Key Points
Artificial intelligence (AI) is slowly reshaping how industries, including healthcare, operate. Various companies are looking to implement AI tools in the sector to boost efficiency and productivity while cutting costs. Recursion Pharmaceuticals (NASDAQ: RXRX) is doing so specifically within the biotech niche, but the company’s efforts haven’t been rewarded by the market, at least so far. Recursion Pharmaceuticals’ shares have significantly underperformed broader equities over the past two years, and the stock recently hit a fresh 52-week low. Could Recursion Pharmaceuticals bounce back and deliver solid returns to patient investors?
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Multiple votes of confidence
Recursion Pharmaceuticals is trying to solve a serious problem. Even with technological improvements, the time and costs required to develop brand-new drugs have increased in recent decades. It can take 10 years (or more) to go from the discovery phase to launch, and cost several hundred million dollars, or even over $1 billion. And that’s for the ones that get that far. The discovery phase — that is, before human clinical trials even start — can account for about 35% of these costs.
Recursion Pharmaceuticals wants to tackle this issue with an AI-powered operating system that predicts which compounds are more likely to be effective. In doing so, the company could shorten the time and reduce the costs of the discovery phase, while boosting the likelihood that drugs that enter the clinic will eventually reach the market. The biotech’s approach might help even beyond that. It could use AI to help design and run clinical trials more efficiently. Recursion Pharmaceuticals’ project looks exciting, so much so that it has had the backing of several market leaders.
It partnered with Nvidia to build the largest supercomputer in the pharmaceutical industry. Nvidia also had a stake in Recursion Pharmaceuticals, but the chipmaker sold all its shares last year. Meanwhile, several leading drugmakers also partnered with Recursion Pharmaceuticals. The list includes Roche, Sanofi, and Bayer. The deals Recursion Pharmaceuticals made with these leading companies help on multiple fronts. First, it highlights that the company’s approach has some merit. Second, it could make it easier for it to access non-dilutive financing compared to your average clinical-stage biotech company.
Are there brighter days ahead?
Given Recursion Pharmaceuticals’ innovative approach and the company’s partnerships with multiple big names, why hasn’t the stock performed well? The simple answer is that the biotech has provided little tangible evidence that its strategy can work as intended. It’s not just that Recursion Pharmaceuticals has no products on the market. The company doesn’t even have a single candidate in late-stage studies. Of course, it may get there eventually, but for now, Recursion Pharmaceuticals remains a speculative bet.
The company may turn things around if it can make significant clinical and regulatory progress over the next two years. Recursion Pharmaceuticals has several exciting pipeline candidates. For instance, it is developing REC-4881 as a treatment for Familial Adenomatous Polyposis (FAP), a rare disease characterized by the growth of gastrointestinal polyps. Patients with FAP are nearly guaranteed to end up developing colorectal cancer as a result. There is no medicine approved to treat FAP, and it is usually treated with various invasive surgical methods. So there is clearly a high unmet need here.
In an ongoing phase 1/2 study, REC-4881 is showing promise in significantly reducing polyp burden. This investigational therapy looks promising, but it still has a long way to go before earning approval. And that’s one of Recursion Pharmaceuticals’ most advanced programs. The company faces significant clinical and regulatory risk that could lead to meaningful setbacks and further stock price dips over the next few years. Recursion Pharmaceuticals’ AI-based approach doesn’t change that, especially given that it has little to show for it so far. So, most investors should stay away from the stock, even near its 52-week low.
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Prosper Junior Bakiny has positions in Nvidia and Recursion Pharmaceuticals. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends Roche Holding AG. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
