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Morgan Stanley’s five cutting-edge ‘long shot’ investment ideas

‘Long shots’ are major, industry-shaking, potentially world-changing innovations. And according to Morgan Stanley there are at least five.

10th May 2024 09:16

by Stéphane Renevier from Finimize

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  • "Long shots" represent investments where groundbreaking technology meets critical “longevity” challenges – like eradicating diseases or 3D printing vital organs. These ventures blend life-extending innovations with the potential for significant financial gains.
  • Firms at the forefront of combating diabesity, utilising AI in drug discovery, and developing smart chemo and DNA synthesis are all amongst Morgan Stanley's top picks for potentially rewarding "long shot" investments.
  • While the potential reward of investing in long shots can be huge, you have to accept high volatility and a significant chance of failure. So if you allocate a small portfolio of your portfolio to them, spread your bets and make peace with the risk of losing it all.

"Long shots" aren't just any investing opportunities: they're the bold, potentially transformative plays where high tech meets high stakes. Think curing diseases, controlling DNA, or 3D printing organs. This is where longevity intersects with tech innovation, and the rewards could be world-changing – not to mention wallet-fattening.

Identifying these pioneers is no small feat. Yet, Morgan Stanley believes that by understanding the adoption and innovation cycles of these technologies, investors can stack the odds in their favor. So here are five cutting-edge innovations in longevity that Morgan Stanley believes could be the next big breakthroughs in tech, and how you could potentially cash in on their success.

Long shot #1: Diabesity (diabetes and obesity)

Diabesity – a blend of diabetes and obesity – is a global health crisis affecting over 650 million adults, significantly straining healthcare systems worldwide and driving the mortality rate up. That’s creating increasingly urgent demand for innovative treatments.

Enter GLP-1 drugs. They work by mimicking a natural hormone that helps regulate blood sugar and appetite. Not only do these drugs help people lose weight, but they also tackle associated issues like diabetes and heart disease. While developers do face high costs and risks of failure while developing and testing these drugs, widespread demand means the market for these medications is expected to balloon to over $105 billion by 2030. Morgan Stanley ranks it as its top long-shot opportunity due to its blend of strong academic research, venture capital interest, huge market potential, and investability.

Companies like Novo Nordisk and Eli Lilly offer a direct route for investors, since the duo lead the pack when it comes to developing GLP-1 therapies that effectively tackle both obesity and diabetes.  

Long shot #2: AI-drug discovery

It typically takes over $1 billion and more than a decade to bring a single new drug treatment to market, with only about a 10% success rate of clinical trials leading to approval.

AI-driven drug discovery promises to drastically cut development time and costs by using algorithms to predict how drugs interact with the body, potentially reducing the current timeline by about 75% and increasing the success rate of preclinical trials. The early-stage technology might not have fully proven itself in practical, real-world applications yet, and there are substantial financial and regulatory obstacles to overcome. Yet, Morgan Stanley ranks AI-Drug Discovery highly due to significant venture funding and its potential to disrupt the $50 billion medical market.

For investors, this represents a chance to get in on the ground floor of a transformative technology poised to redefine a major market. Publicly traded companies such as Recursion PharmaceuticalsEvotec, and Exscientia PLC are directly engaged in AI-driven drug discovery. Additionally, Big Tech firms such as AmazonGoogleMicrosoft, and Oracle are playing pivotal supporting roles by providing robust data storage, management, and AI capabilities essential for this field.  

Long shot #3: Smart chemotherapy and antibody-drug conjugates (ADCs)

Traditional chemotherapy often lacks precision. Smart chemotherapy and ADCs represent a transformative leap in cancer treatment by directly targeting cancer cells while sparing healthy ones, thereby reducing side effects and improving patient outcomes.

