Recursion Pharmaceuticals (RXRX 2.13%) is not the most famous artificial intelligence (AI) stock on the market, but the biotech (or techbio) company has attracted the attention of some big names. Recursion has partnered with the AI juggernaut Nvidia to build a powerful supercomputer, for example.
It is also attracting interest from some prominent Wall Street figures, including Cathie Wood, the CEO of Ark Invest. The investment firm owns about $164 million worth of the stock, as of this writing. Yet, Recursion has not been performing well -- shares are down by 19% this year.
Should investors take this opportunity to buy the stock on the dip?
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Recursion's paradigm-shifting approach
People in the tech world are familiar with Moore's law, which predicts an exponential increase in computing power at a lower cost. Fewer people are familiar with Eroom's law (Moore's backward), the observation that the business of developing novel medicines has become more expensive even as technology has improved. Drugmakers spend considerable time and money to get their products to market. Most new compounds never go that far, and many that do hardly make enough money to justify the investment that went into them.
Recursion is looking to solve that problem. The company has developed an AI-powered operating system (OS) that features a library of human genes. This OS is constantly testing clinical compounds against this library. The most promising ones are chosen to be tested in the clinic. The potential benefits here could be faster discovery, faster development, lower costs, longer time spent under patent exclusivity on the market, higher sales, higher profits, and higher margins.
In other words, if Recursion Pharmaceuticals is successful, it could transform the pharmaceutical industry. Besides developing its own medicines, Recursion would also license out its AI-powered OS to other companies. That business might look even more attractive. It is far less cost-intensive than developing medicines (even if that becomes easier thanks to Recursion, it will still require tens of millions of dollars to undergo clinical trials), while also returning much higher margins.
That's why some investors like Wood are interested in the stock. The company's upside potential is massive. And it got an even rosier outlook earlier this year when the U.S. Food and Drug Administration announced that it would be slowly phasing out animal testing in pre-clinical trials in favor of other methods, including AI-based models.
It might look as though Recursion'a approach is the future. So why isn't the stock soaring, then?
High risk, high reward
Recursion Pharmaceuticals has yet to show the kind of evidence that would convince most investors that its approach works. The company doesn't have a single product on the market. Worse, it doesn't even have a single product in phase 3 studies. In fact, the biotech recently abandoned the development of several compounds. While management said this was to focus on other, more promising candidates, that move still doesn't bode well for a company that claims to be able to transform the way medicines are developed.
It's also worth noting that other companies have recognized the potential for AI to transform the industry. Novo Nordisk, through its parent company, helped build an AI supercomputer in Denmark, where it is based, because of the technology's potential across healthcare, including in drug development. Recursion hopes that its AI-based OS will become more fine-tuned thanks to future successes and even failures. In other words, data from clinical trials is important, and that's an advantage that more experienced companies, such as Novo Nordisk, will have over smaller, younger biotechs.
So what should investors do?
Recursion Pharmaceuticals carries above-average risk because of its status as a clinical-stage biotech company, but it could also deliver life-changing returns if it achieves its goals. Risk-tolerant investors might consider initiating a small position in the stock, just like Wood did. The company makes up 1.65% of Ark Invest's combined portfolio, as of this writing. Those comfortable with volatility can start somewhere there (or lower). Risk-averse investors, though, should look elsewhere.
