Cathie Wood can't get enough of Recursion Pharmaceuticals (RXRX +8.19%) stock. Through her Ark Innovation ETF, the maverick growth stock portfolio manager bought shares of the biotech three times, expanding her position from a mere 61,000 shares to roughly 4 million by Nov. 14. When news of her purchasing first broke, the company's stock rose by 30% over the following days.
But Wood is known for making huge bets on potentially disruptive businesses, and it's a fact that sometimes chasing the big new thing doesn't pan out as intended. Let's explore what's driving her decision with this stock, and make a few predictions about whether it'll prove to be a smart investment in a few years from now.
NASDAQ: RXRX
Key Data Points
This company is a classic Cathie Wood stock
Cathie Wood's strategy is to invest in companies with big ideas that plan to use cutting-edge technology to reshape their markets and industries with new paradigms.
Recursion Pharmaceuticals aims to utilize artificial intelligence (AI), machine learning, large language models (LLMs), big data, and laboratory automation to dramatically streamline the early steps in the drug discovery and development process. In English, it wants to use computers to digest a ton of biological and pharmacological information to propose leads for new drugs that researchers can follow up on with laboratory experiments and preclinical trials in animal models.
If it realizes its ambitions, it'll pioneer a new way of doing biopharma research and development (R&D), which it claims will cut timelines, decrease costs, and increase the chances of success. Being the master of that new method could enable it to commercialize medicines of its own while simultaneously licensing out access to its platform and its data.
It'd also be a popular collaborator for other biopharma players looking to kick the productivity of their development pipelines into overdrive. And with the potential to make money from those three segments, it just might be wildly profitable too, which is what Wood doubtlessly sees happening in the future.
Time for a reality check
But how close is Recursion to reaching that golden state of flourishing? It depends on how generously you view the available evidence. Let's pin down a few of the less-positive tidbits first.
Today, it's nowhere close to being profitable, with a trailing-12-month net loss of $293 million. Its pipeline has five clinical-stage programs, all of which have years to go before they have a chance at getting approved for sale.
And the sum total of its collaboration revenue and platform/data licensing fees was less than $11 million in Q3, down from more than $13 million a year prior. The core thesis, that its approach can make drug discovery and development far more efficient and reliably successful, is entirely unsubstantiated so far. Generating evidence to support that thesis will also be a process that takes years.
On the other hand, Recursion already has the endorsement of a handful of influential and deep-pocketed parties. It's collaborating with German pharmaceutical company Bayer to find leads for oncology drugs in a deal that could eventually yield it royalties as much as up to $1.5 billion in milestone payments. It's likely that when the two businesses announced on Nov. 9 that their collaboration would be updated and refocused on oncology, Cathie Wood interpreted it as a highly bullish sign.
Similarly, Roche is teaming up with it on up to 40 different programs in neuroscience and oncology, and it's willing to pay as much as $300 million in milestones for each of those. The potential revenue from that collaboration is massive, and it has the advantage of being spread out across so many programs that a slew of failures still won't preclude raking in a lot of cash overall.
But it isn't just big pharma that's interested in working with the biotech. Nvidia, the chipmaker and AI hardware company, made a $50 million equity investment in Recursion to collaborate on its AI models for biomedical research and drug development. It's also helping to build what will become one of the world's 50 most powerful supercomputers, just to crunch Recursion's data. With Nvidia's help, it'll have the best shot it can at making the most of its data.
The ride will probably be bumpy for a good while
Given the company's situation as it is today, its near-term survival is close to guaranteed. There is also a high chance that it will capture at least some of the billions of dollars in milestone payments it currently has exposure to at some point in the future. And it doesn't even need to reach that many of its milestones in any single year to cover its annual operating costs.
But as it is an unprofitable growth stock, the market may continue to be volatile or unkind to shareholders. Recursion isn't the only biotech developing a platform with the help of AI, and its shares have so far tended to suffer when it isn't in the spotlight of the financial media. That will have a chance to change if it can demonstrate that its platform is valuable by succeeding in its collaborations or with its pipeline programs.
So did Cathie Wood make the right call with this stock? Unfortunately, it's far too early to tell definitively. The only certain thing is that it'll be a risky investment -- but presently, the balance of risk and reward is trending toward a sweet spot for investors, where it could make sense to buy.
