What's the appeal of investing in relatively small and little-known corporations? Though these businesses come with heightened risks, getting in on the ground floor can potentially be lucrative over the long run if they become successful. Just think: What if you had invested in a massively successful biotech giant like Vertex Pharmaceuticals in its early days?
Let's look at two relatively small biotechs that, if enough goes right, could deliver outsize returns to those who invest now: Editas Medicine (EDIT 1.92%) and Recursion Pharmaceuticals (RXRX 3.57%).
1. Editas Medicine
Editas Medicine has been struggling over the past 18 months. Its market capitalization is just about $680 million, down from more than $3 billion in 2021. The gene-editing specialist had to give up on one of its leading candidates, EDIT-101, a potential therapy for an eye disease called Leber congenital amaurosis 10, at least until it can find a partner with more funds.
However, the company may be a steal at current levels, provided its current programs pan out. Editas is developing EDIT-301 to treat sickle cell disease (SCD) and beta-thalassemia (TDT). There have been significant breakthroughs in targeting this blood disease lately: A couple of biotechs recently launched gene-editing therapies in these areas. But that won't be a problem if Editas' candidate proves more effective than the competitors.
Although the company is far from proving it is, Editas argues that its gene-editing method is superior to the CRISPR/Cas9 technique utlized by a recently approved SCD and TDT treatment called Casgevy. EDIT-301 has already produced some positive results in clinical trials, including successfully ridding four SCD patients of painful side effects called vaso-occlusive crises, with follow-up ranging from two months to 10 months.
Editas Medicine expects to release more data on this program throughout the year. The company also thinks it has enough funds to last into 2026. Editas could deliver outsize results if it can produce effective gene-editing therapies. And at current levels, the stock could soar if the company reports steady and positive results for its leading candidate.
2. Recursion Pharmaceuticals
Recursion Pharmaceuticals is a clinical-stage biotech company with an ambitious goal. The company wants to decrease the drug development process significantly by utilizing artificial intelligence (AI).
The company uses a database of human genes and an AI-powered algorithm that runs experiments to determine whether various clinical compounds would be effective at treating certain illnesses. Recursion then picks the most promising compounds of the lot to test in actual clinical trials. Recursion's platform arguably benefits from the network effect.
Whether the compounds it selects succeed or fail, it helps it further fine-tune its process, making it more accurate and valuable over time. The biotech has attracted various partners with its innovative approach, including tech giant Nvidia and healthcare leader Roche. What's the catch? Investors want to see results, and Recursion's approach has yet to yield many positive ones.
The biotech does have several pipeline programs, but it currently has no approved product and is consistently unprofitable. Recursion's approach can revolutionize the biotech industry, which is where its massive upside potential lies. But the company isn't there yet; in the meantime, a lot could go wrong.
Read the fine print
Editas Medicine and Recursion Pharmaceuticals are both innovative biotechs with exciting platforms. Provided their master plans come to fruition, investors who buy their shares today can expect to see their capital increase substantially over time. But both stocks come with significant risks, as enough clinical and regulatory setbacks could render their shares practically worthless within just a few years. Invest accordingly.
