As a biotech that's planning to go big on artificial intelligence (AI) for drug development, Recursion Pharmaceuticals (RXRX 1.70%) is a decidedly forward-thinking organization. Rather than simply making drugs alone, its business model features additional elements like renting out access to its data and being a capable collaborator for other biopharmas looking to discover new medicines.
Presently, it's still in its infancy. Its plans are in motion, but they'll take quite some time to pay off. So where will Recursion be in five years, and is the stock worth buying today?
There's a lot coming up
Today, Recursion has no products approved for sale. By early 2029, it could have as many as five medicines on the market, marking a relatively rapid transition from fledgling biotech stock to a more mature one.
All five of those are currently in phase 2 clinical trials, and three of them are for rare diseases like cerebral cavernous malformation (CCM) or neurofibromatosis type 2 (NF2). For reference, CCM affects around 360,000 people across the U.S., U.K., Italy, France, Spain, and Germany, whereas NF2 affects 33,000 across the same set of countries. If the biotech succeeds in making it to one those markets -- and the odds are good that it will eventually commercialize at least one program in its pipeline today -- it could well be the only player.
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Furthermore, as it has an orphan-drug designation for its CCM and NF2 treatment programs, it'll get beneficial tax treatment and exemption from certain regulatory fees. But it's undeniable that the markets it's targeting are quite small, so it'll likely keep initiating new pipeline programs and advancing with other clinical trials as consistently as it can afford.
It's important to note that within the next five years, either something will need to change about Recursion's rate of incurring operating losses, or it'll need to raise capital by taking out debt or issuing stock. Right now, it has $391.5 million in cash, equivalents, and short-term investments on hand and trailing-12-month (TTM) operating expenses of $351.3 million. As it has only $44.5 million in TTM revenue, derived largely from its drug-development collaborations, it's nowhere near being profitable.
AI is the wildcard
There are two thrusts underway that could change the profitability situation. Both of them have to do with the company's AI-enabled drug-discovery platform, which claims to help with making biopharmaceutical research and development (R&D) more efficient.
In short, Recursion has around 20 petabytes of data derived from real patients that it uses in its AI models. Once it or one of its collaboration partners proves that there are promising potential therapies waiting to be found in that archive with the help of its software, biotech and pharma businesses will likely come running to license the data and the tools necessary to explore it.
Given that simply maintaining the trove of data is fairly inexpensive, licensing will probably become a high-margin source of revenue, though it may not be enough on its own to cover all of the company's significant overhead costs.
The other thrust is to collaborate with players who want its aid in exploiting the data it's holding for the purpose of joint drug development. Collaborations imply a lot more of the heavy lifting to be done by Recursion in the laboratory and with its AI platform than with the licensing schemes.
But the upside is also potentially much larger. Rather than merely earning fees based on usage, development partnerships could enable Recursion to collect years and years of royalties from any commercialized medicines, and that could indeed be enough to cover its operating expenses, especially with more than one medicine out the door.
Recursion is already working with both Roche and Bayer, a pair of major European pharmaceutical businesses, and if those projects go well, over the next few years more aspiring teammates could come knocking.
Plus, collaborations do not need to be exclusively in the biopharma domain. Recursion's acumen with AI was sufficient for Nvidia to make a $50 million equity investment last year. It's faintly possible that by 2029, it'll be one of the preferred partners in the industry for advancing AI projects or capabilities, and that status would mean that it stock would be upwardly mobile.
The road could be a very bumpy one
A lot could go wrong to prevent Recursion from realizing its potential over the next five years. Clinical trials could fall short and fail to produce favorable data. Similarly, collaborations that do not result in medicines approved for sale may be cut short or otherwise burn money that the biotech may not be able to easily replenish. And it remains to be seen whether Recusion's AI platform will bear fruit and to what degree.
Make no mistake, Recursion faces various potential stumbling blocks that could set back its ambitions. This is a risky stock. But it's unlikely that giants like Bayer, Roche, and Nvidia would take a chance on Recursion if it was so risky as to be uninvestable. And in the long run, one of the companies pursuing AI-enabled drug development is going to succeed.
In that view, this stock is worth making a small investment on today.
