Boston-based biotechnology company Puretech Health (PRTC) has a strong track record of creating value for shareholders.

Yet its share price languishes more than 50% below a sum-of-the- parts valuation and implies the company’s internal pipeline of assets is worthless, which is far too pessimistic and provides savvy investors with a relatively low-risk buying opportunity.

Puretech operates a unique, hybrid business model whereby it invests its own capital to develop a pipeline of assets as well as running a ‘Founded Entities’ business for outside investors to provide capital.

Crystallising value in the Nasdaq-listed quoted Founded Entities has allowed the company to fund new projects and return capital to shareholders. These entities have raised $3.8 billion since 2018, of which 96% was funded by third parties.

The most successful entity to date has been Karuna Therapeutics (KRTX:NASDAQ), which has an oral schizophrenia drug KarXT in development. Approval is expected in 2024 and would make KarXT the first new schizophrenia treatment to be commercialised in over 50 years.

Analysts at William Blair estimate KarXT could generate revenue of $2.5 billion a year in the US by 2028, making it a ‘blockbuster’ treatment.

Puretech sold a royalty interest in KarXT to Nasdaq-listed Royalty Pharma (RPRX:NASDAQ). This comprises of an upfront payment of $100 million, up to $400 million in commercial milestones and royalties on sales over $2 billion.

In aggregate, the company has the potential to crystallise $780 million from an initial $18.5 million investment and it still retains an equity interest of $375 million equating to a return on investment of over 60 times.

Liberum believes two more of the company’s clinical-stage assets have unrecognised ‘blockbuster’ potential.

Puretech’s $320 million of cash and cash equivalents on the balance sheet and its stake in Karuna shares, worth around $195 million, add up to more than its current market capitalisation.

Liberum estimates the value of the other founded entities and risk-adjusted value from the firm’s internal pipeline adds up to 370p per share, which means the shares are trading at a 59% discount to intrinsic value, implying 142% upside.

The biggest risk is the shares remain unappreciated and value takes longer than expected to crystallise. This might be a problem for a normal biotech company developing a drug pipeline as financing needs are never far away.

However, this clearly isn’t a concern for Puretech given the huge amount of cash sitting on its balance sheet. This in turn may invite potential bidders for the business and provides another possible exit for patient investors.

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