Biotechnology investors dream of success stories like Karuna Therapeutics. Founded in 2009, the company took a drug others had given up on, ironed out its flaws and then, against tremendously poor odds, ushered in a new generation of antipsychotic medications.Bristol Myers Squibb recently acquired Karuna for $14 billion. PureTech Health, the Boston-based incubator that got the company off the ground with about $19 million, has now recorded more than $1 billion in gross proceeds.Despite that success, PureTechs leadership doesnt think investors fully appreciate the firms worth. Not counting funds at subsidiaries it doesnt wholly own, PureTech had $400 million in cash, cash equivalents and short-term investments as of June 30. And yet, the companys stock, which is listed on both the Nasdaq and London Stock Exchange, trades at prices that suggest shareholders dont see much value beyond those reserves.Bharatt Chowrira, PureTechs former president and freshly minted CEO, believes theres a disconnect between shareholders and the work being done at firms like his, which operates under a hub-and-spoke model. In such a model, a central biotech creates offshoot companies that each get to focus on a specific medicine, disease area or drugmaking technology, while still staying tethered to the parent firm and drawing on its resources and expertise.This structure holds advantages, namely that its relatively easy to sell off or spin out projects that show great promise or, conversely, wind down those that hit major obstacles. Companies like BridgeBio Pharma, Centessa Pharmaceuticals and Roivant Sciences, which last year sold one of its subsidiaries to Roche for $7 billion, have adopted this radial style as well.Chowrira, along with PureTechs co-founder and current president, Eric Elenko, spoke to BioPharma Dive about the drawbacks of the hub-and-spoke model. They also discussed the hard lessons investors learned over the last five years, as an extremely sunny biotech market took a historic downturn thats made funding harder to secure.The following conversation has been edited and condensed for clarity.BIOPHARMA DIVE: Puretech has done the hub-and-spoke approach longer than most. What have you learned? Whats worked, what hasnt, and has your mindset on building companies changed?BHARATT CHOWRIRA: We are really proud of our track record, in terms of executing on this model and developing really innovative, novel treatments for serious diseases. And it's been very successful from an R&D perspective. We've had an 80% success rate with our clinical trials, whether they were run at PureTech or through founded entities. Compared to the success rate of clinical trials in the industry, we are about six-fold better than the average.On the financial side, founded entities have been a great source of capital back to PureTech. We've been able to generate a lot of funding from our entities that we can then use to re-invest into our R&D engine to create new programs. In the last six years, we haven't had to go out and raise money in the public markets to advance our [business]. Not many companies can claim that they're evergreen or self-funded.We have a very strong balance [sheet] still $400 million last reported cash at the PureTech level, which will continue to generate capital as we advance some of these additional programs.One of the challenges with this model is that, because it's hub-and-spoke, even though we start with 100% ownership of each of the programs at the beginning, over time, as we bring in outside investors, our ownership stake gets diluted. We've never been able to get the full value for all of the successes we've had.That's reflected in our market capitalization on the London Stock Exchange. Right now, we are trading at or slightly above our cash on the balance sheet, which is a huge value disconnect. That's been a challenge for this hub-and-spoke model as a public entity, [and] something we are working towards bridging and narrowing that gap of what the intrinsic value we believe is and what is reflected in the public stock market.Eric ElenkoPermission granted by PureTech HealthERIC ELENKO: If you look at a lot of how entrepreneurship happens, how a lot of companies get started, it tends to be haphazard. An entrepreneur meets someone; they get excited about something. It really isn't done in a reproducible manner. [Our model] allows for doing things more efficiently.You think about a company that's starting for the first time. It literally has to go out and build capabilities from scratch. If you're building a plane while flying it, that's inherently inefficient and challenging.[Our model] also offers, from a corporate perspective, less binary risk. The trade off is not owning 100% of the upside because of the inherent dilution that comes from accepting funds. But the plus side is having a portfolio. If you look at many companies, these are binary bets. The program works in the clinic or it doesn't. And even when there might be more than one program, value is often attributed to that lead program if there's one far ahead and two far behind.When we started PureTech, we didn't have a lot of capital. One of the things we've been able to do now is develop to a more mature state than previously, so if we choose to spin something out, the value that can be attributed to that asset is greater because it's more derisked.One last thing that's a little bit of a shift for us: we were more broad in our scope of modalities. We did digital, we did this, we did that. We've been much more focused lately on therapeutics.You mentioned derisking, a word thats come up a lot in biotech recently. Whats the most important thing to think about when it comes to derisking and building companies around therapeutic assets?ELENKO: I agree, it does seem to be something that, particularly in the investor community, there's a focus on.If you look at things [in our portfolio], what you see as a theme is a drug that has a human impact but had a problem. At Seaport, there's a pipeline of assets where there's human pharmacological experience, but an issue that held them back. The Glyph platform solves it. Or you look at Karuna, xanomeline had great data. The combination [Karuna developed] solves the inherent issue that held back that drug.While not all our plays are going to be along those lines, it's a little bit of a philosophical perspective that human data is really the most important aspect of viewing risk and it trumps everything else.Bharatt mentioned a disconnect between PureTechs value and the price at which its shares trade. Is that a PureTech-specific problem, or one affecting other hub-and-spoke firms? In either case, how do you better convey PureTechs value?CHOWRIRA: We have looked at this, believe me. Is it the model? Is it the investor base? Is it being on the London Stock Exchange versus the U.S. Nasdaq? When you look at Roivant, when you look at BridgeBio, when you look at Centessa, all of these companies [have this problem].If you look at [Roivants] market cap, it's not that much above their cash. They're not getting value for anything else in their pipeline. Yes, they had a big exit with one of the