Recursion Pharmaceuticals (RXRX 2.01%) and Exscientia (EXAI +0.00%) made waves on Aug. 8 when they announced plans to merge into one business, forming the world's largest biotech devoted to doing drug development empowered by artificial intelligence (AI). The deal is expected to close sometime in early 2025. And now the bull thesis for Recursion's stock is more formidable than it was before.
Here's what you need to know about what this merger is going to accomplish for shareholders, and why it's probably going to be a net positive in the long run.
NASDAQ: RXRX
Key Data Points
The merged player will have plenty of resources and near-term catalysts
There are a handful of upsides to Recursion merging with Exscientia.
First, all of Exscientia's pipeline programs will become Recursion's, which gives it that many more opportunities to commercialize a medicine and start to generate revenue for the first time.
As both are currently dependent on their collaborators to pay milestone fees to help with the costs of research and development (R&D), they'll now both get the benefit of the other's benefactors. Those include powerful international pharma companies like Bayer, Roche, Bristol Myers Squibb, and Sanofi, as well as preeminent AI hardware company Nvidia. It's difficult to overstate the importance of having such a deep roster of allies across multiple domains of medicine and information technology.
In terms of the new company's pipeline, the focus will be on a combination of rare-disease therapies and precision oncology treatments, with a secondary emphasis on drugs for infectious diseases. There's no overlap between the pipelines of the two companies, and right now there don't appear to be any plans to jettison any programs during the merger.
Combining the two biotechs' pipelines opens the door to improvements in shareholder value each time favorable clinical trial data is published. Per management's estimate, the pair have as many as 10 readouts to look forward to within the next 18 months. Four programs are now in phase 2 clinical trials, so it might only be a couple more years until Recursion has a shot at commercializing something.
The new entity combining Exscientia and Recursion will keep Recursion's name, as well as its CEO, Chris Gibson, who is trained as a scientist. Exscientia's interim CEO, David Hallett, will become chief scientific officer (CSO). That job shift is a bit of an oddity, but it isn't bad by any means, considering that he's also trained as a scientist. With these two experienced leaders at the helm, it's likely that the Recursion brain trust will punch far above its weight.
Critically, the merger will also result in a well-capitalized business that won't need to issue new shares or take out fresh debt for a while. On top of the estimated $100 million in cost synergies that are anticipated, the new company will have around $850 million in cash, equivalents, and short-term investments. That means it's set for cash through at least the start of 2027.
NASDAQ: EXAI
Key Data Points
Key questions still need answering, and that will take awhile
There are a lot of reasons to be optimistic about the new Recursion, but the reality is that these two biotechs are in uncharted waters in more than one sense, and the new business will be quite risky, just like the old ones.
The main driver of these risks is that no competitor has yet proven that using AI and other advanced information technologies can actually make developing drugs cheaper, faster, or more reliable. Nor is there evidence that medicines created with these methods will be safer or more effective than drugs with traditional origins. And while the presence of many powerful collaborators looking to get a slice of the action is a positive sign, there's no definitive proof yet that they'll actually gain value by partnering with Recursion. It's questionable whether the big fish will stick around if setbacks in clinical trials start to pile up.
Still, given the newly augmented capabilities that Recursion will have next year, the odds of success are in its favor for now. With so many shots on goal lined up, so many collaborators, so much cash, and probably the largest concentration of AI-based drug development experts in the world, the bull thesis is now stronger than ever.
If you can accept the relatively high level of risk, it's worth picking up a few shares sooner rather than later.
