Artificial intelligence (AI) is all the rage these days, even in fields like biotech, where long product development cycles mean that cool new tools today might not lead to cash flows for years. In particular, there is a trio of biotechs going all-in on AI, and so far, the hype wave has been excellent for their shareholders.
All three companies I'll discuss have smashed the market's return this year so far. While it's true that they're quite risky and still need to prove that their AI-driven business models are more than vaporware, the early signs look positive, so let's take a look at each.
1. Recursion Pharmaceuticals
The idea of Recursion Pharmaceuticals (RXRX 3.57%) is to throw petabytes of data on biological targets, chemical interactions, and bioactive molecules at a machine learning platform to identify compounds that are good starting points for drug development.
By taking that approach, it hopes to cut research and development (R&D) costs for companies it collaborates with, while slashing the risk of failures in clinical trials. And as of July 12, Nvidia, one of the market's hottest AI businesses, is on board as a collaborator, making a $50 million investment in Recursion with the goal of supercharging its own AI-based drug discovery platform.
Recursion's stock is up 73% this year, and while it doesn't have any recurring revenue as of yet, it plans to license out some of its data, forge more drug development collaborations, and pursue several therapy programs of its own.
That gives it three independent avenues for AI to enable its business. So far, pharma juggernauts like Bayer and Roche have also signed up to collaborate, each committing to potentially dishing out billions in milestone payments. That doesn't mean this biotech stock is destined for success, but it won't be short of cash to keep its operations going for quite some time, even if it doesn't generate recurring revenue. So keep an eye on this one.
2. Ginkgo Bioworks
Ginkgo Bioworks (DNA 10.60%) also plans to be a collaboration-driven business, but its approach is a bit different. While it uses its machine learning platform to help with drug discovery and development, its focus is on organism engineering as a service. That way, if a customer wants to make a yeast cell that's a biological factory for an industrial enzyme, they can get Ginkgo to handle all the typically troublesome steps involved in bioengineering the yeast, saving money in the process. And that's a lot easier, thanks to its heavy reliance on AI and robotic automation.
It doesn't develop medicines on its own, but it's already collaborating with Bayer and Roche, as well as Merck, Moderna, and many others in biopharma. It currently has around 100 collaboration programs in process, with more on the way.
And while it isn't exposed to the hype from AI as much as Recursion since a big portion of its value proposition to customers is in its cost-cutting physical automation capabilities, its shares are still up by 29% this year. With a bit more development of the software portion of its platform, that might soon change, but even if it doesn't, it could eventually become profitable via its collaborations alone, which isn't half bad.
3. Schrödinger
Schrödinger (SDGR 2.70%) is very similar to Recursion Pharmaceuticals in that it's using AI for drug discovery and hopes to win big by licensing out its software while also developing medicines and pioneering development collaborations with the bigwigs. But it has the wrinkle of pairing its AI methods with a physics-based approach that uses reams of old-fashioned mathematics and known molecular properties to calculate promising leads, which AI wouldn't be capable of discovering on its own.
The idea is that Schrödinger can thus find novel combinations of targets and molecules that won't be included in any machine learning data set.
With a total return of 191% so far this year on Schrödinger's shares, it's clear the market finds the company's drug discovery paradigm very promising. Giants like Eli Lilly and Bristol Myers Squibb are already working on partnered programs, not to mention a slew of collaborators. And with $129 million in net income in the first quarter of 2023 stemming largely from those collaborations, Schrödinger is also the only business of the three mentioned today that has a claim to being (likely temporarily) profitable.
So if you're a bit hesitant to invest in Recursion or Ginkgo, owing to their ambitious game plans, know that this company is a tad less risky, even if it has a long way to go before its business model is validated.
