Disruptor Alert: These 5 Companies Are Changing Healthcare

Disruption doesn't happen overnight. Instead, it's typically a process that moves along relatively quietly -- seemingly not making big changes at all. Then at some point along the way, things are dramatically different than they were before. The disruption is apparent to everyone.

The reality is that disruption is going on nearly all the time, even if we don't realize it. That's especially true in healthcare. Five companies that are in the process of changing healthcare right now are CRISPR Therapeutics (NASDAQ: CRSP), Editas Medicine (NASDAQ: EDIT), Intellia Therapeutics (NASDAQ: NTLA), llumina (NASDAQ: ILMN), and IBM (NYSE: IBM). These companies are at different stages in the disruptive process, but healthcare will change dramatically because of what they're doing.

Gene editing: CRISPR Therapeutics, Editas Medicine, Intellia Therapeutics

Gene editing involves the insertion, deletion, or replacement of DNA in a cell or organism. While there are several ways of editing genes, the most exciting technique right now is clustered regularly interspaced short palindromic repeats, or CRISPR, an approach that uses an enzyme found in bacteria to alter DNA.

Three small companies are at the forefront of using CRISPR: the appropriately named CRISPR Therapeutics, Editas Medicine, and Intellia Therapeutics. Each of these companies is using CRISPR gene editing to target multiple diseases. Some of those diseases are, as you might expect, caused by genetic mutations. For example, CRISPR Therapeutics and Editas are working on therapies for treating cystic fibrosis and Duchenne muscular dystrophy. However, all three companies are also researching use of gene editing on the body's immune cells to fight cancer that isn't linked to genetic mutations.

The possibilities for CRISPR gene editing are tremendous. Some envision a day when many genetic diseases can be cured, or even prevented altogether. Others see the potential for even more effective cancer treatments using genetically altered cells. Regardless of whether these dreams come to pass, the work that CRISPR Therapeutics, Editas Medicine, and Intellia Therapeutics are doing today could greatly change how diseases are treated in the future.

Gene sequencing: Illumina

For gene editing to be successful, scientists must first know which genes are associated with which diseases. That's made possible by gene sequencing -- the process of determining the precise sequence of nucleotides within DNA. And the company leading the way in gene sequencing has been and still is Illumina (NASDAQ: ILMN).

Not only has Illumina pioneered next-generation gene sequencing, a high-throughput method of mapping genes, it has also helped greatly reduce the costs, which in turn has paved the way for more research to be performed. Consider that in 2009, the average cost of sequencing a human genome, the complete set of DNA, was $200,000. Just five years later, the cost plunged to $1,000 -- thanks in large part to Illumina's technology.

Gene sequencing holds the potential for identifying many more genetic links between diseases. It's especially important in the development of precision medicine, also known as personalized medicine, which involves customization of care to an individual's genetic profile. Illumina seems highly likely to continue to be a major player in advancing this disruptive field of healthcare, particularly with the impressive success for its new NovaSeq sequencing system.

Artificial intelligence: IBM

Artificial intelligence (AI) is being used to disrupt multiple industries. I think one of the most important areas where AI will radically change things is in healthcare. IBM stands out as a clear leader in applying AI to healthcare with its IBM Watson system.

There are lots of opportunities for using AI in healthcare. IBM Watson is currently helping major pharmaceutical companies in their drug discovery process by identifying new drug targets, combination therapies for study, and patient selection strategies in immuno-oncology. The technology is helping doctors provide precision medicine to cancer patients by analyzing genetic alterations in tumors. IBM Watson is also enabling healthcare teams to tailor care plans for patients to give them optimal care.

Some think of AI as replacing humans with robots. IBM's approach, which the company refers to as "cognitive computing," is to use AI to augment humans rather than replace them. This intelligence augmentation could become the standard approach throughout all phases of healthcare in the future. If so, IBM seems likely to be at the center of the new way of providing healthcare.

Investing considerations

With gene editing, gene sequencing, and AI on track to disrupt healthcare in significant ways, should investors jump on board? I think there are great opportunities to make nice returns, but there are also several things to consider.

First, the leaders of today might not be the leaders of tomorrow. My view is that all five of these companies should be successful over the long run, but there's no guarantee that they will.

Second, the potential for tremendous growth is already reflected in the stock prices for several of these companies. Illumina stock, for example, trades at more than 46 times expected earnings. The three gene-editing companies mentioned aren't profitable yet and have valuations at sky-high multiples of their current revenue.

A third issue is specific to IBM. Healthcare is only a portion of IBM's overall business. Even if the company disrupts healthcare, it might not be enough to significantly affect the stock's returns.

With all that being said, though, I like each of these stocks. CRISPR Therapeutics, Editas, and Intellia are still speculative plays, but I think the risk-reward propositions for the stocks looks pretty good over the long run. Illumina's valuation is admittedly steep, yet my view is that the company's leadership position in gene sequencing will be sustainable. As the market for gene sequencing expands, Illumina should profit.

I like IBM as a value and dividend pick. Its stock trades at less than 11 times expected earning. Big Blue boasts a dividend yield of 3.9%. I suspect a needed turnaround for IBM will eventually come. But turnarounds don't happen overnight -- just like disruption.

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Keith Speights has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Illumina. The Motley Fool recommends Editas Medicine. The Motley Fool has a disclosure policy.