These therapies use antibodies linked to potent drugs: the antibodies guide the drugs to the cancer cells, where the drugs are released to destroy them. This targeted approach allows for higher doses of chemotherapy with fewer side effects, potentially revolutionising protocols for tough-to-treat cancers. And while venture capital funding remains low and the development process is complicated and expensive, Morgan Stanley ranks this opportunity highly due to its potentially huge total addressable market of around $140 billion.

Publicly traded companies like Seagen, AstraZeneca, Daiichi-SankyoADC Therapeutics, and AbbVie are heavily invested in developing ADCs.

Long shot #4: DNA synthesis and biosecurity

Hunger affects 828 million people worldwide, and adverse drug reactions are between the fourth and sixth most common causes of death globally. Those statistics highlight the urgent need for innovative solutions in agriculture and healthcare. DNA synthesis and biofoundries simplify how we create and modify organisms. This technology allows scientists to design DNA – the building blocks of life – quickly and accurately in a lab.

For one, this would allow them to engineer plants to resist diseases, creating more food stock to tackle hunger. The technology also means they can develop safer and more effective drugs, reducing the risk of adverse reactions. By speeding up this process and cutting costs, DNA synthesis opens up new possibilities not just in health and food, but also in creating environmentally friendly products. Despite the potential, DNA synthesis faces significant hurdles, including complex ethical issues related to genetic manipulation, stringent regulatory environments that can delay innovation, and the need for advanced biosecurity measures to prevent misuse. Still, the market for these technologies is rapidly growing, and is expected to reach around $58 billion by 2025, positioning it as one of the most significant investment opportunities in the tech space.

Ginkgo uses biofoundries to design microorganisms that can produce everything from fragrances to food ingredients. Thermo Fisher provides various laboratory equipment and services, including those used in DNA synthesis and genetic analysis. The company should also benefit indirectly through the supply of essential technologies and tools used in synthetic biology. The broader synthetic biology industry competition includes CodexisWuXi Biologics, and AbCellera.

Long shot #5: Psychedelics

Mental health disorders are increasingly prevalent, with over 970 million people worldwide suffering from a mental or substance use disorder. And yet, current treatments often have limited efficacy and significant side effects.

Psychedelics offer a revolutionary approach to treating neuropsychiatric disorders, potentially disrupting the current mental health medication market with their ability to significantly improve symptoms in conditions like depression, PTSD, and anxiety after just a few doses. Investing in psychedelics is complicated by regulatory hurdles, public perception issues, and the nascent stage of many underlying research programs. That said, early clinical results are promising, and growing acceptance in the medical community is driving increased funding and research into psychedelics. Overall, while it represents a huge opportunity, Morgan Stanely notes its total addressable market may not be as high as the others long shots, and is still at an early stage.

Publicly traded companies such as Compass Pathways are pioneering the integration of psychedelics into therapeutic protocols, offering a direct route for investors to engage with this emerging sector. Indivior, a publicly traded company focused on addiction treatments, is not directly involved in psychedelic therapies but could potentially benefit if it expands into this emerging field.

So what’s the opportunity?

While the potential reward of investing in long shots can be huge, you have to accept high volatility and a significant chance of failure. That’s why it’s not a strategy for everyone: for instance, investing legend Peter Lynch advises against getting swept up in the hype of “long shots”, recommending a focus on solid companies with clear competitive advantages instead. And don't forget, broad indices like the S&P 500 often include the future high-flyers anyway.

That said, these are huge themes with big potential, so if you're game for a bit of adventure, consider allocating a small portion of your portfolio to these high-risk opportunities. Just ensure it's cash you can afford to lose, and play “mini-VC” carefully by spreading your investments across various opportunities and stocks to hedge your bets. Most importantly, don’t rush. Great investments often emerge from unexpected places, and history tells us that patience pays off. For example, buying Amazon in 2010 or Microsoft in 2014 would have still reaped considerable returns. So stay informed, keep learning, and be ready to adapt.

Stéphane Renevier is a global markets analyst at finimize.

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