3 VALUE NAMES IN CATHIE WOOD’S ARKG FUND

By Subin Im, PharmD

This past year has been quite the roller coaster in the stock market, particularly for the biotech sector. ARK Genomic Revolution ETF (ARKG) is no exception. But as one of the biggest and best biotech ETFs to buy, $ARKG had proven a stellar track record of 160% over the past 5 years. So should the 57% drop of late be considered an opportunity to buy, or is this ETF filled with more trash than treasure?  As one of the most famous American investors, Cathie Wood is bullish on the future of healthcare and biotech, specifically gene editing.  Should you be, too?

Due to the exponentially rising number of public-traded biotech companies, it is challenging to keep track of each company and its pipeline medications, not to mention the constant scientific discoveries. Because these companies do not have much control over the results from their clinical trial studies, it is never really a good idea to put all your eggs in one basket. In fact, it will be hard to do so because once you immerse yourself in the biotech world, there is just so much going on. 

A big advantage of investing in the ETF is that you don’t really have to do all the research because it is all done for you by professionals. You get to enjoy a piggyback ride. However, it’s still important to note what these ETFs are made of and which companies hold the most weight. With the ARKG fund plumbing new depths all the time, it’s worthwhile to scan the fund’s holdings for value that the market has forgotten. 

The top 3 ARKG holdings are Exact Sciences, Teladoc Health, and Ionis Pharmaceuticals. 

1. Exact Sciences Corp ($EXAS)

This company takes up the most weight in ARK Genomic Revolution ETF at 8.68%, but what exactly is Exact Sciences? Let’s first take a step back and talk about cancer. 

The best way to fight cancer is through prevention and early detection since cancer is an evil disease that spreads like wildfire. Prevention is a very broad term because even though there are a lot of factors that could increase the risk of cancer, the exact cause of cancer is still unknown. That is why early detection is so important, which is why it is recommended to get routine screening for certain cancers like breast cancer with a mammogram for women over the age of 40. However, almost all cancers require a biopsy to make a definite diagnosis that the patient has cancer. Biopsies are procedures where a piece of tissue is taken out of the suspected area with cancer so that it can be examined under a microscope. 

One of the many unmet needs in cancer is making less-invasive diagnostics, which is exactly what Exact Sciences strives to do. It specializes in detecting early stage cancer through non-invasive diagnostics. For example, one of its products, Cologuard, tests for DNA in stool to detect colorectal cancer. Cologuard 2.0 is being developed to only be a blood sample, because drawing blood is much more convenient than collecting stool. Another focus is precision oncology with Oncotype Dx, which is a treatment based on genetics for specific cancers including breast, prostate, and colon. Exact Sciences is also working to become bigger with its acquisitions of Base Genomics and Thrive Earlier Detection, where they are developing an early screening test for over 14 different cancer types. But that’s not all. It not only has diagnostic genetic screening tests but also helps formulate patients’ treatment plans in terms of relapse monitoring and treatment selection, which make it much more convenient for healthcare providers. Because those at high risk for these types of cancer require rescreening, the use of Exact Sciences’ products is not a one and done deal, which is reflected in its quarterly revenue growth of 219.2% based on the combination of first and follow-up screenings over the past 3 years. 

However, the stock price also plummeted when its co-promotional deal with Pfizer for Cologuard ended at the end of 2021, so it is no surprise that Exact Sciences hired 400 former sales reps from Pfizer. Even though Pfizer’s large-scale infrastructure and commercial expertise will be hard to replace, Exact Sciences has enough of a backbone to keep its momentum going. Another possible reasons for rapid decline in the stock price is because the revenue from its COVID-19 testing decreased by 70% due to the increasing competition. But because COVID-19 tests weren’t and still aren’t the company’s focus, its trajectory of cancer screening tests is enough for it to be a long-term buy.

2. Teladoc Health Inc ($TDOC)

Like other “COVID-19 stocks” such as Zoom, Peloton, and Netflix, Teladoc Health skyrocketed during the first year of the pandemic. Different circumstances called for different demands, and these companies’ products and services are very home friendly. But now that people are starting to go out again with less fear, the effects of the pandemic are starting to quiet down. 

Despite the 75% crash from its peak, will it be able to rise from its reputation as a pandemic stock? Before selling this stock out of panic, keep in mind that the company’s revenue is not always reflected on the stock price. In fact, the stock price was higher pre-pandemic even though the revenue now is a lot higher. If the pandemic has taught us anything, it would be that people don’t like to waste time. People don’t want to wait at the doctor’s office when they could easily do it in the comfort of their own home. So it is no surprise that its revenue increased by 98% in one year from $553.3 million in 2019 to $1.09 billion in 2020. Virtual visits had increased from 10.6 million in 2020 to 14.7 million in 2021.  This momentum is expected to snowball as 2021 revenue is expected to reach $2.03 billion. 

With its acquisition of Livongo in 2020, Teladoc Health is more than a telehealth company. Now, it also specializes in managing common chronic conditions, including diabetes and hypertension. Because these chronic conditions can lead to much more expensive disease states, the market for managing these diseases is worth addressing, especially since these disease states can easily be managed virtually. 

3. Ionis Pharmaceuticals ($IONS)

Ionis Pharmaceuticals has over 40 pipeline medications, with eight of them being in phase 3 development. The medications are extremely unique because they are first-in-class medications that use unique RNA targeted therapy. By inactivating the messenger RNA, these medications called antisense medications prevent translation of DNA to a protein. So it doesn’t work to just meet a medical need or mitigate the disease by relieving symptoms. In fact, it completely eliminates the medical need by directly targeting the disease. 

One of its approved medications, Spinraza, is the first FDA approved medication to treat spinal muscular atrophy. It also has two medications for genetic disorders: familial chylomicronaemia syndrome (FCS) and hereditary transthyretin-mediated amyloidosis (hATTR). It has robust phase 3 pipeline medications that cover a variety of therapeutic areas from cardio-renal (heart-kidney) to neurological (brain) and pulmonology (lung). Five of the nine phase 3 pipeline medications are collaborations with pharma giants: Novartis, AstraZeneca, Biogen, and Roche. Last year, Ionis Pharmaceuticals’ stock plummeted after two of the partnerships with pharma giants had ended. But four of the nine are owned independently by Ionis. 

Because Ionis Pharmaceuticals is developing medications for diseases that currently have no treatment options available, it serves a very vulnerable patient population. This also means that the medications can be priced at over $100,000 per treatment. This antisense technology could have the potential to treat broader diseases, such as hypertension, which is currently being developed in phase 2 trials. Even though there are a lot of treatment options available for hypertension, it still remains one of the biggest risk factors for common causes of death, such as heart attacks and stroke. Therefore, if this drug were to get approved, it has the ability to completely resolve hypertension through its unique antisense RNA technology. Further positive clinical results would equal a world of opportunity for Ionis shareholders. 

With the tumbling stock market, the biotech and healthcare sectors are very vulnerable. But is now the time to buy? As the saying from Mr. Buffett goes, “be fearful when others are greedy, and greedy when others are fearful.” The reason Cathie Wood has these companies as her top 3 holdings is because they either fulfill an unmet need or a growing demand. Therefore, in the long term, these companies are bound to be successful.