Recursion Pharmaceuticals (RXRX 5.58%) is arguably one of the most unique drugmakers on the planet. Though it's classified as a biotech company, its claim to fame is an artificial intelligence (AI)-based approach to speeding up drug discovery and development. Recursion Pharmaceuticals remains a small and little-known player in the industry, and like all clinical-stage biotechs, the stock is relatively risky. There are arguments for and against buying shares -- let's consider one in favor and two against.
Reason to buy: A potential paradigm shift
Developing brand-new drugs is difficult, risky, and expensive. There is the pre-clinical stage, where novel clinical compounds are tested on laboratory animals. Then, provided results are positive, human clinical trials begin, typically in three phases, each more daunting than the last. Some drugs never make it past phase 1 studies despite acing pre-clinical testing. Some stop at the phase 2 level, and others fail late-stage studies. Those that make it through this grueling process aren't guaranteed approval -- sometimes, regulatory bodies decline to grant it.
And among those that do get marketing authorization, many don't generate enough revenue to cover the cost that went into developing them. This slow process doesn't just affect drugmakers' bottom lines. It affects all of us since a more efficient approach would lead to more breakthroughs in drug development and cheaper medicines.
That's where Recursion Pharmaceuticals comes in. Its AI algorithm is designed to test various clinical compounds against a library of human genes it contains. It helps predict which compounds are the most likely to be effective at treating various illnesses, thereby speeding up the discovery process and reducing the risk that drugs that enter clinical trials will fail somewhere along the way. If the biotech can increase the probability of success from pre-clinical testing to regulatory approval, it would be a monumental step forward for the company and the entire biotech industry.
And if that happens, Recursion Pharmaceuticals' shares will soar. In other words, the company's stock presents substantial upside potential. Those who get in on the ground floor could be handsomely rewarded.
Reason to sell 1: No results to show for it
Though Recursion Pharmaceuticals' platform seems promising in theory, investors will ultimately want to see results -- tangible evidence that its approach can produce the kinds of breakthroughs hoped for at a speedy pace. So far, the biotech hasn't produced much evidence of its claims. Recursion Pharmaceuticals has about half a dozen programs in clinical trials. Most are in phase 2 studies. That's not particularly impressive for a clinical-stage biotech.
More importantly, the company doesn't have a single product on the market or even in late-stage studies. Even though that wouldn't prove that its approach is working as intended, it would at least make the stock less risky.
Reason to sell 2: There will be competitors
AI has been around for a while, but the technology has gained substantially more prominence in the past two years thanks to significant advances in the field. Companies in most industries are now seeking to implement AI in their businesses to improve productivity and efficiency. That's also true in the healthcare sector. So, we can expect Recursion Pharmaceuticals to encounter plenty of competition as other companies also attempt to use AI to speed up the drug development process.
Novo Nordisk, through its parent organization, the Novo Nordisk Foundation, is helping build an AI supercomputer in Denmark powered by Nvidia's AI technology to accelerate research and development in biopharma and other fields. Novo Nordisk has access to more data from its many successes and failures in its long and storied history in drug development. The Denmark-based pharmaceutical giant -- one of the largest drugmakers in the world -- also has access to more funds than the much smaller Recursion Pharmaceuticals.
So, Novo Nordisk could eat Recursion Pharmaceuticals' lunch. More drugmakers might also decide to start similar ventures. Though the increased competition wouldn't mean Recursion Pharmaceuticals can't be successful, it certainly won't help the company's cause.
Should you buy the stock?
It might be a while before Recursion Pharmaceuticals' platform produces real results, if it does at all. The biotech might survive the competition by creating a competitive advantage. Its AI algorithm could build a network effect, as successes and failures lead to a more fine-tuned system that can better predict successful compounds. However, no data suggests that this has happened or is happening. The drugmaker could certainly end up being a winner, but it is far too early to bet on the company to deliver market-beating results. The stock looks too risky for most investors. There are much more attractive biotech companies out there.
