These 3 actions are the future of biotechnology

The biotech industry is heavily regulated by the federal government and its scientific watchdog, the Food and Drug Administration (FDA). Therefore, biotech investors often evaluate a possible investment by looking at the company’s portfolio of future assets. Research and development is a key factor in this sector.

So which biotech companies have the most exciting future prospects? Three Fool.com health contributors like Vertex Pharmaceuticals (VRTX -3.16%), Repligen (RGEN -1.61%)and Recurrence Pharmaceuticals (RXRX -5.97%). Here’s why they believe these three stocks are the future of biotech.

An eye-catching deep value proposition

George Budwell (Vertex Pharmaceuticals): Vertex Pharmaceuticals has recently become a money-printing machine with its breakthrough cystic fibrosis treatments like Trikafta. This unique drug generated $5.7 billion in sales in 2021.

The company has used 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 private biotechs Semma Therapeutics and ViaCyte. These add-on transactions suddenly made Vertex a potential juggernaut in the world of diabetes care.

The 2019 Semma Therapeutics deal gave the biotech allogeneic stem cell product VX-880, intended to cure type 1 diabetes. And earlier this year, Vertex bought ViaCyte for its cell replacement therapy platform, which also initially aims to cure type 1 diabetes.

This ViaCyte transaction also stands out because the biotech has an ongoing collaboration with Vertex collaborator for blood diseases, CRISPR therapeutics. This ViaCyte/CRISPR partnership is centered on the development of genetically engineered beta cells for the treatment of type 1 and type 2 diabetes. CRISPR and ViaCyte are reportedly on track to release the first data from an early-stage trial on type 1 diabetes next year. Human trials for the duo’s type 2 therapy could start in late 2023 or early 2024.

In summary, 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 global epidemic. Wall Street, however, doesn’t seem to have taken notice of this deep value proposition — at least not yet. Vertex shares, after all, seem to be valued primarily for its cystic fibrosis franchise and pipeline assets in various blood disorders.

The backbone of the future

Patrick Bafuma (Repligen): Looking to the future, Repligen is creating the tools that make it all possible. From cell and gene therapy to cutting-edge mRNA vaccines and monoclonal antibody treatment, Repligen has you covered. This biotech provides the associated equipment and consumables required for the various manufacturing stages of today’s most complex treatments.

And in a year marred by supply chain and geopolitical issues, Repligen has seemingly been isolated. There has been virtually no mention of either issue in recent earnings conference calls. Not bad considering its sales are spread across the globe, with Europe, North America and Asia accounting for 35%, 45% and 20% of Q2 revenue, respectively. Despite slowing sales of COVID-19 treatments and vaccines that Repligen helps manufacture, the company’s second-quarter core business grew 41% year-over-year. The record quarterly revenue of $207.6 million — up 32% year-over-year at constant currency — is a welcome sight for biotech investors in the uncertain market of 2022.

If you think cell and gene therapy is the future of healthcare, then Repligen deserves a second look. The cell and gene therapy segment of the bioprocess company is experiencing accelerated growth. Revenue for this line of business increased 40% for the full year of 2021, and growth in the second quarter of 2022 increased by nearly 70% compared to 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 also other signs that the future is bright. At the end of 2020, more than 1,200 clinical trials were underway worldwide in the field of cell and gene therapy, according to the company. Then there are the FDA estimates for over 25% annual revenue growth for all 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 excellent choices. Both companies are already very profitable, so the outlook for the future is based on what these companies have already accomplished. Recursion is a different animal. The business has no profits yet and revenues are still low. But I opened a small position here because the upside is so high. If this venture succeeds, it will radically transform drug discovery.

This is the current paradigm for finding a new drug candidate. You notice a problem in the world of health. You read academic papers to see what has been tried and what hasn’t. You formulate your own hypothesis. And then you collect data by testing your hypothesis on animals and then on people. It’s the basic model for drug discovery – and it has a spectacular failure rate of over 90%.

Recursion uses 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 is estimated that the human brain can store 2.5 petabytes of memory data. Thus, Recursion’s AI solution now has more data than six human brains.

More importantly, the company’s AI solution is constantly running experiments with this data. Recursion computers have now made 2.4 trillion predictions about biological and chemical relationships. Scientific researchers can research all of this data to create a more informed hypothesis. It is a fundamentally superior model, in my opinion. First, you collect and analyze scientific data, and so you make the assumption.

The company has major partners in Bayer and rock. And Recursion quickly found drug candidates. In the first quarter, the company launched a phase 2 study for a drug intended to treat cerebral cavernous malformations. In the second quarter, the company started a phase 2 study for a molecule intended to treat neurofibromatosis type 2. This quarter, the company will initiate a new phase 2 study, in a drug treating familial adenomatous polyposis (FAP).

Of course, improving the odds doesn’t mean these drugs are safe things. But I really think Recursion is on the right track, and the future of drug discovery will follow that pattern. So I made a small investment here while it’s still early days and the company is still small. (Its market capitalization is less than $2 billion.) If I’m right, Recursion will be a fundamental holding for biotech investors for many years to come.

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