Primecap's Biogen Exposure Could Be History Repeating

 Biogen’s (BIIB) March 21, 2019, share price drop of 29.2% on news that it has discontinued late-stage trials of an Alzheimer’s treatment hurt few asset managers more than Pasadena-based Primecap Management Company. As of year-end 2018, Primecap firmwide owned 7.5% of Biogen’s shares outstanding. All six Primecap strategies owned Biogen, but its Vanguard funds had the most exposure. Biogen was the second-biggest position in  Vanguard Capital Opportunity (VHCOX), third-biggest position in  Vanguard Primecap (VPMCX), and eighth-biggest position in  Vanguard Primecap Core (VPCCX). It was a top-25 holding in  Primecap Odyssey Growth (POGRX) and a top-40 holding in both  Primecap Odyssey Aggressive Growth (POAGX) and  Primecap Odyssey Stock (POSKX).

Primecap was in a similar but even more severe position in early 2005 with respect to Biogen. It then owned firmwide about 10% of Biogen’s shares outstanding. On Feb. 28, 2005, Biogen voluntarily suspended sales of its multiple sclerosis treatment TYSBRI, and Biogen’s stock price shed 42.6% that day. Primecap’s Alfred Mordecai had just been named as a portfolio manager in November 2004 and was then the firm’s biotech analyst in charge of covering Biogen. He discussed this experience at length with Morningstar during a June 2018 stewardship visit, citing it as an example of how Primecap’s tolerance for pain distinguishes it. Mordecai re-evaluated Biogen’s post-TYSBRI prospects, and Primecap’s managers held fast, in some cases adding Biogen exposure. That proved to be the right call. Between March 1, 2005, and March 21, 2019 (thus including the most recent swoon), Biogen’s shares returned 13.9% annually, versus 10.2% and 8.6% for the Russell 1000 Growth and S&P 500 indexes, respectively. 

Primecap’s managers may follow a similar script this time around with Biogen, or they may decide to act differently. Either way, they have been here before and have proven adept at taking advantage of such opportunities. Each Primecap strategy retains its Morningstar Analyst Rating of Gold.