PureTech Health provides the blue-print for value creation in the life sciences sector

Spotting the weakness of a potential treatment early in the R&D process can save hundreds of millions of dollars that can be diverted to more promising discoveries. Case closed we can all go home. Ah, but wait. While the ‘fail-fast’ philosophy in drug development is accepted intellectually by scientists and pharma execs, is it really rigorously enforced? Certainly, the number of late-stage blow-ups that continue to occur would suggest a blind eye is being turned somewhere. Okay, the trend has improved. According to the academic literature, the phase III approval rate moved from just 49% nine years ago to 67% today. Yet a 33% failure rate is still a huge amount of investment down the tubes if you think the average cost of getting a drug to the market is a conservative US$985mln (this is based on research co-authored by the London School of Hygiene & Tropical Medicine). Fail fast, save money, move on So, when PureTech Health PLC (LON:PRTC, NASDAQ:PRTC) says it actively targets its discoveries’ potential shortcomings you can see where it is going with this approach. Fail fast, save money, move on. In fact, PureTech has demonstrated a strong track record of clinical advancement, particularly in the stages where industry failures are typically high. “We actually try to set up the experiment that is very likely to kill the project to address whatever the key weaknesses are,” explains PureTech chief executive, Daphne Zohar. “On the other side, if it goes well, it creates a lot of value quickly.” The approach may explain why PureTech, which styles itself as a biotherapeutics company with a “unique R&D engine”, has hit two home runs (taking a treatment from first principles to the market). It also has an impressive portfolio of clinical assets. That said, its almost cut-throat approach to research isn’t the only reason for its success. Zohar, who founded the business in 2005, outlines a rigorous screening methodology. Rigorous methodology First, it looks for science that hasn’t yet appeared on the radar screens of big pharma, or even the academic world. “We like to hear about things before they appear in the peer-reviewed journals,” she says. “We work together with the academic inventor, and we also are inventors, and we file intellectual property. It’s then onto experiments that address the key points of scepticism.” Its focus on three areas – the brain, the immune system, and the gut – means PureTech has accumulated a huge bedrock of expertise over the past 15 years that confers a significant competitive advantage. Overlaying this is the hub and spoke model, which the company has pioneered in the life sciences arena. It was developed to allow the PureTech teams and companies to advance their assets further without the need for outside help in the form of licensing deals. But as Zohar points out: “[Hub and spoke] also allows us to move resources to the programmes that work and away from the ones that don't.” Impressive pipeline, and two home runs The approach certainly appears to have been efficacious for PureTech, which has 26 therapeutic and new therapeutic candidates, of which 15 are clinical-stage. It has also developed US Food and Drug Administration-approved therapeutics – one for attention deficit hyperactivity (ADHD), the other for obesity – that have been spun out into separate companies. It is currently blazing a trail in the emerging area of fibrosis, which is a potentially huge addressable market, as well as long-Covid, lymphatic disorders and hard-to-treat cancers. With an extensive pipeline, the potential catalysts are coming thick and fast. In all, it has at least nine clinical readouts, at least 10 clinical trial initiations and the full commercial rollout of two therapeutics in the calendar year 2021, each with the potential to move the dial for the business. Well-funded The development of the company’s fat-to-bursting pipeline can be largely done internally given the cash resources at PureTech’s disposal, which, at the end of March totalled almost US$487mln, or enough to see it into the first quarter of 2025. Impressive has been the way it has leaned into non-dilutive funding such as grants, but most eye-catching has been the value it has realised monetising stakes in companies it has founded. This has brought in over US$465mln in the past year and a half. Akili Interactive, a PureTech-founded ‘entity’ in which it still holds a 23.4% stake, recently raised US$160mln in debt and equity that will be used to fund the commercial roll-out of EndeavorRx. The product is the first digital therapeutic ever to successfully undergo the gold-standard Food and Drug Administration (FDA) phase III clinical trial process. It has the potential to revolutionise the treatment of ADHD and associated neurological and developmental disorders. Weight management drug Plenity, developed by founded entity Gelesis Inc, is the other innovation to make to the market. PureTech has 19.2% of the business. Karuna Therapeutics reveals how the company-created businesses are adding value to the portfolio. The sale of a stake in February brought in US$118mln, while the remaining holding in the Nasdaq-listed business is worth US$310mln based on Friday’s close. Karuna is developing KarXT, which it hopes will be the first new approach for the treatment of adults with schizophrenia for 60 years. London brokers bullish The current share price has advanced 18% over the last year and around 40% from its November nadir to 340p, though two London brokers believe there is further to go. Liberum says that on a sum-of-the-parts valuation PureTech is worth 540p a share. “We also like the diversity in the portfolio, with the largest entity, Karuna, accounting for just 16% of the target price,” it said in a note flagging the company as one of its top picks in the sector. It pointed out that around 200p of the current share price is held in liquid assets (cash plus quoted equity). Analysts at Peel Hunt, meanwhile, are even more bullish and have set a 930p price target for PureTech stock. Zohar can’t and won’t be drawn into predicting the future share price. Indeed, who of sound mind would? However, she’s keen to address one major misconception of the business that might also serve to underline its potential. “People think we went out and invested in companies like Karuna, Akili and Gelesis. They think we are a holding company,” says Zohar. “That’s a common misconception. They don't realise that we were the creator of those programmes. “If you think about it, if we had had the resources to develop all of those internally ourselves, we would now be what's now dubbed a mega-biotech.”