Beam Therapeutics' (BEAM 7.34%) stock has fallen by 40% this year so far, but that hasn't stopped portfolio manager Cathie Wood's ARK Genomic Revolution ETF from loading up on its shares. Most recently, on Aug. 15, she bought more than 20,000 shares, capping off a slew of earlier purchases with her ARK Innovation ETF (ARKK 1.02%) this year. Now, the stock accounts for nearly 2% of the ARK Invest portfolio of exchange-traded funds (ETFs).
But why is Wood buying shares of this biotech when its stock keeps going down? Let's unpack her reasoning and consider what the company's chances of success are in the long run.
Playing the long game
Cathie Wood is unlikely to harbor any illusions about Beam Therapeutics as it exists today. It's a pre-revenue biotech devoted to using advanced gene-editing techniques to treat illnesses, which means that it needs to commercialize at least one program in its pipeline before it runs out of money.
Wood's investing strategy involves taking significant risks on long shots that have the potential to disrupt industries, and her decision to invest in Beam reflects this approach.
The company has only two early-stage clinical programs. One could treat or even cure beta thalassemia and sickle cell disease (SCD), a pair of hereditary blood disorders that are getting a lot of attention from competing gene-editing biotechs.
Beam's other early-stage project aims to address refractory T-cell acute lymphoblastic leukemia (T-ALL). Both of those programs will take at least a few years to be commercialized, assuming they ever are.
What makes Beam's approach special is its gene-editing platform based on CRISPR-Cas9 technology, which it claims is both more precise and less likely to cause unwanted genetic effects than the alternative methods.
Its cast of collaborators likely agrees that those assertions have a solid chance of being proved true. It has deals with Pfizer, Verve Therapeutics, and Sana Biotechnology, to name just a few. Pfizer has already paid it $300 million to collaborate on three undisclosed gene-therapy programs that are in the preclinical stage, and Pfizer could pay out an additional $1 billion if it meets its development milestones. Beam could also opt to split future commercialization costs and proceeds, though its share will be only 35%.
At the moment, it has more than $1 billion in cash, cash equivalents, and marketable securities. Its trailing-12-month (TTM) operating expenses were $400 million, though thanks to collaboration income, it only burned $26 million in cash over the last four quarters. That means it probably has enough money to continue its research and development (R&D) activities at their current intensity for a bare minimum of two and a half years.
It's too early to say definitively whether it has the resources it needs to actually commercialize its most-advanced clinical projects, but the early signs look good. Still, it currently has $177 million in debt, which is significant for a biotech that's at such an early stage.
The implication is that if the business needs more money before launching its product, shareholders will likely foot the bill by having their ownership diluted with the issuance of more stock.
Buying this stock would be a gamble
Cathie Wood sees the long-term potential of Beam's pipeline fulfilling its promises. Building sophisticated gene-editing therapies is a high-impact and highly lucrative space, and that will continue to be true for quite some time. And even if Beam's candidates don't make it to the market, it could still mark itself as an innovator on the bleeding edge of gene editing and engineering if its platform actually works.
In that vein, when a biotech's shares drop without any proximate cause like a failed clinical trial, it's often due to market factors, and the market is not keen on biotech stocks right now. Therefore, in Wood's view, a falling share price is an opportunity to bolster her position.
If it falls further, it's no big deal; she is buckled in and has plenty of patience for the company's plans to unfold over the course of the coming years. Plus, she's diversified in the gene-editing space already, with major investments in CRISPR Therapeutics, Intellia Therapeutics, and others. So even if Beam doesn't work out, she's clearly convinced that one of her bets in the space will.
That doesn't mean you need to follow her lead, especially if you're concerned about losing your capital. Pre-revenue biotechs are incredibly risky, and there is no guarantee that holding them for years will recoup your losses.
At the same time, Wood's intuition about the merits of genetic-editing businesses in general is almost certainly correct. If you're looking for a pick for the speculative segment of your portfolio, Beam Therapeutics is an acceptable choice, though for most investors, it's better to look for something a bit more concrete.