BB Biotech Vontobel Offer

BB Biotech (BION) invests globally in companies active in the biotechnology sector. Biotech has been one of the best-performing elements within healthcare in recent months, supported by fundamental drivers and M&A interest from big pharma companies seeking to replenish their product pipelines. Within this, individual stock performance reflects the binary nature of biotech investing, and individual investors may benefit from the diversification offered by a collective fund managed by a sector specialist. The proposed tax-efficient distribution policy implies a yield of c 5%, with continuing share buybacks.

The board reviews strategic direction
BION’s board has rejected an informal proposal by Vontobel for a restructuring that would see BION shares exchanged for units in a new open-ended Luxembourg investment fund. The mooted proposal would see new fund units offered to BION shareholders at NAV less a 4.2% discount (retained by Vontobel for executing the transaction). BION shareholders would benefit from an immediate closing of the discount (c 27% before the announcement, though already close to c 22%) less 4.2%, and would be able to trade in the new fund at NAV. This may appeal to some investors in the short term but we think it very unlikely that BION could be managed with the same degree of stock conviction and would lose the benefits of a closed-ended structure, particularly the support for long-term decision making, free from redemptions, in volatile markets. BION is keen to find alternative ways to narrow the discount to NAV and the newly proposed tax efficient distributions (free from local withholding tax), equivalent to a c 5% yield should broaden investor interest.

Positive fundamentals
The healthcare sector is supported by favourable global trends with biotech further supported by big pharma companies looking to replenish their product pipelines, which is driving M&A. Our healthcare team believes collective investment vehicles such as BION are for many investors the most appropriate way to access these favourable fundamentals given the complexity of the sector and stock-specific risk.

Valuation: Discount opportunity
The current 21% discount is attractive and although similar to the three- and five-year averages of 22% and 19% respectively, is much higher than peers and the level that the board aspires to (between 10% and 15%). BION continues to repurchase shares and proposed tax efficient cash distributions should attract investor interest.

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