Schrödinger (SDGR 2.70%) and Recursion Pharmaceuticals (RXRX 3.57%) are both biotechs that want to use AI to streamline the drug discovery and development process. And that makes them hot stocks in the AI-obsessed market of 2023.
But which business is a better pick, given that the field they share is evolving rapidly and that neither is profitable? Let's weigh the case for each and work it out.
Schrödinger's triple-pronged approach diversifies its bets
Schrödinger has three ways of making money. First, it sells licenses to its AI-driven software platform, which is supposed to help biopharma businesses discover new leads for therapeutic molecules and thereby reduce their costs and development timelines. That segment brought in $32 million in the first quarter, flat from a year prior. So there isn't exactly a scramble to make use of its technology in isolation, even if it might be useful.
The story is a bit different when it comes to companies wanting to use its software or lean on its expertise more heavily. Schrödinger collaborates with a handful of biopharmas directly; it received a $25 million milestone payment from one of its benefactors, Bristol Myers Squibb, in Q1. In the past, it worked with Agios Pharmaceuticals on two programs, which ultimately led to two medicines being commercialized.
Finally, it develops medicines much like a normal biotech, except that its candidates are identified and advanced on the basis of what its AI-based analysis finds. Its pipeline only has one clinical-stage program, its phase 1 trial for treatment-resistant or refractory non-Hodgkin lymphoma. It'll take quite some time before it has the opportunity to make any sales of its medicines, assuming it ever does.
Recursion is on the way to being an AI heavyweight in biotech
Much like Schrödinger, Recursion has a pipeline of medicines it's working on. It's currently investigating three candidates in phase 2 clinical trials, two of which are intended for rare diseases: cerebral cavernous malformation, and neurofibromatosis type 2. It also has revenue from collaborations, and licenses for its massive corpus of chemical and biological data, which it hopes to exploit using AI.
Recursion is well-capitalized, with more than $473 million in cash and equivalents. And it has trailing-12-month revenue of around $46 million from its collaborations. But as of the first quarter, there don't appear to be many buyers for licenses to its data set just yet. That means in terms of other biotechs actually finding its offerings useful enough to pay for, Schrödinger has a distinct edge.
The difference might not matter much for shareholders, though, if the hype surrounding AI keeps accelerating. On July 12, Nvidia invested $50 million in Recursion so that the pair could work to improve each other's AI capabilities as they relate to drug discovery and development. The latter's shares popped by more than 70% as a result.
Why not buy both?
At the moment, there's nothing to suggest that either Recursion or Schrödinger has or will have a competitive advantage that'd make it far more likely to succeed than the other. Neither has demonstrated that its AI-enabled methods are sufficient to reach profitability, nor is either expected to do so anytime soon.
What's more, their claims regarding lower failure rates in clinical trials are difficult to evaluate one way or the other. Also, the quantity and maturity of their pipeline programs are not different enough to pick a clear winner given Schrödinger's longer record as a pharma collaborator and Recursion's larger number of candidates in clinical trials.
Thanks to their recent popularity, both stocks have valuations that are so inflated they'd make Warren Buffett blush: Recursion's price-to-sales (P/S) multiple is 48, and Schrödinger's is 20.
So it's a very close call between these two stocks. Given that they're very early in their growth stories, it probably makes more sense to buy a small amount of each rather than to concentrate your investment in one. Just be aware that their valuations and ambitious goals present risks that shouldn't be underestimated, and be ready to hold your shares through the inevitable doldrums or stumbles in clinical trials.
Within 10 years, there's a solid chance that one or both of these companies could be much larger, and if you're usually comfortable with the level of risks involved in biotech, it's worth investing to capture some of that upside.
