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2016-07-22

BB Biotech: Stabilization of biotech sector in the second quarter of 2016

BB BIOTECH AG / BB Biotech: Stabilization of biotech sector in the second
quarter of 2016. Processed and transmitted by NASDAQ OMX Corporate Solutions.
The issuer is solely responsible for the content of this announcement.
Interim Report of BB Biotech AG as of June 30, 2016

BB Biotech returned to profit in Q2 2016

The biotech sector stabilized during the second quarter. BB Biotech's Net
Asset Value (NAV) increased by +1.4% in CHF and +2.3% in EUR, resulting in a
net profit of CHF 36 mn. Despite the positive trend witnessed during the past
few months, BB Biotech's net result for the first half was a negative CHF
1170 mn due to the loss reported for the first quarter. BB Biotech shares
closed the second quarter slightly lower, down -2.7% in CHF and -1.2% in EUR.
An increasing disconnect has been observed between the share prices of
companies in BB Biotech's portfolio and their positive operational
performance. Valuations of biotech blue chips have dropped to levels last
seen in 2010/11. Meanwhile company fundamentals remain positive,
notwithstanding the increasing attention that drug-pricing practices have
received. From an operating standpoint, the companies are performing well and
setting new milestones
.

The global equity markets showed continued volatility in Q2 2016. The US
Federal Reserve Bank's decision to defer again interest rate increases and
the UK referendum to leave the European Union were notable. Overall market
performance for Q2 2016 was mixed. Positive total returns were recorded for
the S&P 500 of 2.5% in USD, European indices such as the DAX showed negative
2.9% performance in EUR, the SMI was positive 4.7% in CHF, and the Nasdaq
Biotechnology Index (NBI) more or less stable with negative 1.1% in USD.

The disconnect in value between strong progress reported in biotechnology
relative to the equity market valuation continued to widen. Biotechnology
stocks have underperformed general equity markets by around 20% since January
2016. The following can be summarized for the biotech sector in 2016:

* Valuations for biotech blue chip companies have fallen to previous lows of
2010/11, trading significantly below large pharmaceutical company multiples
and below the average S&P multiple. Many small and midsized market cap
biotech firms continue to trade at record low pipeline valuations.
* Healthcare reform discussions continue, and the drug industry has become
more assertive about new product value propositions. The US presidential
election process will highlight payer complexities of the US healthcare
system and continue to rattle investors.
* Payer recalcitrance continues to impair the pace of new product launches
such as the PCSK9 antibodies Praluent and Repatha for hypercholesterolemia.
Future launches will face similar pushback on price and volume.
* Investor's fund flows were negative in January and February 2016 but have
begun to stabilize in recent months. Large asset managers reduced
biotechnology holdings in the second half of 2015 and in 2016, but overall
pressure diminished in the second, compared to the arduous first quarter
2016.
* Positive biotech pipeline news was only recently reflected in equity gains.
This is encouraging compared to the first quarter 2016, when good news
hardly moved the needle.

It was therefore appropriate that BB Biotech's strategy meeting in June
included an expert panel on global drug pricing and reimbursement trends.
Encouragingly, genuine innovation is anticipated to command premium pricing
as long as innovators address market price realities. Experts believe that
innovation continues as the strongest foundation for attractive prices.
Health economic arguments are also gaining in importance and can help solve
the equation of payer profitability - which remains their first priority. BB
Biotech continues to monitor the political and legal landscape for healthcare
reforms and changes but expects incremental rather than dramatic change
particularly in the US.

Strong progress by many of the portfolio holdings was evident once more. At
several companies this progress was not adequately reflected in equity
valuations. Conversely, two negative news events were associated with sharp
share price reactions. However, BB Biotech believes the share price
corrections of Ionis and Agios in connection with clinical news were
overreactions. Furthermore, new investment candidates were identified in the
small- and mid-cap category with attractive investment cases and which have
the potential to develop into highly valued biotech companies in the future.

BB Biotech Q2 2016 and H1 2016 performance

For the second quarter 2016, BB Biotech's share return was -2.7% in CHF and
-1.2% in EUR while the NAV gained +1.4% in CHF and +2.3% in EUR. The
resulting gain for Q2 2016 was to CHF 36 mn.

For the first six months of 2016, BB Biotech's total share return was -18.8%
in CHF and -18.4% in EUR. The total return for the NAV for the same period
was -29.1% in CHF and -28.9% in EUR, corresponding to a net loss of
CHF 1,170 mn.

BB Biotech investment leverage remained in double digits with an investment
grade of 112.3% by end of June 2016. The year 2016 began with the fund 103.5%
invested, by March 31 it was 112.8%.

