Companies whose breakthroughs revolutionize industries often end up being massively successful. Think Netflix 's move from DVDs to streaming, or Apple 's innovative smartphone that killed BlackBerry 's competing franchise.
Could Recursion Pharmaceuticals (NASDAQ: RXRX) experience similar success? The biotech is, after all, working hard to introduce a major paradigm shift in the industry. Let's find out what exactly Recursion is working on, and whether buying the company's shares is worth it.
Eroom's law and artificial intelligence
The process of developing novel medicines is notoriously complicated, expensive, and long. Though you might think it's getting faster and cheaper thanks to technological breakthroughs, the opposite is true. This phenomenon is known as Eroom's law (the reverse of Moore's law ), the observation that the drug discovery process is slowing down and becoming more costly.
Any company that can reverse this process could become incredibly successful. That's what Recursion is working toward. The biotech is as much a tech company as a drug developer. Thanks to an algorithm powered by artificial intelligence (AI) that constantly tests various clinical compounds against a virtual library of human biology, Recursion hopes to identify highly promising drug candidates to start testing in clinical trials.
Many early-stage compounds never make it to the market. But suppose Recursion can significantly increase the probability that a novel compound entering clinical trials will prove effective and, eventually, earn regulatory approval. The company would then spend less on research and development than its peers, while still launching breakthrough therapies. The result would be (all else being equal) higher operating and net profits, and margins, than its competitors.
If its AI-powered platform proves as effective as hoped, Recursion will also be able to license it to other drugmakers. In fact, this approach has attracted the attention of some major players. Recursion signed drug development agreements with leading drugmakers Bayer and Roche Holdings . It also entered a partnership with Nvidia , which helped the biotech build an AI-powered supercomputer, the largest in the pharmaceutical industry.
The interest of these big-name players at least suggests that Recursion is onto something.
Should you buy the stock?
Recursion Pharmaceuticals is still just a clinical-stage company. None of its products are in phase 3 trials, although it expects more than half a dozen data readouts over the next 18 months. The company will first have to prove that its tech-centered approach to developing drugs works; this will entail earning approval for one or (preferably) several candidates, while having a much higher success rate than other drugmakers in identifying early-stage compounds that eventually reach the market.
Even clinical failures could be useful in helping Recursion fine-tune its algorithm to provide more accurate predictions. Unfortunately, the company isn't there yet. For now, it generates little revenue from collaboration agreements. Meanwhile, other drugmakers, including Novo Nordisk , are working on somewhat similar AI-centered projects that could help transform -- or at least improve -- the drug development process.
Where does that leave Recursion Pharmaceuticals? Right now, the company is at the "proof of concept" stage, in my view. Sure, the project looks incredibly exciting. If it's nearly as successful as the company hopes, expect something approaching generational returns in the long run.
However, the company's downside is just as massive, which makes it a risky biotech stock. If you're a risk-averse investor, you might consider initiating a small position. Perhaps the company will be worth much stronger consideration from other investors as it starts earning approval for its products, or even if its coming data readouts are positive.
Before you buy stock in Recursion Pharmaceuticals, consider this:
