PureTech provides investors with diversified exposure to biotechnology in a way few others do. While it is somewhat higher risk than a healthcare fund or ETF, PureTech is a biotech company that, unlike many peers, doesn't depend on a single product or platform for success and instead provides 'multiple shots at goal'. Management has an excellent track record in drug development, claiming an 80% success rate with clinical trials conducted, well above the industry average. Much of PureTech’s development success is due to its strategy of improving already approved medicines by addressing their limitations. Using an active pharmaceutical with proven efficacy reduces development risk. Bristol Myers Squibb's $14bn acquisition of Karuna Therapeutics at the end of 2023 highlights PureTech's ability to support and develop the right prospects. PureTech played a significant role in Karuna's founding, funding and strategic direction, going back to 2016. PureTech generated $1.1bn in proceeds from Karuna, having invested $18.5m.
PureTech Health certainly appears significantly undervalued. However, for a traditional investor looking at earnings multiples or dividend yield, valuing PureTech is tricky. As with many biotech companies, there is little revenue and substantial annual losses, and it's unclear how an investor will realise this value. In addition, the recent share tender offer left a perceived overhang, and the shares have been heavily sold off.
We think it is worth looking at the company in more detail as something is likely to change.
The business model
PureTech's structure means it isn't as capital-hungry as most biotechs. It operates a 'hub and spoke' model where PureTech is the hub and it spins off companies as 'spokes'. Some of its development drug candidates remain wholly owned and funded by the hub. Others are spun off as separate companies where PureTech retains a shareholding and provides support. As individual companies, these 'spokes' can raise funding from other 3rd party investors, often specialist healthcare venture capital organisations. This model allows PureTech flexibility to allocate cash to different projects or return it to shareholders should it choose to. Since spin-off, the spokes have raised $4.1bn, with 95% coming from external investors.
At today's share price of 172p in the UK and $22.8 on Nasdaq, PureTech's market cap. is roughly £420m or $540m.
Recent results show that the company reported net cash of $400m, which will fall to $345m by the end of 2024. So, using this year-end cash of $345m, the remaining assets in the hub and all the spokes in the chart above are currently valued by the market at approximately $200m or £150m.
Seaport Therapeutics
Seaport Therapeutics is led by the ex-Karuna Therapeutics team, the developers of Cobenfy (previously KarXT), which was sold to BMS in 2023 for $14bn. Seaport has a platform technology ('Glyph') that allows drugs to be delivered to patients more effectively, increasing the amount of drugs available to the body and reducing side effects. Seaport has multiple opportunities for different drugs using the Glyph technology.
Seaport spun out of PureTech in April this year, completing a $100m Series A fundraise which attracted high-profile healthcare investors such as Arch Ventures, Sofinnova Investments and Third Rock Ventures, presumably on the back of the team's previous success at Karuna. In October, Seaport announced a Series B that raised a further $225m from additional experienced investors, Foresite Capital, Invus, and Goldman Sachs, amongst others, as well as participation from existing investors. PureTech made a small contribution to this round of approximately $15m but effectively exchanged 21% of Seaport to external investors for a capital investment of $210m. Assuming existing investor participation, the transaction implies a valuation for PureTech’s remaining 37% stake of $370m. Allowing for some additional dilution, we use $320m as a best guess. Considering these specialist investors in Seaport expect to make their money back multiple times, valuing the business at their investment 'in-price' is conservative.
Therefore, the forecast year-end net cash of $345m plus the Seaport stake of $370m gets us to $715m, already well above the current market cap.
And there’s much more.
Vedanta Biosciences
PureTech also funded, and remains a 36% shareholder, in Vedanta Biosciences, a developer of drugs to treat gastrointestinal diseases by modifying the human microbiome. This is an emerging therapeutic field and has attracted substantial interest from investors. Vedanta’s lead programme for the prevention of C. difficile infection (CDI) is currently in Phase 3 studies. While existing treatments are already on the market, they are derived from human faecal matter (FMTs). These FMTs work by replacing a dysfunctional microbiota in a C. difficile patient with one transplanted and derived from healthy individuals. This has been a controversial and costly approach and the mechanism by which these drugs work is not completely understood. There remains perceived infection risk, administration issues and difficulties in standardisation, so there is an unmet need that could be filled by Vedanta’s treatment which overcomes variability, being based on bacteria grown in clonal banks.
In April 2023, before commencing the Phase 3 trial on the CDI treatment, Vedanta announced it had raised $106m, funded by the AMR Action Fund and The Bill & Melinda Gates Foundation, amongst other prestigious investors.
The involvement of these institutions, plus existing investors such as Pfizer, highlights the importance of Vedanta's drug pipeline.
Since its formation, Vedanta has raised approximately $350m, taken a lead candidate into Phase 3, has an IBS treatment in Phase 2, plus various other earlier stage programmes. If we simply assume capital invested as a valuation, a 36% stake is worth $125m.
The full terms of the 2023 raise have not been disclosed. However, it appears that PureTech's stake was diluted by 5.5 percentage points from the end of 2022 to 2023 (from 41.4% to 35.9%). In the absence of more detailed information, we assume a $270m valuation for PureTech's stake.
LYT-100
An important programme for PureTech is its wholly owned LYT-100 (deupirfenidone), a treatment for Idiopathic Pulmonary Fibrosis (IPF). IPF is a rare disease which involves extensive scarring of the lungs. The scarring progresses and makes it increasingly more difficult for the patient to breathe, and it is often fatal. Only two drugs are approved for IPF: Roche's Esbriet (pirfenidone) and Boehringer Ingelheim's Ofev (nintedanib). Both are compromised with often severe gastrointestinal side effects such as diarrhoea, vomiting, and abdominal pain. Liver enzyme elevation and bleeding risks are other concerns. As a result of these difficulties, it is believed that up to 75% of patients remain untreated with these drugs. Nevertheless, Esbriet and Ofev still generated sales of over $4bn in 2022. PureTech believes its improved treatment could address this 75%, meaning the market opportunity for LYT-100 is substantially bigger than just the existing revenues.
LYT-100 is a relatively low-risk development programme as it uses the same active ingredient as Esbriet, currently with a 40% share of the IPF market. LYT-100 has already been shown to significantly reduce the side effects associated with Esbriet. We look forward to Phase 2b data before the end of 2024, which should enhance the programme's value.
Assuming a 20% share of a $4bn market and a partnership that gives PureTech a 20% royalty would bring in $200m in annual revenues. Discounted at 25% to reflect the clinical and commercial risk and taxed, gives a valuation of $300m for LYT-100.
However, Esbriet has recently faced generic competition in the US, which changes the market environment. It is likely to make the launch of a new product, particularly a derivative of the generic, more difficult. While there have been several real-world studies done, a recent study suggested that, since its launch, only 17% of patients given Esbriet discontinued treatment, so the side effects might not be so limiting. In addition, Bristol Myers Squibb announced positive results last year from a Phase 2 study evaluating its oral LPA1 antagonist in patients with progressive pulmonary fibrosis, plus FibroGen and others have products in development. For example, Avalyn Pharma’s lead product is an inhaled formulation of pirfenidone, which, like LYT-100, seeks to reduce the side effects associated with Esbriet.
These factors may dampen excitement over LYT-100’s commercial prospects, and we would like to see some external validation for LYT-100. This support could come through spin-out and external funding or a relevant partnership. Until then, we suggest a cautious approach and attribute only $150m of value here. This leaves significant scope for upside should external interest emerge.
Gallop Oncology
Gallop Oncology has Orphan Drug Designation for LYT-200, aiming to treat haematological malignancies such as acute myeloid leukaemia (AML). LYT-200 targets the galectin-9 protein, which is believed to suppress the immune system in its fight against cancer cells. Inhibiting this protein would allow the immune system to recognise and kill cancer cells more effectively. Other companies are investigating the potential for a galectin-9 inhibitor, but Gallop believes it is the most advanced. LYT-200 has achieved various designations from FDA that should improve development speed and chances of success, such as Fast Track and orphan drug designations. It also has strong preclinical and encouraging Phase 1 data. However, LYT-200 is an early-stage programme and previous development attempts with galectin inhibitors have seen mixed results. Therefore, we would attribute a valuation of only £50m at this point. However, we recognise the broad potential for a galectin inhibitor in cancer, and positive later-stage data could significantly add to Gallop’s valuation and generate more interest from external parties.
Cobenfy and other assets
Cobenfy has been hailed as a breakthrough treatment for patients with schizophrenia. While the sale of Karuna has already brought substantial value to PureTech (see below), it still stands to share in the future success of Cobenfy. PureTech remains entitled to certain royalties and milestones. It just received $29m on Cobenfy's FDA marketing approval, and the additional income accruing to PureTech could be worth more than $400m, depending on the success of Cobenfy in schizophrenia and other indications.
Puretech also has other assets, such as a share of a preclinical oral drug delivery platform through its 75% stake in Entrega. The platform aims to develop an oral delivery mechanism for larger molecule, biologic drugs, such as GLP-1s, to treat obesity. Biologic drugs are mostly injected to ensure they are not degraded and rendered ineffective in the gut. An oral delivery method would be very valuable to many biologic developers, allowing more convenient and cheaper administration options.
Sonde Health has a voice-based AI technology that detects changes in the voice that can indicate certain illnesses. The company aims to incorporate these into phones, headphones and smart speakers.
Within Seaport, Vedanta and the PureTech hub, other earlier-stage candidates often use the same drug and mechanism of action. Hence, they can rely on some of the safety data already generated when testing different diseases and indications. We have not detailed any of these candidates, and many have the potential to drive significant future value for PureTech.
Possibly harsh, but allowing for the uncertainty and risk, we'll attribute only $200m of value to Cobenfy and the other assets discussed above.
Assuming external investors in the hubs have paid sensible prices and taking our very conservative assumptions for the value of the remaining prospects, Puretech’s assets are worth over $1.3bn versus a current market capitalisation of $540m.
The hurdle
PureTech has an enviable track record of value creation. However, as with any investment, returns are generated by the income or capital gain you receive down the line. You expect to get that directly from the company through distributions or by selling your shares to someone else at a higher price than you paid. Either way, you likely need to be patient, and in a world of higher interest rates, waiting is not something you want to do for long. Hence, one of the reasons for the sector and PureTech's malaise.
PureTech's shares were listed in 2015 at 160p and trade marginally above there now. As a shareholder, to have seen any cash returns on your investment you would have had to sell your shares to the company during the buyback, at the tender offer, or at higher levels in the open market. There have been no income distributions, and the table above shows that selling your shares to PureTech at anything less than £4.30 or $55 (for the ADRs) is a better deal for the company. To be fair to PureTech, income distributions are somewhat restricted by US tax regulations.
Share Price (£)
PureTech is a US company that listed in London as it believed that UK investors would understand the business model better than those in the US. It floated at a time when certain UK funds were flush with cash and allocating a significant part of it to healthcare companies. PureTech made a secondary listing on Nasdaq in 2020 to entice US investors and broaden the shareholder base. However, most of the largest shareholders remain UK institutions, except for one US value fund. UK investors still seem to have a better understanding of the business model.
After the Karuna Therapeutics sale, PureTech shares seemed to be on an upward trajectory as the company continued its $50m share buyback, and investors appeared to be beginning to appreciate the model and the team's abilities. However, a $100m tender offer at 250p during the summer saw almost two-thirds of the share capital (worth $600m at the time) tendered. While there would have been an element of over-tendering, it left an overhang that drove the shares down below the IPO price. It is easy in hindsight, but the $100m would have been better used in another buyback programme. The company would have bought shares cheaper and could have supported the share price.
On the recent results call, the option to raise more capital on Nasdaq was mentioned to address low liquidity and attract specialist healthcare investors. The company just paid 250p to buy shares from investors in the tender offer, so selling them when the stock trades near 160p doesn't make sense. Additionally, we believe that PureTech is more of a stock for generalist investors looking for diversified biotech exposure rather than specialists who tend to prefer more focused investments. Increasing liquidity in shares seldom solves a valuation problem anyway.
PureTech, listed nine years ago, founded and sold Karuna Therapeutics for $14 billion, has demonstrated an 80% success rate in clinical trials, and has a portfolio of over 25 drug candidates, with multiple opportunities to drive more value. With a large cash balance, it is in a stronger position than ever, allowing it to advance programs further before requiring dilutive external funding. In our view, PureTech should be launching another buyback and not issuing shares at anything less than £4 or $50.
Management needs to be more precise on how future distributions will be made and how shareholders can realise a return on their investment. Otherwise, it is difficult to see what will make the shares go higher in the absence of an outright bid for the group. For those who are patient, there's plenty of potential value, but in the absence of change, internally or externally, it seems unlikely to be realised soon.
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