Nordisk      6.6%
  Incyte      3.8%
  Micromet      3.0%
  Amgen      2.2%
  Immunogen      1.9%
  Intercell      1.8%
  Biomarin Pharmaceutical      1.7%
  Genzyme      1.7%
  Alexion Pharmaceuticals      1.7%
  Roche Holding GS      1.6%
  Halozyme Therapeutics      1.6%
  Optimer Pharmaceuticals      1.5%
  Basilea Pharmaceutica      1.0%
  Bavarian Nordic      0.8%
  Affymetrix      0.7%
  Elan      0.7%
  Arena Phamaceuticals      0.2%
  Idenix Pharmaceuticals      0.2%
  Cosmo Pharmaceuticals (1))      0.1%
  Probiodrug (2))      0.5%
  SWAP agreement on treasury shares      <0.1%
  Cosmo Pharmaceuticals put option (long) (1))      <0.1%
  Novo Nordisk call option (short)      <(0.1%)
  Roche put option (short)      (0.1%)
  Total securities      CHF 1 247.6 mn
  Liquid funds (net)      CHF (70.1) mn
  Other assets       CHF 8.9 mn
  Other payables      CHF (1.6) mn
  Total shareholder's equity      CHF 1 184.9 mn
  Treasury shares (in % of company) (3))      14.9%
1) Exchange from shares BioXell due to the acceptance of the public tender offer
of Cosmo Pharmaceuticals
2) Unlisted company
3) Correspond to the total of all own shares held in Switzerland, Germany and
Italy including the second trading line
[HUG#1456202]
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BB BIOTECH AG
Vordergasse 3 Schaffhausen Switzerland
WKN: AONFN3;ISIN: CH0038389992;
Press Release BB Biotech Q3 2010 (PDF):
http://hugin.info/130285/R/1456202/395987.pdf
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