The potential for artificial intelligence (AI) to be used as a tool for better drug discovery is already obvious. AI can help in patient recruitment, better trial design, predictive analytics, and data analysis. Simply put, it can help cut the time that it takes to bring a prospective therapy to market.
Three companies on the forefront of using AI to help drug discovery right now are Schrödinger (SDGR 2.70%), Recursion Pharmaceuticals (RXRX 3.57%), and Exscientia (EXAI 1.00%). While none of these companies is consistently profitable, each shows great potential and is already getting strong buy-in from larger pharmaceutical companies in the form of collaborations. Let's see why.
Schrödinger is using AI on both sides of trials
Schrödinger's shares are up more than 80% so far this year. The healthcare computational platform services company operates a software segment and a drug discovery segment, and it uses AI in both. In its software segment, it sells licenses to its physics-based platform, to help other biopharmaceutical companies save time while searching for new therapies. In its drug discovery segment, Schrödinger is using AI, by mixing computations with chemistry to find its own therapies. AI may be one of this year's hot phrases, but Schrödinger has been using machine learning for two decades.
In the second quarter, the company reported revenue of $35.2 million, down 9% year over year, but it saw net income of $4.3 million, compared to a loss of $47.7 million in the same period last year. Most of the company's revenue right now is from its software division, where it brought in $29.4 million in the quarter while drug discovery was responsible for only $5.8 million. These may seem like small numbers, but Schrödinger has $554 million in cash, more than enough to fund operations for several years.
The company has multiple collaborations, and so far two of them have resulted in Food and Drug Administration (FDA)-approved therapies: Tibsovo to treat acute myeloid leukemia (AML) and bile duct cancer, and Idhifa, which is also used to treat AML. Its partners include some huge pharmaceutical companies, including Bristol Myers Squibb, Eli Lilly, and Takeda Pharmaceuticals.
Schrödinger's pipeline includes several collaborations that are in late-stage trials. Plus, it has four wholly owned therapies in its pipeline, led by SGR-1505, to treat BTK-resistant or relapsed B-cell non-Hodgkin lymphoma, large B-cell lymphoma, and chronic lymphocytic leukemia. The company's other wholly owned candidates include SGR-2921 to treat various blood cancers and solid tumors, SGR-3515 to treat gynecological cancers and solid tumors, and LRRK2 to treat various neurological cancers.
Recursion's bet is a long way from paying off
Recursion Pharmaceuticals' shares are up 10% so far this year. The clinical-stage biotechnology company says it can industrialize drug discovery using innovations in data science, engineering, automation, biology, and chemistry. One of those innovations is its use of AI, and that's one reason for the stock's climb. The company said that machine learning helps it perform millions of wet lab experiments weekly.
Recursion has nine programs in its pipeline, including three in phase 2 trials: REC-994 to treat cerebral cavernous malformation (CCM), REC-2282 to treat neurofibromatosis type 2, and REC-4881 to treat familial adenomatous polyposis. All three diseases are quite rare. The most common of the three is CCM, which is an abnormal cluster of thin-walled capillaries that form lesions that can lead to strokes, paralysis, pain, and other conditions. CCM affects roughly 360,000 people in the U.S., according to Recursion.
The company does have a program that has a larger potential target market, REC-3964, to treat clostridioides difficile infection, which affects roughly 730,000 people in the U.S., but REC-3964 is only in a phase 1 trial.
Recursion is still years away from its first potential marketed product, and even then, the likely revenue from that product would be small because the target audience is tiny. However, because of its AI-enabled platform, the company is already seeing some revenue from collaborations with other pharmaceutical companies. It has a $50 million investment and partnership from computer chipmaker Nvidia to speed the development models for biology and chemistry. The company also has partnerships with Roche and Bayer that could pay off down the line.
In the second quarter, Recursion reported that it had $405.9 million in cash, not counting the $50 million investment from Nvidia. It also reported $11 million in revenue in the quarter, compared to $7.7 million in the same period last year, thanks to increased revenue from its collaboration with the Genentech division of Roche. The company also said it had a net loss of $76.7 million in the quarter.
Exscientia uses AI to fight cancer
Exscientia is a clinical-stage precision medicine company that uses AI to develop oncology therapies. The stock is up more than 6% this year. In the second quarter, the company made several machine-learning advancements. The company opened up an automation laboratory in Oxfordshire, Great Britain, using its own hardware and software to automate more experimental laboratory processes. Exscientia said it expects the lab to be online later this year.
The company's pipeline tilts toward early-stage therapies, with all five programs in phase 1/2 trials or earlier. It has two wholly owned blood cancer therapies, EXS74539 and EXS73565, in pre-clinical testing, but its other pipeline therapies are part of collaborations with Evotec, Bristol Myers Squibb, and private Chinese biotech company GT Apeiron Therapeutics.
In the second quarter, Exscientia reported that it had revenue of $3.8 million, down 58% year over year, and a net loss of $42 million, equal to the same period a year ago. The difference in revenue was due to greater milestone payments in the second quarter of 2022. The company has plenty of cash at $508.6 million, enough to fund operations for years.
Cutting down on the risk
Of the three, Schrödinger seems to be the safest bet if you're looking to benefit from the growth in drug discovery stocks that use AI. The company has two different avenues to cash in on machine learning and has already shown it can bring drugs to the market and turn a profit. My only concern with the stock is that its run-up has been so large. It may make sense for investors to wait for a dip before buying in.
Recursion is also a good long-term bet due to its large pipeline, but its therapies are a long way from reaching the market, so potential investors will have to be patient. Exscientia, due to its preponderance of early-stage therapies, is the biggest risk of the three, though the company's large cash situation and its focus on profitable oncology drugs bodes well.