programs that they sold. But their market cap hasn't really gone above the cash they have on the balance sheet. It is still a challenge for them.You look at BridgeBio: Until they decided that they wanted to take their lead program all the way to commercial ... they were also facing this conglomerate discount. You never get the full value of the sum of the parts.At least for us, we have looked at this and said, Maybe it's the model that has some challenges for people to value your overall portfolio versus valuing just one or two programs that you have the most upside on.There are companies out there that are private the hub is private but their spokes are either sold or taken public. And then they get the cash back, and they distribute the cash to their stakeholders as a private hub. Those have generated some value for their shareholders.Its hard to [know] whether, eventually, this model is going to generate full value for the portfolio. It remains to be seen.You said PureTech has narrowed its focus to therapeutics. Was that decision hastened by the restrictive financing environment weve seen in biotech over the last couple years? Relatedly, how has this environment shaped the way PureTech builds and finances its companies?ELENKO: Actually no, it hasn't. Our philosophy has always been: go to an area of huge unmet need, an area that lacks innovation, and make a big difference for patients. It's okay if no one's playing there, they'll still follow.You saw this with psychiatry. When we started Karuna, there was almost no interest. The reason there's an interest in psychiatry [now] is because there's been success, notably Karuna.We don't believe in letting trends, or what perhaps is the dish du jour, influence what we do. Were really looking for: how can we make drugs in an efficient manner, take less risk and have those help patients?The environment is somewhat risk-off. That puts an emphasis on programs where there is increased evidence, preferably some type of human evidence backing up the drug. But our move towards traditional therapeutics really is based on the desire for focus.We really don't want to be involved in novel modalities where, the modality can work, but perhaps there's a greater amount of commercial risk because it involves pioneering a new commercial model. We're no longer involved in those types of plays.How does that conviction square with an investor base that might be more jittery right now?ELENKO: We have been trying to develop products where, often, there is this human pharmacological proof of concept, and then taking them to a more mature point and forming these spokes, these companies that ... can leverage the resources of PureTech. By definition, that is a more derisked asset.Sometimes in the market, the pendulum swings from people who are willing to invest in things that are very early, preclinical, five years from the clinic, to people who are very conservative and only wanting later-stage assets.But if an asset has great science behind it and its got the ability to move forward rapidly to a next value inflection point, those types of assets will always have a market.So when it comes to these big swing ideas, is PureTech still pulling from the same playbook?CHOWRIRA: The core approach is still this belief that if we identify a problem that exists in a really serious disease condition ... and the solutions could be based on those two types of modalities small molecules and biologics we want to tackle those big problems.Based on the success of Karuna and now Seaport and our LYT-100 program, we think some of those straightforward, simpler approaches could actually have tremendous impact.Big problems don't necessarily need big science to actually solve them. Sometimes solutions can be very simple. We learned through the Karuna experience that that can be very compelling. Thats how we've calibrated some of our thinking.Investors now talk about the biotech boom between 2019 and 2021 as a period of too much exuberance. Do you expect the tempered attitude we're seeing right now to continue when the cycle inevitably changes and the markets warm up? Or do old habits die hard?CHOWRIRA: I've been in this space for 30-plus years. Ive seen the cycles repeat at least a couple times. You go through these periods where suddenly there are plenty of successes in biotech, and a lot of money comes into the sector. And [maybe] the cost of capital is cheap, so investors end up funding companies and taking them public.Bharatt ChowriraPermission granted by PureTech HealthBut those companies don't necessarily have strong fundamentals to go public. Some survive, but for a lot that shouldn't be public or shouldn't have been funded, suddenly things go south at the macro-level and you end up with companies that either fail or cannot get more funding.People become jaded about it, saying, We learned our lesson. But not really. There is this fear-of-missing-out mentality. And people end up funding things that shouldn't be funded.ELENKO: I haven't been in the industry as long as Bharatt, but I've been in it for quite a while. Its always like this. Eventually we'll be back around to the frothiness.CHOWRIRA: You would think that these VCs are so smart they are, theyre really smart people and that they would learn from the past. And not just VCs, but other investors. [Youd think] they would look at history and say, Maybe we shouldn't be playing in this space at this stage of development.One positive to take through all of this is that good, solid value propositions have always done well, regardless of whether it's the downturn or the frothy markets. They've always been able to attract blue-chip investors. Those are the success stories people talk about.Turning to PureTech specifically, what convinced the firm that Karuna wasnt a one-off story, and that you could find similar success in a broader company like Seaport?ELENKO: It really goes back to the very systematic way we approach innovation, this problem-solving method of: start with the unmet need, brainstorm, define the solution space, go look all over the world for the potential solutions, bring it in and derisk it, and go from there.CHOWRIRA: People always ask us: Was Karuna a fluke?We have demonstrated, now multiple times, different approaches to [finding] a solution to a problem. But an underlying constant is that we start with something we know has some human pharmacological effect. Once we know it works in humans, then we can figure out what a solution set could look like to overcome other challenges holding it back.CEOs are often under pressure to put their stamp on the company. Bharatt, what, if anything, do you hope to change about PureTech and the way it creates or funds biotechs.CHOWRIRA: I think we're going to continue to do what we're really good at, which is innovating new medicines to bring to the patients. The challenge we are trying to address is how do you bridge this value disconnect? We have all these tremendous benefits. How do we unlock that value potential so that we can do right by the shareholders and generate value?So no major plans to shake up the strategy then?CHOWRIRA: Youll just have to stay tuned. '
