Don't call Recursion Pharmaceuticals (RXRX -1.32%) a biotech company. Its management prefers the term "TechBio." While many have been skeptical about TechBio in the past, the reception is changing rapidly.
There's a good reason for this shift: The tech part of TechBio focuses on machine learning and artificial intelligence (AI). Nearly every industry is undergoing an AI-fueled transformation. Biopharmaceutical development is no exception.
That's great news for Recursion. Its shares have plunged more than 70% since the company's initial public offering (IPO) in 2021. But the potential for its technology and pipeline have arguably never looked as promising. Can Recursion Pharmaceuticals stock double in five years? Here's what it would take.
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Key Data Points
Recursion's path to doubling
Recursion Pharmaceuticals' market cap currently stands at just over $2 billion. The math is simple: To double, the company will need its market cap to increase to more than $4 billion.
The best way to make this happen is for Recursion to achieve success with its pipeline programs. Recursion has five candidates in phase 2 clinical studies. We won't have to wait long to learn how well several have fared.
Recursion plans to report results from the phase 2 study of REC-994 in treating cerebral cavernous malformation (CCM) in the third quarter of 2024. CCMs are abnormal, tightly packed small blood vessels that can lead to leaking of blood and cause brain and spinal cord issues.
The company expects to announce safety and preliminary efficacy data from a phase 2 study of REC-2282 in the fourth quarter of 2024. REC-2282 targets neurofibromatosis type 2, a rare genetic disease where benign tumors grow on nerves.
Recursion hopes to share results from a couple of phase 2 studies in the first half of 2025. One of those clinical trials is evaluating REC-4881 in treating familial adenomatous polyposis, a genetic disease where precancerous polyps grow in the gastrointestinal tract. The other features REC-4881 targeting cancers with AXIN1 or APC mutations.
Five years is a relatively long time in drug development. It's possible that one or more of these programs could sail through phase 3 testing and either await regulatory approval or have already secured approval by mid-2029. Just one success could be enough to enable Recursion stock to double.
Key obstacles
The biggest obstacle that could get in the way of Recursion stock doubling in five years also involves simple math. Cofounder and CEO Chris Gibson acknowledged in the company's latest annual shareholder letter: "The industry average success rate for phase 2 readouts is approximately 20-30%."
Recursion's phase 2 programs are far more likely to fail than to succeed, if history is any guide. Sure, the company has multiple shots on goal. But one clinical setback won't magically increase the chances of success for other programs.
It's also important to note that a tremendous amount of anticipated success is already baked into Recursion's share price. The company has a market cap of over $2 billion with no product sales. Its only revenue comes from collaborations with Bayer and Roche.
Gibson noted in the recent shareholder letter that Recursion's mission is to "decode biology." He added: "[R]realization of that mission may take another decade or two." We're back to simple math: A decade is further in the future than five years.
Is Recursion Pharmaceuticals stock a buy?
Recursion Pharmaceuticals stock may double or more within the next five years. However, the stock could also decline or tread water. There's too much uncertainty with the company's clinical programs to know what will happen. As a result, risk-averse investors will be better off buying other stocks.
I think, though, that Recursion is exactly the kind of stock that aggressive investors willing to take on considerable risk should love. The company is building a platform using AI that could enable it to develop a large number of drugs over the long term. If Recursion's TechBio strategy achieves its potential, this stock could do a lot more than double over the next decade and beyond.
