Recursion Pharmaceuticals (RXRX -0.71%), a biotech focused on artificial intelligence (AI), became a publicly traded company in 2021 -- a time when AI did not grab nearly as much attention (if any at all) as it does now on Wall Street. Although things have changed on that front, Recursion has not benefited from the skyrocketing interest in AI companies. Its stock has plunged over the past four years and is currently not far from its 52-week low of $3.79.
If it can bounce back and generate solid returns in the next five years, now is about as good a time as any to invest in the company. But how likely is that? Let's find out how things might evolve for Recursion Pharmaceuticals through the end of the decade.
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What Recursion Pharmaceuticals does
Recursion Pharmaceuticals uses AI to improve the process of discovering and developing drugs, making it easier and more cost-effective. Most medicines that enter clinical trials never reach the market. Others that get that far barely generate enough sales to justify the investment made by their pharmaceutical companies.
Using an AI-powered algorithm that tests compounds against a virtual library of human genes, Recursion hopes to improve the success rate of therapies that enter the clinic. The company would be able to launch successful medicines while spending less money than its peers, potentially leading to higher profits and margins compared to industry averages.
Recursion also hopes to generate revenue by licensing its operating system (OS) to other pharmaceutical companies.
Potential catalysts
The company has been a pioneer in using AI-powered algorithms to advance drug development, and this method is now gaining some traction. Earlier this year, the U.S. Food and Drug Administration announced it would gradually phase out animal testing in favor of other methods, including AI-powered models.
In the next few years, there will be a growing need for the kind of approach Recursion uses; that could lead other companies to seek out its services or, at the very least, to make collaboration agreements. That's especially the case since Recursion partnered with Nvidia to build the most powerful supercomputer in the pharmaceutical industry.
The drugmaker could also benefit from clinical progress. Its pipeline features four products that are currently undergoing clinical trials, with several more in pre-clinical studies. Recursion has partnered with several pharmaceutical leaders, including Merck, Roche Holding, Sanofi, and Bayer. Any clinical progress it can make may trigger milestone payments from these partners, potentially encouraging them to double down on their collaborations with Recursion.
It would also provide evidence for the soundness of the company's approach, which might attract even more collaborators. Under this scenario, Recursion would likely perform well through 2030. It might launch one or two products on the market, make significant pipeline progress elsewhere, license its AI-powered OS to other companies, and sign partnership deals to develop drugs using its approach with others.
Reasons to be cautious
Recursion Pharmaceuticals doesn't yet have a single approved product. While the company is correct that the process of developing drugs is complicated and expensive, it has yet to demonstrate that its approach can yield better outcomes -- and until it does, the market is unlikely to reward the stock.
Recursion was founded in 2013, so it's been a while. And worse, it doesn't currently have a single medicine in late-stage studies. Its record is hardly a good commercial for the superiority of its strategy.
Furthermore, the company may face increasing competition as several companies are working on similar projects. Eli Lilly recently launched TuneLab, an AI-powered drug discovery platform. The pharmaceutical giant is making TuneLab accessible to select smaller biotech companies free of charge.
Lilly has a considerable advantage. It's a much larger company and has access to a mountain of data from its past clinical successes and failures. And making TuneLab accessible for free will grant it even more data to improve its AI models. Can Recursion overcome that kind of competition in the next five years? It's hard to bet on it, considering the company's very modest successes so far.
So, where will the stock be in five years? There is a (small) chance that Recursion's drug discovery engine will finally take off and produce at least decent results. In that case, the stock will soar.
However, Recursion Pharmaceuticals could also lose significant market value by 2030 as it struggles under the weight of clinical failures and increased competition for AI-powered drug discovery models. In other words, the stock looks risky, and only investors comfortable with significant volatility should even consider initiating a small position.
