On 30 November, Alphabet’s London-based artificial intelligence company, DeepMind, announced a huge breakthrough. Given a sequence of amino acids, DeepMind’s AI solution can reliably and rapidly predict the shape of a protein to within approximately the distance of an atom, around two-thirds of the time. In most of the remaining cases, the AI solution is highly accurate too.
By knowing the shape of a protein, scientists can better predict interactions. Many industry experts have said the breakthrough is a game changer. They believe the breakthrough could expedite the discoveries of new drugs in the future.
The market reaction to the news
Shares of GSK and AZN barely moved on the news, although it was widely regarded as a breakthrough. From 27 November to 2 December, AZN rallied about 1.5% on the NYSE. GSK rallied around 1%. I think the market reaction was muted because the breakthrough won’t make new blockbuster product discoveries possible right away.
Given that many investors care only about the short term, the breakthrough doesn’t matter much in their holding timelines. It doesn’t change the value of GSK or AZN that much in those investors’ eyes.
Why I’d buy AstraZeneca and GlaxoSmithKline
The breakthrough might not meaningfully affect industry earnings right away, but it will certainly be positive in the long run. The New York Times explains the breakthrough’s potential impact: “If DeepMind’s methods can be refined, [..] they could speed the development of new drugs as well as efforts to apply existing medications to new viruses and diseases”.
In particular, the DeepMind AI breakthrough could help scientists in their quest to find eventual drug solutions to major illnesses such as Alzheimer’s. The AI method could also help accelerate pharmaceutical/vaccine responses to future pandemics.
Both GlaxoSmithKline and AstraZeneca have tried to solve Alzheimer’s in the past. I think the breakthrough could help them if the companies choose to continue to tackle the problem. The Alzheimer’s market is huge, and a drug that could help defeat Alzheimer’s would be in high demand in my view.
I think another reason to be bullish on GlaxoSmithKline and AstraZeneca is that the breakthrough indicates how quickly technology is advancing.
Before the breakthrough, many thought that a solution to this problem was years to decades away. The solution, albeit still crude, fortunately was made just recently. If technology is advancing faster than expected, I believe the market is underpricing the potential impact of new pharmaceutical discoveries that Big Pharma can make. Were Big Pharma to come up with solutions faster than estimates because technology is advancing faster, I think the industry’s overall profits could also be higher than current expectations.
If that were to happen, I think GSK and AZN could both benefit given their leading positions in the industry. To me, both are undervalued and GSK has an attractive dividend. Given the two companies’ future potential, I’d buy and hold both stocks for the long term.
Jay Yao has no position in any of the shares mentioned. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Alphabet (C shares). The Motley Fool UK has recommended GlaxoSmithKline. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.