On Monday, Keybanc analyst Scott Schoenhaus revised his price target on Recursion Pharmaceuticals (RXRX 3.57%) upward, opining the stock would climb by 33% and hit $16. The call came days after the rare-disease drug developer reported 2023 fourth-quarter earnings, which caused the market to dump its shares to the tune of 13%.
Here's what Shoenhaus could be thinking will catalyze a reversal for this stock.
An intriguing new development may take a long time to pay off
In January, Recursion made an interesting decision regarding one of the assets it's developing in its fibrotic disease collaboration with Bayer.
While the biotech's bread and butter is collaboration revenue right now -- as it has no medicines on the market of its own -- it opted to in-license one of its preclinical candidates under co-development, such that it would have the full rights to any therapies the program leads to. That means it won't get that portion of the collaboration income, and also that it coughed up an undisclosed amount of cash for the privilege of full ownership. The company currently only has $392 million in cash, equivalents, and short-term investments, and it's unprofitable.
Reading between the lines, the takeaway is that management probably would not have moved forward with such an aggressive move unless the program in question had suddenly delivered some incredibly promising data. Recursion is already claiming that the asset has the potential to be the best in its class of medicines. As the project is still in preclinical development, the next step will be for it to initiate clinical trials in humans.
Any new announcement about how the research and development (R&D) process is progressing could easily buoy the stock. The same goes for the other programs in its pipeline. Its phase 2 clinical trial for cerebral cavernous malformation (CCM) is expected to report some data in the third quarter, with its phase 2 trial for neurofibromatosis type 2 (NF2) following with a data update of its own before the end of the year.
