Biotechnology is at the heart of modern drug development. Innovations within the sector have accelerated the progress of the Covid-19 vaccine. But what about treatments unrelated to the pandemic? I’ve found a FTSE small-cap biotech stock whose share price has jumped more than 60% in only a few months.
Why is the stock surging? And should I add this company to my growth portfolio? Let’s take a look.
FTSE small-cap: a biotech stock with hidden potential
PureTech Health (LSE:PRTC) discovers, develops, and commercialises new treatments for diseases that affect the brain, immune system and gut.
A common problem with young biotech companies is finding the necessary funding to develop new medicines. After all, the process is long and expensive, with a high chance of failing to deliver a viable product. But this FTSE small-cap stock has found an intriguing solution.
The business comprises two pipelines. The first is called Wholly Owned, which, as the name suggests, develops new drugs entirely owned by PureTech. The second pipeline is where things get interesting, in my opinion.
It’s called Founded Entities and is essentially a portfolio of nine independent businesses of which PureTech is a major stakeholder. What’s more, some of these businesses, such as Karuna Therapeutics, are actually listed on the stock exchange themselves. So, whenever PureTech needs to raise additional capital to fund its own drug development, it can sell some of its shares.
Combining both pipelines, PureTech has 23 product candidates in its portfolio, 14 of which are already in clinical trial phases, with another two on the market today.
Drug development is risky
The biotech stock has an extensive portfolio of products in its pipelines. And while most have either entered or are entering clinical trial phases, there’s a considerable level of risk to consider.
Firstly, none of the drugs in its Wholly Owned pipeline have been FDA approved as they are mostly in phase 1 trials. And given that the typical drug development cycle lasts around 10 years, it could be some time before any of these products yield tangible returns. And that’s assuming they don’t fail along the way.
Today, the firm generates all of its profits from Founded Entities through stock sales and royalty income on two FDA-approved medicines. The remaining products are once again at various clinical trials stages, although there are two in their final phases.
The highly regulated nature of the drug development industry protects the health of patients. But it also makes it incredibly difficult to release new treatments. Even if a new medicine is approved, there’s still the chance that it won’t be economically viable. For example, PureTech’s new drugs may not be covered by health insurance policies or government health authorities.
The bottom line
This FTSE small-cap biotech stock undoubtedly has a significant level of risk attached to it, especially since the business is currently structured more like a holding company, as opposed to a regular biotech stock.
But over the long term, PureTech looks like a solid business in my eyes. It has a vast portfolio of potential products and is set to continue receiving royalties from treatments designed and developed by other firms. This is one biotech stock I’d add to my growth portfolio.
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Zaven Boyrazian does not own shares in PureTech Health. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.