Amidst the artificial intelligence (AI) revolution and a rapidly shifting landscape in drug development, Recursion Pharmaceuticals (RXRX -6.07%) is aiming to position itself at the intersection of both big trends. While it isn't the only biotech exploring these rising opportunities, it just might be one of the few to have what's needed to succeed in such a dynamic time.
Still, innovative businesses also tend to be risky investments. Does this company have what it takes to overcome the risk and reward investors buying today? Let's evaluate what the bulls and bears are saying About Recursion Pharmaceuticals.
The bull thesis for Recursion Pharmaceuticals
The core problem Recursion seeks to solve is that the process of discovering and making new medicines is becoming slower and more costly over time, despite perpetually increasing knowledge of human biology and ever more sophisticated approaches to the research and development (R&D) process.
To buck that trend, the biotech seeks to integrate a full stack of highly automated modules to identify leads for promising new medicines, validate them, and move the best candidates into clinical trials and beyond. Technologies like AI, machine learning (ML), and large language models (LLMs) are core to its vision, as they reduce the human labor needed at each step, and hopefully cut down on costly human errors as well. The company also claims that by using its approach, customers can move much faster from the discovery stage to clinical trials, with fewer late-stage failures along the way.
Its pipeline has four programs in phase 2, and just one program in phase 1. Nearly all of its disclosed candidates are intended to treat rare diseases like neurofibromatosis type 2 (NF2) and uncommon cancers, meaning that most of the time it's targeting patient populations of fewer than 360,000 people. That means the company can rely on picking up orphan drug designations, and perhaps other favorable regulatory designations too, which is a plus.
There is no convincing evidence yet that Recursion's platform can actually do what it claims. Though its collaborations with other biopharmas brought in trailing-12-month (TTM) revenue of $46.2 million, it hasn't yet had the time for any of its candidates to pass through their clinical trials and get approved for sale. Still, as of the first quarter it has $296.3 million in cash and equivalents, and it's currently looking to raise another $200 million in a stock offering, so it will have enough money to try to get at least one of its programs out the door.
Regarding upcoming catalysts, Recursion claims it'll report as many as seven clinical trial readouts over the next 18 months or so. Each of those readouts is an opportunity for the stock to rise on news of favorable results -- but there's also a risk of the opposite happening.
Some Recursion investors may struggle to stomach the risks
Recursion is one biotech among several that are taking stabs at integrating recent advances in information technology, AI, and biotechnology into a cohesive platform. If it has moderate success, it'll be a desirable collaborator for big pharmas, and it will also have revenue from any medicines it commercializes.
Investors who buy Recursion today will do well, but returns are unlikely to be spectacular. Its target markets are niche, and replicating wins may be difficult because the lessons learned from developing therapies for rare diseases may not carry over to other areas. But, as mentioned previously, it hasn't actually demonstrated that its platform is as powerful as it claims, and by the time it does, a lot of the upside from the slow drip of proof will be in the past.
If its platform does fall short, investors will see the value of their shares fall in big chunks over time. Then, those shares will be diluted as the company tries to raise more cash. So far there isn't reason to believe that such an outcome will occur, but this possibility makes Recursion a risky play -- perhaps even riskier than other biotechs with more conservative ambitions. If your risk tolerance is on the lower side, find something else.
Nonetheless, if the company realizes the maximalist version of its vision, the size of its current pipeline will look like a toy boat next to a supertanker. Truly industrializing the process of drug discovery and development, while slashing timelines and costs, could easily make Recursion Pharmaceuticals a leader in its sector. Today it's unclear whether this scenario can actually occur, but for investors looking for opportunities with disproportionate upside, it's worth a (small) bet.
