Portfolio manager Cathie Wood's Ark Innovation ETF (NYSEMKT: ARKK) loaded up on a pair of biotech stocks throughout August and early September, and it wasn't the first time they caught her attention. Her style is to invest in growth businesses that are pursuing disruptive innovation within their industries. So while both are bound to be risky plays, there's reason to believe that these two companies have a decent shot at success.
Here's what she bought, and why you might want to buy them too.
1. Intellia Therapeutics
Intellia Therapeutics (NASDAQ: NTLA) is a gene-editing biotech stock that Ark Investment Management owns around 0.2% of. Intellia's goal is to treat or cure inherited rare diseases by directly editing the dysfunctional genes responsible for causing each illness. That meshes perfectly well with Cathie Wood's investing perspective. Powerful gene-editing technologies are practically the definition of disruptive innovation, since if they work, they'd abrogate the need for legacy interventions that only manage diseases.
Intellia's pipeline is largely early-stage. However, it does have a late-stage gene-editing program for transthyretin (ATTR) amyloidosis that should be entering phase 3 clinical trials in the next few months. It also has a mid-stage program for hereditary angioedema (HAE), which should report data from its phase 2 clinical trial sometime before the end of this year; that could offer shareholders significant upside if the data look good. Both programs aim to offer the convenience of a one-time dose that permanently reduces the burden of the patient's disease, so commercializing either will mark a major scientific accomplishment that would likely send the stock aloft.
Financially, this biotech is in fairly good condition. At the end of the second quarter it reported roughly $940 million in cash, equivalents, and short-term investments, whereas its trailing-12-month (TTM) research and development (R&D) expenses were close to $449 million. Management calculates that at its current rate of expenditures, it has enough money to last until late 2026.
The primary risk of buying Intellia's stock now -- and it's a big one -- is that its ambitious gene-editing programs could run aground on scientific or regulatory obstacles, evaporating much of its value immediately. The company is deep in unexplored territory, and it's unclear if regulators at the Food and Drug Administration (FDA) will be appeased by the standard of evidence it can produce, not to mention the uncertainty of whether its therapies can actually work based on its own standards.
Another potential problem is that if Intellia succeeds in developing curative gene-editing therapies, it could one day cure itself out of having any patients to sell them to. But that's a distant concern for now.
If you can accept these risks without flinching, Intellia Therapeutics is a worthy biotech to add to your portfolio.
2. Recursion Pharmaceuticals
Cathie Wood's portfolio holds slightly less than 0.1% of Recursion Pharmaceuticals (NASDAQ: RXRX) shares, but it isn't the same type of biotech as Intellia. While Recursion has a pipeline of five therapies in mid-stage clinical trials for treating rare diseases like cerebral cavernous malformations (CCMs), the thing that probably draws Cathie Wood is the biotech's devotion to using artificial intelligence (AI) in its drug development process.
On that front, the angle for investors is that Recursion is the largest and most advanced AI-centric drug developer at the moment. And soon it'll be getting even larger: It's merging with another AI drug-developer biotech, Exscientia, in a transaction that's expected to close in early 2025.
The merged company, which will keep Recursion's name, will be left with a cash runway through all of 2026, a much larger oncology pipeline, and the potential for up to $200 million in collaboration milestone payments over the next two years. Furthermore, the two businesses have a combined pile of around $850 million in cash, equivalents, and short-term investments as of the second quarter, and the new entity is expected to realize around $100 million in efficiencies after the transaction closes.
More importantly, the new company will be exposed to as many as 10 clinical data readouts over the coming year and a half, each of which is a catalyst for the stock. These catalysts are not guaranteed to be positive, of course, so there's high risk for investors. Plus, it isn't as though using AI to develop more effective medicines has been proven valuable -- at least not yet. There's a risk that using AI could actually drive costs up without any benefits, contrary to Recursion's expectations and claims.
But it's worth betting on Recursion Pharmaceuticals, even before it achieves a leading status in the AI biotech field. After the combination with Exscientia, its roster of collaborators will be a "who's who" of international biopharma heavyweights, including players like Merck, Roche, and Sanofi, as well as the leading AI chipmaker, Nvidia.
If those companies thought Recursion was worth collaborating with, it probably wasn't on a lark. So you might follow in their footsteps and buy some shares, if you're comfortable with the idea that the stock may lose some value before it has a chance to grow.
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Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Intellia Therapeutics, Merck, and Nvidia. The Motley Fool recommends Roche Ag. The Motley Fool has a disclosure policy.
2 Innovative Cathie Wood Stocks to Buy If You Can Stomach the Risk was originally published by The Motley Fool