Ark Invest CEO Cathie Wood is the ultimate thematic investor. Her flagship fund, Ark Innovation ETF focuses on disruptive new technologies such as artificial intelligence (AI), autonomous vehicles, genomic medicine, molecular diagnostics, and cutting-edge medical devices. This style of investing can generate enormous returns on capital in an exceedingly short period of time. But it also tends to come with a high degree of volatility and an elevated level of risk.
Recursion Pharmaceuticals (RXRX 3.57%) and Exact Sciences (EXAS 0.10%), two of Wood's larger biopharma holdings across her family of tech-oriented ETFs, are prime examples of the pros and cons associated with thematic investing. Both of these biotechnology stocks soared earlier this year due to an abrupt shift in investor sentiment at the start of the year. But they have since pulled back in a big way in response to concerns over the global economy, lingering inflation, and elevated interest rates.
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Here's why bargain hunters may want to buy shares of both of these ultra-high-tech bio companies in October.
Recursion Pharmaceuticals: AI-powered drug development
Recursion Pharmaceuticals is a pioneer in techbio, an innovative new field of healthcare that integrates artificial intelligence, machine learning, robotics, chemistry, conventional laboratory methods, and clinical trials. Techbio aims to spur the development of novel drugs by analyzing large biological/chemical datasets using highly sophisticated computational methods.
At the heart of Recursion Pharmaceuticals' core value proposition is its platform, Recursion OS. Recursion OS allows researchers to explore massive biological and chemical datasets, and test hypotheses virtually. The company's ultimate goal is to reduce the time and cost of drug discovery/development.
Why is Recursion Pharmaceuticals stock a buy this month? This techbio play stands out as an intriguing speculative buy for three reasons:
- Recursion OS has the potential to unlock multiple new blockbuster therapeutics in high-growth areas such as rare diseases and oncology.
- The company has a proven ability to attract top-shelf partners in both tech and biopharma. Underscoring this point, Recursion Pharmaceuticals has active collaborations with Bayer, Nvidia, and Roche.
- Recursion Pharmaceuticals has a direct link to the burgeoning field of AI. While the field of AI-powered drug discovery is still in its infancy, most industry insiders think this approach could significantly streamline this enormously costly and time-consuming process.
What's the risk? The techbio's cash runway isn't particularly extensive and its value proposition could take some time to come to fruition. As a result, Recursion Pharmaceuticals will probably have to rely on shareholder dilution to fund operations in the short term. Prospective shareholders, in turn, may want to keep their initial position on the small side. However, this techbio does have the potential to become an integral part of the massive drug discovery and development landscape, which qualifies it as a possible hidden gem.
Exact Sciences: A cancer diagnostic pioneer
Exact Sciences is a molecular diagnostic company. It is best known for Cologuard, its non-invasive, at-home colorectal cancer screening test. Cologuard has been on the U.S. market since 2014, where it has steadily earned market share as an alternative to colonoscopy. Bullish analysts think Cologuard could be a major revenue driver for the company for perhaps the next 10 years, especially if the company scores a Food and Drug Administration green light for Cologuard 2.0, a more precise version of the stool-based test, next year. However, bears think the colon cancer test could lose market share to next-generation liquid biopsies in the years ahead.
Exact Sciences isn't standing pat, however. The company has been busy expanding its portfolio to include new diagnostics for a broad array of cancers. To speed up this effort, Exact Sciences acquired two companies in 2020: Thrive Earlier Detection, which is developing a blood-based test capable of detecting multiple cancers at early stages; and Base Genomics, which specializes in DNA methylation analysis, a technique that can identify cancer-specific signals in blood samples. If the company's efforts bear fruit in these areas, it should stand on top of the emerging field of non-invasive cancer diagnostics – a market expected to grow by leaps and bounds in the years ahead.
Now, Exact Sciences still has work to do to reach profitability on a consistent basis, and there are important competitive risk factors to consider before buying shares. But this cancer screening company does have a strong track record of innovation in an area widely expected to become a vital part of cancer care over the next 10 years.
What's the bottom line? Exact Sciences stock will likely remain on the volatile side while these competitive dynamics play out. But the company should be able to grow in lockstep with the broader molecular diagnostic space, a market estimated to balloon into a $145 billion-a-year revenue generator by 2028. To put this into the proper context, Exact Sciences currently sports a market cap of only $12.3 billion at the time of this writing.
