Many famous names on Wall Street are rapidly scooping up shares of the most prominent artificial intelligence (AI) companies, including Nvidia and Alphabet, among other tech giants. Though these market leaders are attracting most of the AI-centered attention, there are smaller players in the field, such as Recursion Pharmaceuticals (RXRX -6.65%).
This mid-cap biotech uses AI in an innovative way (more on that below). It has attracted the attention of a notable player on the street: Cathie Wood, CEO of Ark Invest. Let's see what makes this stock intriguing.
Betting on the genomic revolution
Ark Invest seeks out disruptive technologies that are shaping the future. One of their actively managed exchange-traded funds (ETFs), ARK Genomic Revolution, targets companies trying to improve the quality of life through scientific innovation.
Cathie Wood and her team have added shares of Recursion Pharmaceuticals to ARK Genomic Revolution several times over the past few months. On April 2, they bought a little over 174 thousand shares of the company, the highest number they have added to ARKG in one swoop this year.
Recursion currently makes up 5.7% of the ETF, sitting third in portfolio weight.
How does this small biotech company play into the AI and genomic revolution themes? The company is trying to use AI to speed up the drug discovery process. Drugmakers must go through a gruesome, expensive, lengthy, and risky process to launch their medicines. Many that enter clinical trials never earn regulatory approval, and some that do never make enough revenue to cover the cost that went into developing them.
Recursion developed an AI-powered operating system (OS) that tests how various clinical compounds might interact with the human body in an automated laboratory -- to the tune of up to 2.2 million weekly experiments. The approach allows Recursion to advance only those compounds that seem highly promising to clinical trials, presumably increasing the probability that they will make it to the market.
If Recursion Pharmaceuticals OS works as intended, not only will the company be faster than its competitors at launching successful medicines -- an incredibly important factor in the industry -- but it will also be able to license its OS to others. Further, Recursion Pharmaceuticals OS could build a network effect. Whether the compounds it chooses after tests conducted by its OS are successes or failures, it could allow it to fine-tune its algorithm, leading to more accurate results over time.
Should investors follow Wood's lead?
Recursion Pharmaceuticals is still a clinical-stage biotech. Translation: The company's approach hasn't produced marketed therapies yet. However, it has attracted the attention of some big players in the industry, including Switzerland-based Roche, which intends to collaborate with Recursion to discover cancer drugs. Clearly, the biotech looks promising, but is that enough to make the stock a buy?
Since Recursion Pharmaceuticals has yet to produce tangible results, the stock should be pretty volatile as more clinical and regulatory developments unfold. At this point, whether these developments will be positive or negative is anyone's guess. The company's shares could either skyrocket or drop off a cliff, which makes it very risky. We should know a little more by the end of the year.
Recursion expects several data readouts, including from a phase 2 study for REC-994, a potential therapy for cerebral cavernous malformation. The biotech expects to release data by the third quarter of 2024. Recursion is also running a phase 2/3 study for REC-2282, an investigational treatment for neurofibromatosis (a genetic disease that can cause tumors) type 2, with some data expected in the fourth quarter.
Even if these produce positive results, at best they will still be two years away from being launched. That's why investors should proceed with caution. Recursion Pharmaceuticals makes up 1.77% of Ark Invest's total ETF holdings. The biotech shouldn't make a much bigger percentage of anyone's portfolio, even those of aggressive investors.
