Investing in biotechnology has the potential to be hugely profitable. However, for many investors the risks involved are often too high. PureTech Health (PRTC) provides an excellent solution to this problem. Shares in the US-based group are listed on the London Stock Exchange as a financial services stock, but the company is a biotech at heart. PureTech sources high-potential ideas from universities and uses these to create companies. These separate entities then operate as typical small biotech companies and often raise capital via their own fundraisings contributed to by PureTech and institutional investors. At present, PureTech owns stakes - an average of 75 per cent - in 22 biotech companies, thus nicely diversifying the risks of biotech.
- Investment model lowers biotech risk
- Effectively involved in many clinical trials
- Value catalysts in the coming 12 months
- Shares trade well below estimated value
- In biotech even low risk is risky
- No US listing flags concerns
Half of its holdings are very early-stage ventures, but the company also owns stakes in companies that are close to commercialisation. PureTech's largest holding, Vedanta, is one of these. It operates in the fast-growing 'microbiome' space - aiming to find health benefits in gut micro-organisms. Vedanta has recently completed a $50m financing round in order to launch a clinical trial in partnership with the US healthcare giant, Johnson & Johnson (US:JNJ). This would put Vedanta at the same stage of development as Aim-traded microbiome group 4D Pharma (DDDD), whose stock market value is £450m. Yet Vedanta's value - as implied by PureTech's investment - is only about £75m.
Another PureTech investment, digital treatment company Akili, has also recently completed a financing round. This brought contributions from the venture capital arms of US pharma giants Amgen (US:AMGN) and Merck (US:MRK) - hinting that Akili may be an acquisition target.
In October, Akili announced a positive therapeutic effect from a trial into its video game therapy for attention-deficit disorder. A final clinical study is expected to be completed within the next six months, meaning a product could be launched by the end of next year. Other investee companies, Gelesis and Tal, expect results from late-stage clinical trials by the middle of 2017. Positive results would almost certainly raise the value of PureTech's investments in these companies.
Arguably, PureTech's share price does not come close to the underlying value of its investments. Analysts at broking firms Liberum and Numis Securities both have a price target of 206p for PureTech's shares as valuation catalysts provided by clinical trials crystallise in the coming 12 months. Numis labels the stock "the standout buy relative to its peer group" and Liberum reckons that by the end of 2017 the underlying value of PureTech's net assets will be $1bn (£750m), which stands in contrast to the firm's current £356m market value.
It might be odd that PureTech sought a listing in London rather than on the US Nasdaq market, yet that doesn't seem to have hurt its ability to raise capital - the parent group raised $248m at flotation, while many of the individual companies have benefited from cash inputs from US institutional investors. London also offers the opportunity for a peer comparison as there are three other lifescience intellectual property investment companies listed on the LSE - and PureTech's market value to the so-called 'fair value' of its investments plus its cash is well below the average of these.
PURETECH HEALTH (PRTC) | ||||
|---|---|---|---|---|
| ORD PRICE: | 150p | MARKET VALUE: | £356m | |
| TOUCH: | 148-150p | 12-MONTH HIGH: | 177p | 118p |
| DIVIDEND YIELD: | NIL | PE RATIO: | NA | |
| NET ASSET VALUE: | 73p | NET CASH: | $314m | |
| Year to 31 Dec | Turnover ($m) | Pre-tax profit ($m) | Earnings per share (ȼ) | Dividend per share (ȼ) |
|---|---|---|---|---|
| 2014 | 2.2 | -76.2 | -51 | nil |
| 2015 | 11.8 | -56.3 | -21 | nil |
| 2016* | 0.4 | -89.8 | -38 | nil |
| 2017* | 0.2 | -93.6 | -39 | nil |
| % change | -50 | – | – | – |
Normal market size: 2,000 Matched bargain trading Beta: nil *Numis Securities forecasts £1 = $1.313 | ||||
