The AI Advantage: 2 Healthcare Stocks at the Forefront of Innovation – The Motley Fool

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They might not be profitable yet, but they’re swinging for the fences.

Artificial intelligence (AI) is quickly becoming a competitive differentiator for biopharma companies. While there’s no clear victor yet, there are a few businesses that have built AI into the center of their strategy.

To get an idea about how big of an impact AI is having already, let’s take a look at what two of these innovators are doing with AI, and why it matters to investors.

1. Ginkgo Bioworks

Ginkgo Bioworks (DNA 1.27%) is using AI to help other biopharma businesses produce more of the biomolecules and bioengineered organisms they need — and more cheaply than they can do it on their own.

In short, Ginkgo is a service company. Any innovation it can implement to slash its customer-servicing costs will help it generate earnings as it scales to reach a larger portion of the market. AI is thus a core technology, as it can increase efficiency at multiple points of the value chain.

First, AI is involved in parsing clients’ requirements into the planning of the laboratory operations that’ll be necessary to deliver what they’re seeking. For instance, to design a bioengineered cell containing a gene of interest, it’s valuable to automate the process so that a person doesn’t need to spend 20 minutes repetitively clicking around in design software.

Saving a few minutes here and there on a routine task might not sound like much, but for a player like Ginkgo that’s aiming to operate at industrial scale, it helps to squeeze out every efficiency gain possible.

After designing the process necessary to produce the customer’s target output, the company’s extensive robotics resources make the hands-on time for laboratory staff as limited as possible. So major elements of the prototyping, manufacturing, and quality control processes are developed in a way that’s highly automated, scalable, and customized for the client’s specific requirements.

For now, Ginkgo’s business model isn’t profitable despite its focus on efficiency. Nor is it consistently growing; in Q4, its top line shrank by 65%, coming in at $35 million due to the non-recurrence of certain milestone payments it got in the prior year, among other reasons.

Management thinks that will change as it grows and realizes economies of scale. If that argument is correct, it’ll be an unmistakable signal that the business is going to be a leader in biomanufacturing, and its heavy use of AI and other automation will doubtlessly be the single biggest variable contributing to its success.

For now, it’s a biotech that’s still finding its footing, so it’s a fairly risky play for investors.

2. Recursion Pharmaceuticals

Recursion Pharmaceuticals (RXRX 1.13%) is at the forefront of the AI revolution in healthcare.

It’s using AI to screen therapy candidates for advancing into clinical trials while also offering its AI tools to collaborators in biopharma so that they can do the same for themselves. And, while the jury is still out regarding whether its efforts are more successful than traditional drug development methods, if its platform is as valuable as it sounds, it could shake up the industry.

Computer-assisted drug design isn’t anything new, but it’s also true that the latest drug development technologies implementing AI aren’t the same as prior methods.

In Recursion’s case, AI helps screen the universe of possible interactions between different molecules and various physiological targets. Then, it presents human researchers with a list of the molecules and targets where there are not any known reasons why a therapy wouldn’t work to address the pathology in question.

The advantage of doing things this way is that it potentially avoids conducting a vast number of large-scale screening experiments. Most companies try to largely automate or outsource their screening, as it’s costly in terms of money and time, and it typically has a low hit rate. Recursion can take that burden off their hands, and simply license them leads for further investigation.

While it isn’t the only biotech pursuing this type of business model, Recursion does have the most advanced pipeline among its AI-based drug discovery peers, especially in rare diseases. It also has a handful of collaborations with key power centers in the industry.

But, much like Ginkgo, it isn’t profitable yet. Nor is its base of revenue stable; over the last year, its quarterly revenue fell by 3.5%, reaching $10.6 million. That makes it somewhat of a risky buy, at least until it can start reporting consistent growth or consistent progress toward profitability.

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