Many leading companies focused on artificial intelligence (AI) have seen their shares soar as they profit from the tailwind this market is currently experiencing. Perhaps a good way to cash in on this is to invest in smaller, under-the-radar players that don't attract nearly as much attention.
Recursion Pharmaceuticals (RXRX -5.61%), a biotech (or techbio) company, is one such example. The stock is down significantly over the past year, but has soared by 25% in the past month. Is this the beginning of a streak of success? Let's find out.
Image source: Getty Images.
Why is Recursion Pharmaceuticals rising?
Clinical-stage biotechs tend to soar on clinical or regulatory progress, or, occasionally, rumors of acquisitions or signed licensing deals. Curiously enough, none of that has happened to Recursion Pharmaceuticals over the past month. But then again, Recursion isn't your average biotech; it uses AI to accelerate the process of drug discovery and development.
The company's operating system (OS) virtually tests compounds to send the most promising ones to clinical trials. Since 90% of those that enter the clinic never make it to the market -- while costing $2 billion, on average -- boosting the probability of success of new compounds by using AI would give Recursion a massive advantage.
Recursion Pharmaceuticals also uses AI to improve the way it conducts clinical trials. There was news that jolted its stock earlier this year. The U.S. Food and Drug Administration (FDA) said it would gradually phase out animal testing in favor of other methods, including AI-based models.
However, that was too long ago to be the catalyst for Recursion's recent rise. We might chalk this one up to general market volatility, but there's probably more. With the company set to release some clinical updates by year-end, investors are likely anticipating some positive results.
Is there more upside ahead?
Recursion's pipeline features a handful of programs in clinical trials. One of the most advanced candidates is REC-617, being developed for solid tumors. According to Recursion, this drug, which is undergoing a phase 1/2 clinical trial, has shown promising safety and efficacy signs in patients with colorectal and lung cancer -- the two leading causes of cancer death in the world.
The biotech also thinks REC-617 has "best-in-class potential," so it could be more effective than all current therapies across some of the indications for which it's being developed. Recursion plans to release more data for REC-617 before the end of 2025.
Lung cancer is a multibillion-dollar market targeted by some of the best-selling drugs in the world, including Merck's Keytruda and Bristol Myers Squibb's Opdivo. If Recursion is right about REC-617, we're looking at a massive opportunity for the company. Oncology is one of the most competitive therapeutic areas; if the company can develop a medicine in one of the largest subfields of this broader market, already dominated by the world's leading drugmakers, that would speak volumes about Recursion's AI-powered OS.
It would likely grant the biotech the cachet it needs to license its OS to other drugmakers, a business that would come with far higher margins than developing novel medicines. Importantly, Recursion has partnered with some of the leading pharmaceutical companies to use its OS to develop novel medicines; the list includes Merck, Roche Holding, Sanofi, and Bayer. Funding, normally a major issue for smaller biotechs, might not be a problem for Recursion thanks to its partnerships with these cash-rich drugmakers.
That said, there are several issues to consider before initiating a position in the stock. Recursion Pharmaceuticals doesn't have a single product in phase 3 studies. Despite its claims that its AI-based approach improves the process, it has yet to demonstrate that by successfully launching a medicine. Many other companies are working on AI-based platforms to speed up drug discovery, so whatever advantage Recursion currently has might evaporate soon enough. And if the company encountered clinical and regulatory setbacks, its shares would sink.
While the stock has enormous upside potential if everything goes according to plan, Recursion Pharmaceuticals is risky. Only investors comfortable with volatility should consider buying shares in the company.
