What's the Difference Between Biotech Stocks and TechBio Stocks?
As you may have heard, there's a new trend in biotech lingo wherein companies call themselves "TechBio" rather than "biotech" to emphasize their forward-thinking about the role of information technology. Biotechs like Ginkgo Bioworks (NYSE: DNA), Recursion Pharmaceuticals (NASDAQ: RXRX), and Schrödinger (NASDAQ: SDGR) could easily be described by the term, and some, like Recursion, even describe themselves that way.
But what does this new term actually imply, and is it a relevant signal for investors to pay attention to? Let's dig into the first question and find out.
What does "TechBio" mean?
In case it wasn't obvious, the term "TechBio" puts the abbreviation for "technology" before the abbreviation for "biology." That speaks to the perspective that the concept's proponents seek to signal that they have. Rather than being the biology-first company of traditional biotech, where committing good old-fashioned human effort to plan and then do experiments in the laboratory is the path to success, TechBio reframes the scientific challenge of producing new medicines and biological technologies as closer to being an industrial engineering problem.
In that vein, extensive implementations of shiny new technologies like artificial intelligence (AI), machine learning, and laboratory robotics are a prerequisite for accomplishing anything, as is having an abundance of relevant biological and chemical data. For instance, Ginkgo's biofoundry workflow entails using those tools to (hopefully) efficiently help its many customers produce the bioengineered microorganisms that they need for their own purposes. Recursion's idea is similar, relying on lots of work performed "in silico" (in silicon, typically used to mean biological simulations) before proceeding to in vitro (in a test tube or petri dish) experiments and beyond.
The point of having those tools in place is to create a close-to-automated system that handles as many elements of the research and development (R&D) process as possible. Those elements range from target identification to screening, prototyping, manufacturing candidates for preclinical investigations, and managing the data produced by all experiments and, eventually, clinical trials. Keeping hands-on time for human staff as minimal as possible helps to keep costs low, and it also enables these businesses to squeeze more revenue out of each new hire.
At its best, TechBio proposes that the above approach is cheaper, faster, and leads to programs that fail less frequently than with the traditional way of doing things in biopharma, which is claimed to be highly inefficient and error-prone. Schrödinger and Recursion tout their AI-enabled drug discovery capabilities as being dramatically less wasteful and simpler than the traditional approach.
In practice, the companies trying to signal that they're TechBio rather than biotech have a few other things in common, like being relatively early stage, being unprofitable, and not consistently growing their top lines. They're also typically collaborating with a gallery of the biggest and most powerful players in the biopharma sector, who invest in them, supply them with some work, and act as a critical marker of social proof for their capabilities. They aren't going away, but their branding may yet change, and here's why.
Is TechBio more than a marketing term?
It's clear right now that TechBio denotes a distinct and increasingly fleshed-out way of developing new drugs. If it's just a marketing term, the R&D departments at Recursion, Ginkgo, and Schrödinger probably did not get the memo. Their operations are genuinely organized differently and with far more use of automation technologies than other biotechs. But investors should probably not yet think of TechBio as being a different type of investment than normal biotechs.
The idea of TechBio is relatively new, but it may well become the dominant way of doing drug development. More importantly, investors need to recognize that modern biotech companies are already heavily reliant on a slew of advanced technologies for everything from designing basic experiments to performing high-throughput analysis. The level of automation of those technologies and automation of the integration between them is practically guaranteed to keep rising over time as AI and robotics solutions become even more advanced.
With that in mind, the same old rules for investing in biotech stocks apply to anything branded as "TechBio" as well. Look for businesses with plenty of cash, full pipelines, moneyed collaborators, and humble leadership. Avoid the ones that don't have enough money to keep the lights on over the next couple of years and the ones that try to reframe bad clinical trial results rather than admitting that things didn't go as planned.
Understand that the risk of any investment in the sector is on the high side.
As it turns out, Schrödinger, Ginkgo, and Recursion all fit the bill of a company that could become a good biotech investment. Plus, they're at the forefront of their field, pioneering a new way of doing things. They're quite risky, but so far, nobody has attempted to do what they do that's closer to success than they are.
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Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
