Attention! The AI frenzy is sweeping through the US biotech stocks.

Since the beginning of this year, healthcare stocks in the US stock market have performed poorly, but some small-cap stocks are bucking the trend in the artificial intelligence boom.

The healthcare sector of the S&P 500 index has been almost flat this year, while the overall market has gained 19%. This is the worst performance of the sector since 1993. However, the market's enthusiasm for artificial intelligence has greatly boosted the stock prices of some small biotech companies. In this industry, investors are now more focused on growth opportunities rather than current financial performance.

Recursion Pharmaceuticals received a $50 million investment from NVIDIA this month and licensed its model to other pharmaceutical companies to assist in their drug discovery efforts. Two months ago in May, Recursion acquired two AI-driven drug discovery companies in the field for $87.5 million, strengthening its bet on artificial intelligence. The company's stock price has risen nearly 80% so far this year.

The stock prices of other companies applying artificial intelligence to biopharmaceutical technology have also seen significant growth. Schrödinger Inc. has risen by over 160% this year. The company sells AI-enhanced software for the drug development process. In May of this year, the company projected that its drug discovery division's revenue would reach $70-90 million, significantly higher than $45 million a year ago.

Diagnostic imaging company RadNet, which uses AI to interpret X-ray images, has seen an increase of nearly 80% this year. Meanwhile, cancer drug developer Exscientia has risen by over 30%.

The combined market value of these four companies is close to $10 billion.

Although these companies have not yet generated sustained profits from their AI-related businesses, their current valuations remain high because investors are betting on rapid revenue growth. Currently, Recursion's market value is 60 times its revenue in the past 12 months, while Schrödinger Inc. is at 18 times. In comparison, the same ratio for the S&P 500 index is 2.5 times.

After outperforming the market last year, most healthcare stocks have underperformed in 2023. Large health insurance companies, which account for a significant portion of this sector, have been struggling to control costs in response to the growing demand for surgeries, while the sales frenzy for COVID-19 vaccines, testing, and treatments has weakened. At the same time, the United States is seeking new legislation to curb the pricing power of these companies.

How much impact can artificial intelligence have in the pharmaceutical industry?

One important application area of artificial intelligence is in the field of medicine. In September of last year, NVIDIA released the BioNeMo framework, which is used to train and deploy large-scale language models for biological molecules, helping scientists better understand diseases and find treatment methods for patients. This large language model (LLM) framework supports chemical, protein, DNA, and RNA data formats. In addition to the language model framework, BioNeMo also provides a cloud API service that will support an increasing number of pre-trained AI models.

Previously, scientists using natural language processing models to process biological data would generally train relatively small neural networks that require custom preprocessing. With BioNeMo, scientists can scale it up to an LLM with billions of parameters, capturing molecular structures, protein solubility, and other information.

According to data from the Centers for Medicare and Medicaid Services, the United States spends about $4.3 trillion on healthcare each year. Analysts at Jasper Asset Management believe that the most significant impact artificial intelligence could have on the healthcare industry is in helping to detect serious diseases early:

The reality is that 18%-20% of the U.S. GDP is spent on healthcare, and if artificial intelligence can make a difference in this area, there will be a lot of market opportunities.

Regarding the strong performance of some pharmaceutical companies in this AI wave, some analysts believe that it is more of a concept hype.

Jared Holz, a strategist at Mizuho Securities, believes:

I think companies are actually very aware that they are using artificial intelligence as an angle or a narrative to attract investor interest. The reality is that for most companies, artificial intelligence is currently more of a concept than a real money-making tool.