The biotech industry is heavily regulated by the federal government and its science watchdog, the Food and Drug Administration (FDA). As a consequence, biotech investors often evaluate a possible investment by looking at the company's pipeline of future assets. Research and development is a key factor in this sector.
So what biotech companies have the most exciting future prospects? Three Fool.com healthcare contributors like Vertex Pharmaceuticals (VRTX 1.38%), Repligen (RGEN 3.67%), and Recursion Pharmaceuticals (RXRX 4.00%). Here's why they believe these three stocks are the future of biotechnology.
An eye-catching deep-value proposition
George Budwell (Vertex Pharmaceuticals): Vertex Pharmaceuticals has become a cash-printing machine recently thanks to its groundbreaking cystic fibrosis treatments like Trikafta. This single drug generated a whopping $5.7 billion in sales in 2021.
NASDAQ: VRTX
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The company has been using the proceeds from its mega-blockbuster cystic fibrosis franchise to expand into cutting-edge treatment modalities such as stem cell therapy and gene editing. For example, Vertex dipped into its cash reserves in the recent past to buy the privately held biotechs Semma Therapeutics and ViaCyte. These complementary transactions have suddenly made Vertex a potential juggernaut in the world of diabetes care.
The 2019 Semma Therapeutics deal gave the biotech the allogeneic stem-cell product VX-880, aimed at curing type 1 diabetes. And earlier this year, Vertex bought ViaCyte for its cell replacement therapy platform, which is also initially aimed at curing type 1 diabetes.
This ViaCyte transaction also stands out because the biotech has an ongoing collaboration with Vertex's blood disease collaborator, CRISPR Therapeutics. This ViaCyte/CRISPR partnership centers around the development of genetically modified beta cells for the treatment of both type 1 and type 2 diabetes. CRISPR and ViaCyte are reportedly on track to release top-line data from an early-stage trial in type 1 diabetes next year. Human trials for the duo's type 2 therapy could kick off in either late 2023 or early 2024.
In sum, Vertex's cell- and gene-editing-based diabetes care therapies have the potential to bend the curve in terms of the standard of care for this worldwide epidemic. Wall Street, however, doesn't appear to have taken notice of this deep value proposition -- at least not yet. Vertex's stock, after all, seems to be being valued mainly for its cystic fibrosis franchise and pipeline assets in various blood disorders.
The backbone of the future
Patrick Bafuma (Repligen): When it comes to the future, Repligen is creating the tools that make it all possible. From cell and gene therapy to cutting-edge mRNA vaccines to monoclonal antibody treatment, Repligen is there. This biotech provides the equipment and associated consumables needed for various steps in the manufacturing of today's most complex treatments.
NASDAQ: RGEN
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And in a year marred by supply chain and geopolitical issues, Repligen has seemingly been insulated. There was hardly a mention of either of these issues in the last few earnings conference calls. Not bad considering its sales are spread throughout the globe with Europe, North America, and Asia representing 35%, 45%, and 20% of second-quarter revenue, respectively. Despite sales slowing down for COVID-19 treatments and vaccines that Repligen helps manufacture, the company's base business in Q2 was up 41% year over year. The record quarterly revenue of $207.6 million -- up 32% year over year on a constant currency basis -- is a welcome sight for biotech investors in 2022's uncertain market.
If you believe cell and gene therapy are the future of healthcare, then Repligen deserves a second look. The bioprocessing company's cell and gene therapy segment is seeing accelerated growth. Revenue from this business line increased 40% in full year 2021, and growth in Q2 2022 was up almost 70% from the same period a year ago. This puts Repligen on track to smash its own 40% growth target for the division for 2022. There are other signs the future is bright, too. At the end of 2020, there were over 1,200 clinical trials underway worldwide in the cell and gene therapy segment, according to the company. Then there are the FDA estimates for annual revenue growth of over 25% for the entirety of said market through 2025. Put it all together, and Repligen is well positioned to thrive as the backbone of the industry.
Transforming drug discovery
Taylor Carmichael (Recursion Pharmaceuticals): Vertex and Repligen are great picks. Both companies are already highly profitable, so the future prospects are grounded in what these companies have already accomplished. Recursion is a different animal. The company doesn't have profits yet, and revenue is still small. But I've opened up a small position here because the upside is so high. If this company has any success, it will dramatically transform drug discovery.
Here's the current paradigm for finding a new drug candidate. You notice a problem in the world of healthcare. You read academic articles to see what has been tried and what has not been tried. You formulate your own hypothesis. And then you collect data by testing your hypothesis in animals, and then in people. That's the basic model for drug discovery -- and it has a spectacular failure rate of over 90%.
Recursion is using supercomputers and artificial intelligence (AI) to create maps of biology. The company's software has already generated 16 petabytes of biological and chemical data. One petabyte equals 1.5 million CD-ROM discs. It's estimated the human brain can store 2.5 petabytes of memory data. So Recursion's AI solution now has more data than six human brains.
NASDAQ: RXRX
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Even more importantly, the company's AI solution is running experiments with this data all the time. Recursion's computers have now made 2.4 trillion predictions about biological and chemical relationships. Research scientists can search all this data to create a more informed hypothesis. This is a fundamentally superior model, in my opinion. First you collect and analyze the scientific data, and then you form the hypothesis.
The company has major partners in Bayer and Roche. And Recursion has quickly found drug candidates. In the first quarter, the company initiated a phase 2 study for a drug to treat cerebral cavernous malformation. In Q2, the company started a phase 2 study for a molecule to treat neurofibromatosis type 2. This quarter the company will initiate yet another phase 2 study, in a drug treating familial adenomatous polyposis (FAP).
Of course improving the odds does not mean that these drugs are sure things. But I definitely think Recursion is on the right track, and the future of drug discovery will follow this model. So I've made a small investment here while it's early and the company is still small. (Its market cap is under $2 billion.) If I'm right, Recursion will be a foundational holding for biotech investors for many years to come.
