Swiss investor BB Biotech made two new investments in the first quarter in US small caps – Essa Pharma and Revolution Medicines – while exiting its positions in Cidara Therapeutics and Voyager Therapeutics, according to its portfolio update published earlier today.

Essa Pharma (Nasdaq: EPIX) is developing a small molecule drug, EPI-7386, in metastatic castration-resistant prostate cancer. The company reported promising initial data from a Phase 1 trial that prompted a strong rise in its share price earlier this year, which is up 115% year to date – making it one of the sector’s standout performers. Its market cap is now $1bn.

Revolution Medicines (Nasdaq: RVMD), meanwhile, is focused on developing novel targeted therapies to inhibit elusive targets in cancer growth and survival pathways, with a particular emphasis on RAS and mTOR. Its most advanced product candidate, RMC-4630, is partnered with Sanofi with a Phase 1/2 trial underway in a range of tumour types featuring specific oncogenic mutations. The stock is marginally ahead (2%) year to date and the market cap is $2.9bn.

BB Biotech presumably found both companies to have promising technologies and attractive valuations, although it did not specifically describe its own investment rationale. Neither did it do so for the disposals of holdings in Cidara and Voyager, although the latter presumably reflects the setbacks encountered when the FDA put its gene therapy for Parkinson’s disease (NBIb-1817/VY-AADC) on clinical hold which in turn resulted in the loss of the collaboration partner, Neurocrine Biosciences.  Cidara’s stock rose by 16% in Q1 suggesting that it was not specific setback that led to the decision; Voyager’s stock was down by 34% and its investment case has obviously weakened.

BB Biotech reduced shareholdings in several of its larger positions, including in Neurocrine, Vertex, Alnylam, Ionis and Halozyme during the quarter, and realised profits on Moderna, which still remains its second largest holding, after the stock surged in February. The company also reduced some smaller positions such as Arvinas and Scholar Rock. The proceeds were invested in building up positions in Agios, Macrogenics, Black Diamond, Mersana and Relay.

Agios now represents 5.1% of the portfolio (vs 4.0% on 31 December) and it must now be close to becoming a new core holding, while Macrogenics’ share of the portfolio rose to 3.6% from 2.5%; both companies saw rising share prices in the quarter, by 12% and 39% respectively. Black Diamond, Mersana and Relay all saw double digit percentage share price falls in the quarter, suggesting BB Biotech was using the market sell off to build up positions it already favours.

The same strategy seems to have been applied in the advanced areas of gene editing and cell-based immunity, where profits realized earlier from Crispr Therapeutics, Beam Therapeutics and Fate Therapeutics were reinvested in those same companies but at much more attractive valuation, according to manager Bellevue Asset Management.
In the quarter, BB Biotech participated in capital increases by Argenx and Molecular Templates, which both took place in February.  After the quarter end, Molecular Templates suffered a significant operational setback when its key partner Takeda discontinued and returned rights to a lead product TAK-169. This prompted a R&D portfolio review, which led to the decision to discontinue its first-generation products and focus on internal development of next-generation products based on its engineered toxin body technology, including TAK-169.

Ionis Pharmaceuticals (Nasdaq: IONS) remains BB Biotech’s largest holding, but its percentage of portfolio value fell appreciably (8.1% versus 10.4% as of 31 December). This largely reflects the share price reaction to a clinical setback, in which Ionis’ partner Roche had to suspend dosing in a Phase 3 trial of a potential Huntington’s drug. Ionis stock fell by 20 in the quarter and is now down 25% year to date.

Overall, BB Biotech achieved a respectable performance in the first quarter of 2021, in a period that has proved quite turbulent for biotech stocks. As of 31 March, BB Biotech stock closed at CHF82.20, up 15.4% year to date, while the NAV was CHF70.75/share, up 5.5%. As of yesterday, BB Biotech’s stock was up 13.6% year to date at CHF82.85 and the NAV has risen by 4.2% to CHF69.9/share, hence the stock is trading at a 18% premium.

The sharp sell-off in the sector since mid-February highlights the volatility inherent in biotech and underscores that for most investors, collective vehicles are likely to be best way to gain diversified exposure while managing risk.

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