The artificial intelligence (AI) industry has been on a tear in the past two years, and judging by analyst estimates, it's just the beginning. AI-related sales will continue to soar in the coming years, so naturally, investors want to cash in by investing in those companies best positioned to profit from AI.
Though many are attracted to corporations in the tech sector, it might be worth exploring other industries, including healthcare. Let's look at an AI-focused biotech company: Recursion Pharmaceuticals (RXRX +3.95%). The stock has significantly lagged the market in the past year, but if Recursion's ambitions become a reality, it could offer market-crushing returns from here on out.
Is the stock a buy right now?
NASDAQ: RXRX
Key Data Points
Is a revolution in biotech underway?
To understand Recursion's business, here are some basic facts about the grueling, expensive, and risky activity of developing and commercializing new medicines. The process can take about 10 years or longer, and even with significant technological advances in the past few decades, it has become more expensive, a phenomenon known as Eroom's Law (the reverse of Moore's Law).
Imagine if we could find a way to cut the drug development process by 10%, 25%, or even 50%. Medicines would make it to the market faster, they would be cheaper and more accessible, more lives would be saved, and we would be healthier overall.
That's Recursion's goal. The company created an AI-powered operating system with a vast library of human genes that constantly tests clinical compounds against these genes to predict which ones will be effective against certain diseases. Recursion claims to spend about $10 million before submitting an Investigational New Drug (IND) Application, which must be granted prior to starting human clinical trials -- the average for the industry is a little over $25 million.
The company could see immense success if it can maintain this lead throughout the drug development process while launching breakthrough medicines. Not only will Recursion make money from its therapies, but it will also seek to license its OS to other drug developers, a business that will likely carry much higher margins than the typical drugmaker offers. So, there is a massive opportunity ahead for Recursion Pharmaceuticals.
Read the fine print
If Recursion is solving such a huge problem in the biotech industry, why isn't the stock performing better? Here are at least two reasons.
First, the company has yet to launch any medicines. It doesn't matter how fast Recursion can get to the IND stage or how fast it can start phase 1 studies if its therapies never reach the market. Even if it manages to launch products faster, it might not matter too much unless these medicines show reasonable commercial success. It won't bode well for Recursion if its OS can only identify therapies that generate meager sales.
Second, other companies are working on similar projects. Novo Nordisk, the Denmark-based pharmaceutical giant, is building an AI supercomputer to help accelerate healthcare research. Recursion's plan to license its OS to other drugmakers might fall flat if other companies have better AI-powered ways to speed up drug development.
So, Recursion Pharmaceuticals isn't a slam-dunk investment, at least not yet, but there are some reasons to be somewhat optimistic. The company does have a vast pipeline with several candidates in phase 2 studies, including some that have already produced encouraging results at this stage.
Recursion has also partnered with some leaders in the industry to develop medicines, including Roche, Bayer, Merck, and Sanofi. Partnerships with pharmaceutical giants are promising for at least two reasons. First, they show that these well-established drug developers see some value in Recursion's approach. Second, the small-cap biotech is far less likely to face funding problems.
Shares of Recursion will soar if its programs succeed and the company revolutionizes the drug development process. True, significant risk is still involved here, so risk-averse investors should probably not invest in the stock, even at current levels. For those who can handle some volatility, it might be worth it to initiate a small position in Recursion Pharmaceuticals today.
