2 Innovative Stocks That Could Deliver Outsize Returns

Many of Wall Street's largest and most successful stocks became so thanks to innovation. It's too late to get in on the ground floor with those that are already well-established leaders in their fields, but there are plenty of smaller, highly innovative companies that could deliver excellent returns as they gain in prominence. It's not a sure thing, of course -- such stocks often carry a fair amount of risk.

However, for those who don't mind that risk, it's worth considering companies that fit the parameters. In that spirit, let's discuss two in the healthcare sector that could make breakthroughs and deliver market-beating returns along the way: Iovance Biotherapeutics (NASDAQ: IOVA) and Recursion Pharmaceuticals (NASDAQ: RXRX).

1. Iovance Biotherapeutics

Iovance Biotherapeutics is a cancer-focused biotech. The company develops therapies based on tumor-infiltrating lymphocytes (TILs). TILs are a kind of disease-fighting cell that can recognize and destroy cancer cells, and they naturally exist in all of us. Iovance harnesses the power of TILs by extracting them from each patient, manufacturing personalized treatments, and reinserting them back inside the patient.

It's not a simple procedure, but it's produced some exciting results already. In February, Iovance earned approval from the U.S. Food and Drug Administration for Amtagvi, the first therapy for advanced previously treated melanoma (a type of skin cancer). The company estimates a potential U.S. market of 20,000 annual cases for Amtagvi. Iovance will also seek regulatory approvals in other countries, including Canada, several in Europe, and Australia.

Iovance's financial results aren't impressive yet. Revenue in the third quarter was $58.6 million, but that was exponentially better than the $469,000 reported in the year-ago period. Iovance also made progress on the bottom line; its net loss per share of $0.28 was much better than the net loss per share of $0.46 recorded in the prior-year quarter.

It takes time to manufacture TIL therapies like Amtagvi -- about 34 days, in fact. So the company has likely just begun making headway into the U.S. market for its latest medicine. With approval from other countries, its addressable market will significantly expand.

Furthermore, Iovance has a rich pipeline. It's seeking many label expansions for Amtagvi, while developing other brand-new TIL treatments. Iovance Biotherapeutics' innovative approach to treating cancer could prove highly lucrative, and allow it to deliver excellent performance over the long run.

2. Recursion Pharmaceuticals

Developing drugs is difficult and expensive. The process has become slower, even with technological progress, a phenomenon known as Eroom's law (the reverse of Moore's law). Recursion Pharmaceuticals is trying to change that using an operating system (OS) powered by artificial intelligence (AI).

The company built a virtual lab where different clinical compounds are constantly tested in a human gene library; the most promising ones are chosen to undergo clinical trials. The company claims to spend far less time and money on selecting products to send to clinical trials.

Recursion currently has several products across phase 2 studies for which it will release data in the next year or so. One of them, REC-994, posted positive results in a phase 2 study for cerebral cavernous malformation, when clusters of irregular blood vessels form in the nervous system. The drug can cause severe health problems, so it will still be a while before it or others among Recursion's candidates can be approved.

If it proves successful across the board, Recursion will likely be able to license its OS to other drug developers, in addition to making money from its own medicines. The company's goal of significantly reducing the time and money it takes to develop drugs could prove incredibly lucrative.

Read the fine print

Investors should never dive headfirst into a stock without considering the downsides, no matter how innovative a company seems. Here are some of the risks that come with investing in these two biotech stocks.

Iovance's approach is exciting, but the 34 days it takes to manufacture Amtagvi is a significant drawback. The company could also experience clinical or regulatory setbacks, a risk that's more severe for smaller drugmakers.

The same can be said about Recursion Pharmaceuticals -- it still doesn't have a single drug on the market, despite how promising its platform seems.

These two stocks do have significant upside potential. But even for those who can handle the volatility, the heightened risk means investors would want to initiate a small position in one or both stocks at first. Investors can always add more shares over time as (or if) Iovance and Recursion prove themselves.

Should you invest $1,000 in Iovance Biotherapeutics right now?

Before you buy stock in Iovance Biotherapeutics, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Iovance Biotherapeutics wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $898,809!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of November 18, 2024

Prosper Junior Bakiny has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Iovance Biotherapeutics. The Motley Fool has a disclosure policy.