The cost and high failure rate related to bringing drugs and medical devices to market opens healthcare to more artificial intelligence (AI)-connected disruption than perhaps any other industry. A lot of healthcare companies are seeking to brandish their AI bonafides, but Recursion Pharmaceuticals (RXRX 21.55%), and GE Healthcare Technologies (GEHC -0.40%) are already using AI to boost their bottom lines. Both companies have been using AI tools for years.
I wouldn't consider either stock inexpensive, especially since both have already seen big climbs this year. Recursion trades at a price-to-book (P/B) ratio of nearly 6 while GE Healthcare is at nearly 5. However, their growth potential makes both great long-term choices, the type of investments that could deliver parabolic returns over time.
Recursion is making inroads for drug discovery
Recursion's shares are up nearly 90% so far this year. The clinical-stage biotech uses a huge biological and chemical dataset to create new drugs. It's an early adopter of AI technology for drug discovery. The company's backbone is the Recursion OS, which uses a supercomputer and machine-learning algorithms that attempt to take human bias out of the equation of drug discovery. The company said it is capable of performing up to millions of wet lab experiments weekly.
Earlier this month, Recursion announced that AI chipmaker Nvidia was investing $50 million in the company to speed up development of Recursion's AI foundation models for biology and chemistry, allowing it to outsource those models to other companies -- for a price.
Some of the company's AI initiatives include the analysis of cells through high-resolution images to identify changes in cell structure and function that may be connected with disease. The company also uses AI to identify genes associated with diseases to better develop drugs to target those genes. Recursion also uses AI to screen the vast number of chemicals for potential drug candidates, weeding out ones that have low potency or high toxicity.
Recursion has five programs in clinical development, including three therapies in phase 2 trials to treat rare disorders: REC-994 to treat cerebral cavernous malformation, a neurovascular disease; REC-2282, to treat neurofibromatosis type 2, which is associated with the growth of non-cancerous tumors in the nervous system; and REC-4881, to treat the genetic disorder familial adenomatous polyposis, which can lead to colon cancer.
In the first quarter, Recursion reported revenue of $12.1 million, up 128% year over year, due mainly to the company's collaboration with Roche subsidiary Genentech. Recursion has also partnered with Bayer. Recursion isn't profitable, though, posting a loss of $65.3 million in the first quarter of 2023, compared to a net loss of $56 million in the same period last year. The company does have $473 million in cash, giving it plenty of time to become profitable.
In May, Recursion increased its AI-powered capability by agreeing to buy two AI-focused drug discovery start-ups, Cyclica and Valance, for a total of $87.5 million.
AI is a key part of GE Healthcare's systems
GE Healthcare's shares are up nearly 40% to start the year. The recent spinoff from General Electric is already profitable. GE Healthcare focuses on medical technology, pharmaceutical diagnostics, and digital solutions.
The company has benefited not just from the hype around AI, but also its use in its diagnostic systems. The company's AIR Recon DL is a deep-learning algorithm that helps radiologists get sharper images while cutting down scan time. GE Healthcare also has a Critical Care Suite 2.0 of AI algorithms in a mobile X-ray device that looks for critical diagnoses such as a collapsed lung. The company's Edison Brain Tumor Screening helps radiologists more accurately identify brain tumors.
In the second quarter, the company reported revenue of $4.8 billion, up 7% year over year. Earnings per share (EPS) was $0.91 compared to $1.04 in the same period last year. The company raised guidance for annual organic revenue growth from an earlier forecast of between 5% and 7% to between 6% and 8%. It also raised annual adjusted EPS to be between $3.70 and $3.85, up by 9% to 14%.
In the company's second-quarter earnings call, GE Healthcare CEO Peter Arduini said the company should also benefit from improved Alzheimer's therapies because they will drive the need for more PET scans and molecular testing that are often performed by GE Healthcare machines.
The Centers for Medicare and Medicaid Services (CMS) has proposed broader Alzheimer's therapy coverage, but for patients to qualify for Eli Lilly's recently approved Alzheimer's disease drug, Leqembi, they will probably have to have at least a PET scan to show they have the disease and will also need follow-up MRI scans to ensure safety while undergoing therapy.