As a young and innovative company that heavily emphasizes the "tech" portion of the term "biotech," Recursion Pharmaceuticals (RXRX +2.17%) is a classic contender for being the kind of stock that can turn investors into millionaires. It has flashy technology and pioneering drug development methods.
But can those really drive returns on the scale needed to make a relatively small investment grow to be worth millions? Buckle up and get ready for some calculations, because we're about to find out.
NASDAQ: RXRX
Key Data Points
Here's what it would take
Today, Recursion's market cap is close to $2.2 billion. It has no marketed products, and its trailing-12-month revenue of $46.2 million is derived solely from collaborations with bigger biopharmas. In its pipeline, it has a handful of programs intended to treat rare diseases -- three are in phase 2 trials, and there are a couple of earlier-stage projects -- and a pair of oncology programs. In other words, it will probably not have any sales revenue within the next two years.
To help keep the lights on, it could still make some money by signing new collaborations or expanding existing ones. The biotech aims to integrate artificial intelligence (AI) methods into the drug discovery process, thereby creating a platform that's capable of cutting costs and moving from the lab to clinical trials faster and with fewer failures.
If its data-intensive approach delivers on those goals in the eyes of other biopharma players, it might also be able to license out access to its platform for another revenue stream. Plus, it wouldn't be lacking for more collaboration partners if it could genuinely improve the efficiency of their research and development (R&D) pipelines, and it would eventually realize plenty of royalties.
But unlike drug sales, collaboration revenue and potential licensing deals probably wouldn't result in a consistent and linear increase to Recursion's top or bottom lines. Its growth is practically destined to be lumpy, as it'll be driven in large part by attaining development milestones as described in its collaboration agreements.
Still, if the biotech succeeded with a few of its own pipeline programs, and demonstrated the value of its platform to get buy-in from big players at the same time, it could mark massive growth over a long period. Let's take this best-case scenario as the basis for a simple financial model for the next 10 years, to see if this stock could be sufficient to make investors into millionaires.
Per its current agreements with businesses like Roche Holding, Recursion could earn as much as $2.3 billion in milestone payments. Assuming those payments trickled in perfectly evenly over the next 10 years, which they won't, it would bring in roughly $230 million per year before any royalties or sales from medicines it developed in-house.
Next, if we assume that within three years Recursion successfully launches one of its therapies, the picture changes for the better. Based on the historical chances of drug development programs currently in phase 2 clinical trials proceeding to later become commercialized, it should succeed with at least one of its phase 2 programs.
As most of its candidates are for rare diseases, they probably won't attain blockbuster drug status (bringing in $1 billion or more per year). But a seven-year sales haul totaling $700 million, or $100 million per year, isn't an unreasonable estimate. That would bring total revenue over the next 10 years to $3 billion, or $300 million per year.
With that annual revenue, at its current price-to-sales (P/S) multiple of 39.6, its market capitalization would be roughly $118 billion -- up by 5,164% compared to today's market value.
That would be sufficient to make an initial investment of $19,400 into just over $1 million. However, that's an unrealistic amount for most investors to put into shares at one time. Over the course of dollar-cost averaging (DCAing) for a few years, it would be a bit more manageable to build up a position of the necessary size.
A worthwhile investment under the right circumstances
As you can see, even with all of the highly improbable concessions and assumptions made in Recursion's favor -- especially the likely false assumption that its ludicrously high P/S ratio will remain so elevated -- it would still take a hearty investment to become a millionaire with Recursion Pharmaceuticals stock.
A realistic view is that it won't get 100% of its milestone payments. Furthermore, its medicine might bring in far less than $700 million, given the high likelihood of its programs entering very small markets for rare-disease therapies. And while we didn't include royalties in the calculation, such payments are typically only 4% to 7% of a drug's annual sales, which caps the amount they can contribute to a relatively small sum.
That said, there is still a solid chance of Recursion registering significant growth over the coming years, especially if it can demonstrate the utility of its AI platform to potential collaborators. If you're willing to accept the high risks that are part of most biotech stock investments, it could still be a decent addition to your portfolio, though it won't make you a millionaire.
