There’s a lot to like about the company using automation and artificial intelligence to improve the new drug-discovery process.
Investors looking for stocks that can make dramatic gains often turn toward the biotechnology sector. It isn’t unusual for stocks in this industry to shoot higher in response to positive clinical-trial results for experimental new drugs.
Recursion Pharmaceuticals (RXRX 3.73%) is a start-up biotech company with an important twist. It’s using automation technology and artificial intelligence (AI) to industrialize new drug discovery.
With a one-of-a-kind platform that can run and analyze millions of experiments at a time, Recursion could change the drug-discovery process. The stock market, though, isn’t that impressed, and the company’s share price has fallen by nearly half from a peak it set earlier this year. Let’s measure this company’s strengths against some challenges it faces to see if buying the stock on the dip is the right move for your portfolio.
Why Recursion Pharmaceuticals looks like a good investment
In a nutshell, Recursion Pharmaceuticals is transforming the new drug-discovery process with automation, AI, and over 50 petabytes of proprietary data. Deep-pocketed drugmakers, such as Bayer and Roche, employ its platform to rapidly discover new drug candidates with less upfront cost than traditional methods.
New drug candidates discovered by Recursion should also have a better chance at success in clinical trials because there’s a lot more preclinical-stage testing performed or at least implied.
In addition to partnered candidates, Recursion has an extensive preclinical-stage pipeline of wholly owned candidates that could eventually treat cancer and rare diseases. Recursion’s wholly owned pipeline also sports five clinical-stage candidates that could produce phase 2 data in 2024 and 2025.
Investors might not have to wait very long for Recursion stock to pop. This September, the company will learn if REC-994 helped patients with cerebral cavernous malformation, or CCM. This rare neurovascular disease affects around 360,000 patients in the U.S. and EU, but it still lacks effective treatment options.
Reasons to remain cautious about Recursion Pharmaceuticals
The data Recursion’s platform is accumulating should make it the industry’s favorite drug discoverer. So far, though, the biopharmaceutical industry is not interested. The company was first incorporated over a decade ago, but it’s only begun two significant partnerships.
In 2020, Bayer entered into a strategic-collaboration agreement to discover new drugs that address fibrotic diseases. This collaboration ended in 2023 with Bayer transferring rights back to Recursion. On a positive note, Bayer refocused its partnership with Recursion to look for new cancer therapy candidates last November.
Roche began collaborating with Recursion in early 2022 following a $150 million upfront payment. Recursion is producing maps of biological relationships for Roche, but the partners haven’t advanced a candidate into clinical trials yet. That isn’t a good sign for a company that promises to speed up the pace of new drug discovery.
RXRX Net Income (TTM) data by YCharts.
If Recursion had sped up the discovery process as promised, it would be earning heaps of milestone payments that could fund operations. Instead, its trailing-12-month net loss accelerated to an unsustainable $354 million at the end of March.
Recursion completed a secondary offering this June that strengthened its cash reserves with an additional $200 million before fees. Unfortunately, the offering also inflated its share count. Heaps more shares will make it significantly harder for investors holding the stock to realize a satisfactory return on their investment.
Despite heavy losses, Recursion still sports a $1.9 billion market cap. That’s a big valuation for a company that’s bleeding money and has no idea when it can begin reporting recurring revenue. If upcoming phase 2 readouts aren’t rousing successes that inspire confidence, the stock could get beaten down a lot further than it already has.
A buy on the dip?
A lack of new partnerships following Recursion’s initial public offering (IPO) suggests the biopharmaceutical industry is taking a wait-and-see approach with this company’s unique drug-discovery platform.
A lot is riding on Recursion’s upcoming phase 2 readouts, and there are no guarantees they’ll succeed. Human biology is so unpredictable that even if Recursion’s platform doubles the industry’s clinical-trial success rate, there’s still a significant chance that all its clinical-stage candidates report failures this year and next.
The data sets Recursion is building could be valuable, but there’s a chance that nobody will look at them if upcoming trial readouts aren’t a rousing success. This stock is only appropriate for investors with a finger on the biopharma industry’s pulse and a sky-high tolerance for risk.
