BB Biotech SWX:BION
May 31, 2010 - 4:29pm EST by
buggs1815
2010 2011
Price: 60.00 EPS $0.00 $0.00
Shares Out. (in M): 16 P/E 0.0x 0.0x
Market Cap (in $M): 963 P/FCF 0.0x 0.0x
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT 0.0x 0.0x

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Description

 

BB Biotech is a closed-end fund listed in Switzerland (also trades in Germany and Italy).  It currently trades at a ~27% discount to NAV (60 CHF versus 82.5 CHF NAV).   You can find all of its financial reports, etc. here:

http://www.bbbiotech.ch/en/

The fund is actively managed, but is fairly low turnover and is concentrated. Its top 4 positions represent ~70% of NAV.  The top four positions are Actelion, Celgene, Gilead, (~18% of NAV each) and Vertex Pharmaceuticals (~15% of NAV).  The rest of the portfolio is spread across about 20 other biotech investments (most are NASDAQ listed). All the details are availble on the website above in the quarterly report.

The management fee is 0.4%, plus there is an incentive fee above a high water mark that is currently 113 CHF which is pretty much irrelevant given the current NAV.  Fees don't explain the large discount.

The fund is not levered now.  It has been at times in the past.

In the past 5 years the discount has averaged 14% with a peak of 33% (during the '08 financial panic) and a low discount of around 10%.

Going further back, this company has been publicly traded since 1993 and at times as even traded at a premium to NAV (though rarely).

If you look at the portfolio about 70% of it is in what I would call "real businesses" with earnings and cash flow.  Some of these businesses seem like they may be undervalued (see Actelion and Gilead both at around 10x earnings with growth potential due to their pipelines) while others (e.g. Celgene at 20x) are probably expensive or at least have high expectations.  On balance, the owned companies with real businesses are probably fairly valued to slightly cheap. The rest of the investments are in early stage biotech companies.  Essentially, I view this closed-end fund as a way to get exposure to the call option that is these early stage biotechs while only paying for the portfolio that represents established businesses. 

Why do I believe the discount will eventually close?  First, the company has a history of buying back its own shares.  I contacted them recently and they are waiting for some of the market volatility to settle down before purchasing, but they acknowledged they have historically bought back shares when the discount was between 10 and 20%.  I believe they have authorization to buy back up to 10% of shares outstanding.

Second, I think a lot of the reason for the discount is due to retail investors selling.  Most of these companies are US-based companies (or they derive much of their revenue in the US) so there is very little reason to believe that the debt crisis in Europe should actually impact them (aside from general market multiple compression or a currency benefit if they are a European exporter).  I believe retail investors are just pulling money out of the market as they worry about the crisis.

Finally, I do believe that some degree of discount should always remain due to management fees and a liquidity discount. I just think it will likely be closer to 10% instead of nearly 30%.

Risks: 

  • Discount gets wider.  It has been a little wider in the past and could certainly get even wider if the panic in Europe continues.  I'd view any widening as a temporary thing, but who knows how long it will last?
  • NAV declines.  I think this risk is mitigated by the fact that many of these are real companies at what appear to be reasonable to cheap valuations, but an NAV decline could certainly happen (particularly in the short term).  First, general compression of market multiples could reduce NAV.  Second, one of their companies could fail (e.g. Vertex which has a very promising looking but unapproved drug and the current market value certainly almost assumes approval).  Some of this market risk could be shorted away, though I have chosen not to as I believe biotechs have a lot of long-term growth potential that is not particularly tied to the macro outlook and this looks like a reasonable portfolio of them.
  • Active management risk.  This portfolio is actively managed by Bellevue Asset Management.  The historical performance looks quite acceptable and the team seems qualified, but there are no guarantees.  Performance since inception in 1993 is 8.9% annualized.  This is about 120% better than the Nasdaq Biotech index over the same time frame.  This risk makes hedging the trade with shorts pretty hard due to slippage.
  • I believe a voluntary liquidation of the portfolio by the board is fairly unlikely.  BB Biotech is a significant part of Bellevue's asset management business.  I doubt they are going to be keen on a liquidation, though I suppose it is possible if the board of the company decided to go that way.  However, the board appears to have a pretty cozy job that pays about 200k CHF per year for what looks like almost no work.  It's probably not a gig one would give up unless he had to.  I'd welcome members' thoughts on the concept of fiduciary duty in Switzerland and whether or not an activist may be able to compel liquidation or a conversion to an open ended fund.
  • Finally, this one is pretty illiquid.  It only trades about $1 million USD worth of volume daily so its pretty much a PA idea. 

Catalyst

  • Discount to NAV closes due to end of European crisis and/or substantial repurchase of shares by the company.
  • NAV moves.  I think there is a reasonable chance NAV grows substantially in the next few years, but you will have to make your own decision about that after reviewing the underlying companies.

 

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    Description

     

    BB Biotech is a closed-end fund listed in Switzerland (also trades in Germany and Italy).  It currently trades at a ~27% discount to NAV (60 CHF versus 82.5 CHF NAV).   You can find all of its financial reports, etc. here:

    http://www.bbbiotech.ch/en/

    The fund is actively managed, but is fairly low turnover and is concentrated. Its top 4 positions represent ~70% of NAV.  The top four positions are Actelion, Celgene, Gilead, (~18% of NAV each) and Vertex Pharmaceuticals (~15% of NAV).  The rest of the portfolio is spread across about 20 other biotech investments (most are NASDAQ listed). All the details are availble on the website above in the quarterly report.

    The management fee is 0.4%, plus there is an incentive fee above a high water mark that is currently 113 CHF which is pretty much irrelevant given the current NAV.  Fees don't explain the large discount.

    The fund is not levered now.  It has been at times in the past.

    In the past 5 years the discount has averaged 14% with a peak of 33% (during the '08 financial panic) and a low discount of around 10%.

    Going further back, this company has been publicly traded since 1993 and at times as even traded at a premium to NAV (though rarely).

    If you look at the portfolio about 70% of it is in what I would call "real businesses" with earnings and cash flow.  Some of these businesses seem like they may be undervalued (see Actelion and Gilead both at around 10x earnings with growth potential due to their pipelines) while others (e.g. Celgene at 20x) are probably expensive or at least have high expectations.  On balance, the owned companies with real businesses are probably fairly valued to slightly cheap. The rest of the investments are in early stage biotech companies.  Essentially, I view this closed-end fund as a way to get exposure to the call option that is these early stage biotechs while only paying for the portfolio that represents established businesses. 

    Why do I believe the discount will eventually close?  First, the company has a history of buying back its own shares.  I contacted them recently and they are waiting for some of the market volatility to settle down before purchasing, but they acknowledged they have historically bought back shares when the discount was between 10 and 20%.  I believe they have authorization to buy back up to 10% of shares outstanding.

    Second, I think a lot of the reason for the discount is due to retail investors selling.  Most of these companies are US-based companies (or they derive much of their revenue in the US) so there is very little reason to believe that the debt crisis in Europe should actually impact them (aside from general market multiple compression or a currency benefit if they are a European exporter).  I believe retail investors are just pulling money out of the market as they worry about the crisis.

    Finally, I do believe that some degree of discount should always remain due to management fees and a liquidity discount. I just think it will likely be closer to 10% instead of nearly 30%.

    Risks: 

    Catalyst

     

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