BB Biotech's portfolio continued to deliver milestones

Net asset value began to stabilize - outperforming the biotech industry
benchmark in the second quarter - while still slightly behind that benchmark
year-to-date. Clinical trial results, product approvals, launches and one M&A
announcement contributed to positive results in the second quarter. The NAV
was pushed back by news of unexpected adverse events reported for two of
Ionis' late-stage pipeline assets and also by Infinity's Pi3k inhibitor
Duvelisib data which investors rated as underwhelming.

Other company news items were reported. Gilead received multiple product
approvals for products in its leading HIV and HCV franchises. Both the US FDA
and the European Agency EMEA approved the fixed-dose combination product
Descvoy (Emtricitabine, TAF) for treating HIV patients in April 2016.
Gilead's HIV franchise was further strengthened with the positive CHMP
opinion for Odefsey (Emtricitabine, Rilpivirine, TAF). Gilead also received
US approval for Epclusa (Sofosbuvir, Velpatasvir) and a positive CHMP opinion
for Epclusa. Despite these significant successes, Gilead's share price
declined further in the second quarter as Q1 2016 financial results were
below market expectations and investors continued to fret about the
trajectory and longevity of the company's HCV business.

Actelion was granted European marketing authorization for Uptravi to treat PAH
patients in the second quarter. We believe this further strengthens the
company. Intercept was granted accelerated approval for Ocaliva (obeticholic
acid) for the treatment of patients with PBC (primary biliary cirrhosis) by
the FDA. Swedish Orphan Biovitrum was granted EU approval for Alprolix, a
recombinant Factor IX-Fc for the treatment of hemophilia B. In contrast to
these positive regulatory events, Clovis terminated development of
Rociletinib in lung cancer after receiving a complete response letter from
the FDA.

Both Radius and Cempra made progress with lead assets. Radius submitted a new
drug application (NDA) for Abaloparatide-SC for the treatment of
postmenopausal women with osteoporosis. The submission was accepted for
filing by the FDA and an approval decision is expected in early 2017. Also
during the second quarter, Cempra submitted its NDA for Solithromycin for the
treatment of community-acquired bacterial pneumonia in the US and Europe.

Late-stage clinical trial results lifted market sentiment during the second
quarter. Tesaro doubled in market valuation after announcing strong Phase III
data for Niraparib - a new class of anticancer drugs called PARP inhibitors
in specific types of ovarian cancer. The trial met its primary endpoint of
improved progression-free survival in the germline BRCA mutant cohort and in
the non-germline BRCA mutant cohort, including both the HRD-positive and
overall analysis populations. Tesaro plans to submit regulatory applications
in the US and Europe later in 2016.

Regeneron and its partner Sanofi announced positive Dupilumab data in patients
with inadequately controlled moderate-to-severe atopic dermatitis.

Alexion did not reach statistical significance for the primary efficacy
endpoint with Soliris in patients with refractory generalized myasthenia
gravis (gMG). Alexion's share price fell as investors registered concerns
over long-term growth of Soliris.

Infinity announced results for its Pi3K inhibitor Duvelisib in patients with
refractory indolent non-Hodgkin lymphoma. An overall response rate of 46%,
all partial responders, is not considered competitive compared to other
treatment options. Abbvie consequently returned worldwide marketing rights
for Duvelisib.

Unexpected safety findings for Ionis' two late-stage pipeline candidates
IONIS-TTRrx and Volanesorsen resulted in a sharp decline in the company's
valuation. While time will tell, BB Biotech regarded this as an overreaction
by a sensitive biotech market.

Agios presented promising early-stage data for AG-348 in PK deficient
patients.

Acquisition news played a minor role for BB Biotech's portfolio. Although
large pharma and biotechnology companies emphasized their appetite for
acquisitions at current low prices, none has yet landed a transaction. Sanofi
offered USD 52 per share for Medivation in late April 2016. The company and
the market was not impressed, but this story is anticipated to play out -
Medivation has traded around USD 60 per share since the hostile take-over
offer - and recently another buyer made a potentially better offer. BB
Biotech will follow the situation closely.

Portfolio changes

Careful adjustments were made to the portfolio during the second quarter of
2016. Infinity and Clovis were sold off. Three new small and midsized
companies were added to the portfolio:

* Intra-Cellular Therapies is developing the lead molecule ITI-007 for the
treatment of schizophrenia, bipolar disorder and behavioral disturbances in
dementia. ITI-007 is an improved 5-HT2A serotonin receptor antagonist,
designed to offer similar efficacy but improved tolerability profile
compared to established drugs of the same class. The company has announced
one positive Phase 3 study for schizophrenia, and a second Phase III trial
is expected to readout in the third quarter of 2016.
* Macrogenics is an antibody technology company developing effector function
improved antibodies and a novel platform called DART
(Dual-Affinity-Re-Targeting) which offers potential for the efficient
development of bispecific antibodies. This platform has been partially
validated...

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