2022 has been brutal for start-up biotech companies. At Cathie Wood’s Ark Genomic Revolution ETF is down 60% from last year. However, Wood’s long-term performance is outstanding, even after this huge drop. Some of its stocks have become much cheaper in the short term. But the upside potential remains huge.
Our roundtable group dug through their holdings and found three stocks that we particularly like. Here’s why we’re optimistic 10x Genomics (NASDAQ:TXG), Beam Therapy (NASDAQ: BEAM) and Recurrence Pharmaceuticals (NASDAQ: RXRX).
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A leader in a $15 billion market
Patrick Bafuma (10x Genomics): If you browse the holdings of Ark Invest, you will see many moon shots. And every once in a while, you find businesses that are already generating sales. 10x Genomics fits this mold, guiding full-year 2022 revenue of $600-630 million, representing 22%-28% growth over full-year 2021 revenue. half a billion in revenue, this life sciences company is still in the early stages of growth.
This cutting-edge instrument maker sells the machines and associated consumables that enable scientists to look in and around an individual cell, a scientific subspecialty called space biology. This method provides researchers with information at unprecedented resolutions. The company’s tools are already installed in the world’s top 100 research institutes, proving that its product line is essential for today’s research. Scientists must use the 10x toolset or risk being overtaken by their competitors. The company’s strategy of enabling as many researchers as possible to become regular users of its tools is working, having found that customers who own its instruments consistently increase their usage over time. This situation leads to an increase in sales of 10x Genomics high-margin consumables. Sound familiar? This razor and blade model is similar to how Illuminated (NASDAQ: ILMN) has become a monster for shareholders over the past two decades.
This Cathie Wood darling has plenty of leads in the $60 billion-a-year addressable market of life science tools. 10x estimates that $15 billion of that is spent on the space biology research field it already dominates. The field is essentially a one-horse race, with no other space biology research tools used in half as many publications as 10x Genomics tools. It is clear that this instrument manufacturer is the market leader in this emerging field of space biology. And with a steady cadence of new product launches, I think this life sciences company has the best chance of all of Wood’s biotech companies to generate monster returns.
A possible home run stock trading at a steep discount
George Budwell (Beam Therapy): Cathie Wood’s Ark invest has been a shareholder in precision genetic medicine company Beam Therapeutics since the fourth quarter of 2020, according to Whalewisdom. Now, in that roughly two-year holding period, Beam’s stock has appreciated nearly 40%, which is certainly a respectable rate of return for such a short holding period. That said, shares of the precision genetic medicine company have also fallen 73% since hitting an all-time high less than a year ago, in July 2021.
What has weighed on this biotech stock over the past year? The good news is that Beam’s business plan has not encountered any major setbacks. On the contrary, market sentiment has turned extremely sour against start-up research and development companies like Beam.
Why might this sharp pullback be a compelling buying opportunity? Beam’s main selling point to investors is that its proprietary base-editing technology could be a premier platform for developing functional cures for dozens of diseases. So, in theory, Beam could dominate many high-value markets, such as rare blood diseases, inherited genetic disorders, and perhaps some cancers. This is a tremendous business opportunity for a company with a market capitalization of less than $3 billion at the time of this writing.
What is the main downside risk for this stock? Precision gene editing, as a field, is still in its infancy. Additionally, several companies are trying to commercialize their unique gene-editing platforms. Simply put, there’s no way to reliably handicap which of these companies will take gold, so to speak. That doesn’t mean Beam’s equity isn’t worth a shot. But investors shouldn’t overdo it with this speculative gene-editing game either.
Using AI to Rethink Drug Discovery
Taylor Carmichael (Recursion Pharmaceuticals): One of the frightening aspects of investing in drug development is the high failure rate: 90% of potential drugs fail to make it out of clinical trials. How can we improve this success rate?
Recursion has a radical idea. What if we abandoned the “hypothetical” model of drug development? Traditionally, to find new drugs, a scientist had an idea and then tried to confirm it. And if we approached a disease without hypothesis? Instead, we would visually map the cell data and then look at what the data tells us. This could improve the success rate.
That’s what Recursion does. Recursion’s software produced 14 petabytes of biological and chemical images. (It’s estimated that one petabyte contains enough information to fill 20 million workbooks, or about 500 billion sheets of paper.) Using this data, Recursion’s artificial intelligence (AI) performs more than 2 million experiences every week.
This approach results in both faster and cheaper drug discovery. On average, Big Pharma spends about $22 million to find a drug ready for clinical development, and that process takes about two and a half years. Recursion spends $7 million to find a similar drug, and it takes about 10 months.
Unsurprisingly, Big Pharma took notice. rock (OTC: RHHBY) and Bayer (OTC: BAYR.Y) are now collaborating with Recursion. And upfront payments go up. Recursion received $80 million in 2020 and $230 million last year. And future milestone payments are growing: $1 billion in potential milestone payments in 2020 have grown to $13 billion today.
It’s still early days, and in this risk-averse market, the stock has really been beaten. It’s down 75% from last year. But the economic news has actually been strong. Recursion now has several drugs in clinical trials. And it’s sitting on about $600 million in cash, about half of its market capitalization. If the company reports positive test data later this year, the stock will rally dramatically. Risk-tolerant investors might want to open a small position now.
10 stocks we like better than 10x Genomics
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George Budwell has no position in the stocks mentioned. Patrick Bafuma holds positions in 10x Genomics. Taylor Carmichael has no position in the stocks mentioned. The Motley Fool holds positions and recommends 10x Genomics. The Motley Fool recommends Beam Therapeutics and Illumina. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.