As a biotech that's leaning heavily on artificial intelligence (AI) in every aspect of its business, Recursion Pharmaceuticals (RXRX +1.78%) is hooked into a handful of big trends that will likely define the future of its industry.
There isn't any guarantee that the company will be a good investment on the force or direction of those trends alone. But there are three which are especially bullish for the stock thanks to how it's positioned, so let's take a look at each one and see what it could mean for Recursion and its shareholders.
NASDAQ: RXRX
Key Data Points
1. Rising drug development costs
Among the top 20 biopharmaceutical companies, the average research and development (R&D) cost to advance a new drug program all the way from the discovery stage through regulatory review and commercialization was $2.2 billion in 2023, according to the analysts at Deloitte. Between 2022 and 2023, total R&D spending by that same group rose by 4.5%, reaching $145.5 billion. There isn't any indication of this trend slowing down, and many companies are spending more on R&D expenses as a percentage of their revenue than they were 10 years ago.
Enter Recursion, which claims that via its AI-enabled drug development platform, its collaborators will be able to significantly reduce their R&D expenditures and dramatically compress the amount of time they need to advance their programs from discovery phase to initiating clinical trials at the same time.
While Recursion can't reduce the costs of the most expensive parts of the pipeline, specifically the expenses associated with running late-stage clinical trials, it might also be able to prevent costly failures late in the game by screening candidates for clinical testing more effectively.
Furthermore, it could license some of its enormous trove of biological data to other biopharmas, which might help them to avoid doing some laboratory legwork.
As the low-hanging fruit in drug development becomes progressively higher and harder to reach over time thanks to the inexorable march of scientific progress, Recursion will probably not face any shortage of customers or collaborators, assuming it can demonstrate that its platform is actually useful at saving on costs like it claims.
2. Falling anticipated peak revenues from new drugs
Aside from rising R&D expenses, biopharma businesses are also confronted with another unpleasant reality: The expected peak revenue per pharmaceutical asset is falling slightly over time, on average. In 2022 for the top 20 companies, the average estimated annual revenue per program was $389 million at the peak, but in 2023 the average annual forecast was for $362 million in sales. That puts additional pressure on earnings, which are already getting squeezed by rising development costs.
Once again, Recursion could help to ease the pain of its larger competitors. Thanks to its library of AI tools for drug development, it could be instrumental in identifying opportunities for pharmaceutical assets to be investigated for indications other than the ones they originally were developed for. That would allow companies to potentially attain expanded regulatory approvals to market their drugs for more conditions, thereby growing the addressable market and squeezing more revenue out of their early R&D spending.
3. Increasing adoption of AI in drug development
The last trend that's bullish for Recursion's stock is that more and more biopharmas are showing a strong interest in getting AI involved in their drug development process.
Recursion is already collaborating with giants like Bayer and Roche. The other AI biotech company that Recursion is merging with before early 2025, Exscientia, counts Merck, Sanofi, and Bristol Myers Squibb among its collaborators. Many of the other major players have AI initiatives of their own. And AI drug discovery platform competitors like Schrodinger aren't at a loss for clients, either, right now.
At the moment, the field of AI-driven drug discovery and development is still taking shape. Some of the loftier claims proposed by companies may not live up to what their platforms can actually accomplish. Nonetheless, given the undeniable challenges facing biopharmas, there is a big incentive for delivering on promises of cost reduction and other efficiencies.
So even if there are stumbles along the way, or if it takes longer than anticipated to show that using AI confers real advantages, it is still very likely that at least one company will succeed. And that means collaborators will keep on knocking at Recursion's door for the foreseeable future, which is a point in its stock's favor.
