Nvidia Owns This Under-the-Radar $20 Stock Poised to Disrupt a $1.8 Trillion Market

You've almost certainly heard the term "smart money," usually in reference to Wall Street's most proven investment managers. This label isn't necessarily limited to money managers, though. Any organization that picks stocks can be "smart" for any number of reasons, including its sheer expertise on a particular topic or industry.

Enter Nvidia (NASDAQ: NVDA). It's clearly a leading expert on artificial intelligence (AI), having manufactured the computing processors at the heart of most AI platforms (not to mention partnering with other technology companies to improve these systems). If this company invests in a particular AI stock, it's a pretty big deal.

With that as the backdrop, know that Nvidia -- through its venture capital arm NVentures -- now owns 833,325 shares of a small biotechnology company called Generate Biomedicines (NASDAQ: GENB). Here's the deal.

Image source: Getty Images.

What's Generate Biomedicines?

With a market cap of only $2 billion and no significant revenue yet, this pre-profit company isn't exactly a household name. You've probably never even heard of it, in fact.

But that's not the point. Neither is the fact that Nvidia's $13 million stake in the up-and-coming company is practically nothing compared to its current $80 billion war chest. The point is, Nvidia has heard of it -- and likes it enough to take a position.

Then again, Nvidia has a (very) in-depth understanding of this company's business.

Generate Biomedicines isn't a biotechnology outfit in the usual sense of the word. It's actually the developer of an AI platform that digitally tests how a prospective drug molecule might perform as a treatment for a particular disease.

And it's no mere theoretical idea. The platform is up and running, launching the development of real drugs in real clinical trials. As of the latest update, four drug candidates are in Generate Biomedicines' pipeline, with one in phase 3 testing. That's GB-0895, for the treatment of severe asthma.

Of course, there's no limit to the number of such tests the company's technology can perform, whether with a partner or on its own. It and its drugmaking partners just need to come up with worthy ideas to test.

Creating a massive opportunity

To be clear, this AI-powered testing isn't a replacement for actual clinical testing; the United States' FDA and other countries' regulatory bodies still require proof that a drug is safe and effective to use in a real-world setting.

Generate Biomedicines' technology addresses two of the pharmaceutical industry's chief challenges, though: wasted time and wasted money.

Only about one in 10 drugs that begin clinical trials are approved. And that still understates the ultimate failure rate. See, even fewer drug hopefuls move past the preclinical development stage when there's little to no evidence of efficacy realized or when safety concerns surface.

All this work still requires significant resources, though, particularly clinical trials. Numbers compiled by Thermo Fisher Scientific's drug-manufacturing division, Patheon Pharma Services, indicate it can take between 10 and 15 years and $2.6 billion to bring one new approved medicine to market. It costs about the same, of course, even if a drug makes it to and through phase 3 trials only to end up not being approved; dial back the figure accordingly for developmental efforts that are abandoned in phase 1 and phase 2 clinical testing stages.

The real travesty? It's arguably the potentially game-changing drugs that never even begin development in the first place, out of fear that precious resources may be wasted on them that could have been devoted to more promising prospects.

Generate Biomedicines' AI-powered platform dramatically reduces this risk by giving pharmaceutical developers a clear, virtual sense of what's likely to happen between a drug and a disease in an actual clinical trial. Although the numbers vary somewhat, studies on this matter generally indicate that AI-discovered drugs are about twice as likely to succeed in phase 1 trials as drugs that begin clinical trials without prior virtual testing. That's huge. Indeed, it's so huge that AI-powered drug development is likely to change how the entire $1.8 trillion pharmaceutical market constantly renews its drug portfolios.

If it's good enough for Nvidia...

Generate Biomedicines isn't the only name in this budding business, for the record. It competes with Recursion Pharmaceuticals' (NASDAQ: RXRX) -- which is partnered with Sanofi and Roche -- Insilico Medicine, and Isomorphic Labs, which is a spinoff from Alphabet's Google's DeepMind that's already working with established pharma names like Eli Lilly and Novartis. Generate Biomedicines will need to fight for its share of the AI drug development market that Precedence Research expects to be worth $160 billion per year by 2035 (versus less than $20 billion last year).

But even a small fraction of this growth would be a windfall for Generate Biomedicines.

Perhaps more important right now, however, among the up-and-coming businesses Nvidia could have selected, it chose Generate Biomedicines, even though it's also collaborating with the aforementioned Recursion, while supplying Insilico with high-performance AI processors. That speaks volumes about what Nvidia sees in this company. Interested investors might want to take the subtle hint if they can stomach the risk and likely volatility.

James Brumley has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet, Eli Lilly, Nvidia, and Thermo Fisher Scientific. The Motley Fool recommends Roche Holding AG. The Motley Fool has a disclosure policy.