Several stocks on the market offer investors the opportunity to capitalize on the rapidly growing field of artificial intelligence (AI). The list includes some of the "Magnificent Seven" stocks, as well as others, such as Palantir Technologies.
Few would place Recursion Pharmaceuticals (RXRX +3.95%), a little-known biotech company, in the same league as these tech giants when it comes to AI stocks. But could the small drugmaker actually become the next big name in the AI field?
A small-cap stock with big ambitions
One reason Recursion Pharmaceuticals could become a big deal is that its goal is to usher a paradigm shift into the pharmaceutical industry. Even with impressive technological progress over the past few decades, which has helped transform healthcare, developing new drugs remains a slow grind. The process takes years -- sometimes over a decade -- before companies earn approval to launch a new medicine on the market.
And this is for the lucky few that get that far. Most fail in clinical trials before they have that opportunity, taking with them hundreds of millions of dollars in development costs (sometimes more). Meanwhile, there are scores of diseases for which no treatment options exist -- or even when they do, they're inadequate or produce significant adverse reactions.
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This is the problem Recursion Pharmaceuticals wants to solve with AI. The company was founded in 2013, long before AI became the hottest topic on Wall Street. Recursion uses machine learning and a powerful supercomputer -- currently the largest in the industry -- to run and analyze millions of virtual experiments designed to identify the best candidate compounds for clinical trials.
This could help in two ways. First, the company could reduce the time and money spent on discovering new candidates and starting human clinical trials. Second, it may also be able to increase the probability of success for new molecular entities that reach clinical studies. If Recursion is successful, it could, indeed, become the next big AI company.
What has Recursion accomplished?
Recursion Pharmaceuticals currently has no product on the market, so it can hardly claim that its approach is successful -- at least, not yet. The company could still get there. And there are several reasons to be somewhat optimistic about its prospects.
First, Recursion has several products in the pipeline, at least one of which, if approved, could be a breakthrough. Recursion's REC-617 is a potential cancer treatment that inhibits the activity of the CDK7 protein, a key player in the growth of cancer cells. Some solid tumors are highly dependent on this protein functioning properly, and without it they would hardly be able to survive; blocking the activity of CDK7 could be a promising approach to treating these cancers.
Because there is currently no approved CDK7 inhibitor, Recursion has a medicine that might significantly improve patient outcomes across a range of cancers. True, the drug is still in early-stage studies, but it's worth keeping an eye on.
NASDAQ: RXRX
Key Data Points
Second, Recursion has partnered with major players in the pharmaceutical industry. Small drugmakers with large pipelines but no partners are often viewed with suspicion. Clinical-stage biotechs are always looking for funding, because running clinical trials is an expensive activity.
If their approach is any good or they had promising candidates across their deep pipelines, they'd likely attract at least some attention from bigger names in the industry; large pharma companies often look for ways to skip the earliest preclinical trial phase and get their hands on promising programs that are already undergoing clinical studies.
Recursion has attracted those big names; it's partnered with Bayer, Sanofi, Roche Holding, and Merck. That's not including Recursion's deal with Nvidia, which led to it building the largest supercomputer in the industry. Although these partnerships don't automatically make Recursion a buy, they do help somewhat validate the company's strategy.
But is the stock a buy?
There would be no greater validation than actually launching a product on the market in a fraction of the time and with a fraction of the costs typically witnessed in the industry. But Recursion Pharmaceuticals has yet to do that -- so, despite its AI ambitions, its stock remains as risky as those of most clinical-stage biotechs. In fact, since it's currently not running any phase 3 trials, Recursion is especially risky.
And that's before we consider the mounting competition in the field. Other drugmakers, including the largest of them all by market cap, Eli Lilly, are now building supercomputers of their own. All things considered, Recursion Pharmaceuticals looks unlikely to become the next major AI stock.
