As many veteran investors can attest, biotech stocks are tricky to trade. Their potential upside is enormous, but so is their risk. Too many of these names end up being complete busts. If you pick the right biotechnology name though...ka-ching! Holding a big enough stake in one of these winners could make you a millionaire.
With that as the backdrop, here's a closer look at a curious biotech name, Recursion Pharmaceuticals (RXRX -3.52%). It's risky, but it's not unreasonable to say this company has game-changing, millionaire-making potential.
The Recursion Pharmaceuticals story
Never heard of it? Don't sweat it. Plenty of people haven't. Its $2 billion market capitalization doesn't turn many heads. Losses that are persistently greater than its scant revenue don't draw a crowd either.
Still, you largely own biotech stocks for the promise of their research and development (R&D) pipeline and the company's potential to develop new therapies around its core science. That's where Recursion Pharmaceuticals shines.
Furthest along in the pipeline is Recursion's REC-994 for the treatment of cerebral cavernous malformation. The orphan drug has already shown efficacy through the latter portion of phase 2 testing, and in September, it was confirmed to be safe and tolerable for most patients. A meeting with the Food and Drug Administration (FDA) to discuss its next developmental steps is in the works.
That being said, Recursion is working on four other drugs that aren't too far behind REC-994, while another two treatments are in their early R&D stages. It's not the therapies Recursion is working on that serve as the crux of the bullish argument here, however. It's how these and any future drugs were and will be developed that makes Recursion such a promising prospect.
See, the company's chief profit center is ultimately intended to be its drug-development software platform, Recursion OS, which focuses on figuring out how drugs will (or won't) work without the need for so much expensive and time-consuming clinical and preclinical work.
The underlying need behind the bullish argument
It's long been a dream of the pharmaceutical industry to minimize as much of its initial R&D effort as possible by punting this work to a computer. Unfortunately, until the advent of artificial intelligence (AI) and high-performance computers, doing so was neither practical nor possible.
Now it is. With Recursion OS, drug developers can digitally simulate how a therapeutic molecule can be created and then simulate how that molecule is apt to work as a treatment for diseased or damaged bodies. The company reports it's identified almost 4 trillion associations between chemical and biological if-then relationships, or over 50 petabytes' worth of data that might be helpful to anyone attempting to create a new drug with a particular purpose or mechanism of action in mind.
The need for such a solution has never been greater either. The Congressional Budget Office reports that the typical cost to create and bring a new therapy to the market is now in the ballpark of $1 billion to $2 billion apiece. In some cases it can be more, exceeding $4 billion. Some of these treatments may not even produce much profit in their lifetime.
And that's just the drugs that are eventually approved. Nine out of 10 drugs that begin clinical trials don't finish these trials simply because they don't work well enough or are found too dangerous to use. It still takes time and money just to begin this clinical testing, though. If nothing else, Recursion's AI-powered platform could have sidestepped this waste, allowing drug companies to limit their investments to their most promising prospects.
This is most definitely the future, too. Precedence Research predicts that the AI-assisted drug development software business is set to grow at an annualized pace of 21.5% through 2033, jibing with an outlook from Global Market Insights.
The risk and reward align, but both are still significant
There's still risk here, to be sure. Chief among these risks are uncertainty and skepticism. Pharmaceutical companies seem hesitant to try out this new technology. They may also just be unwilling to pay for access to Recursion Pharmaceuticals' know-how and information, opting to continue using their long-standing (read "comfortable") trial-and-error approaches to R&D.
There's also lots of potential, though, particularly given Recursion's three-pronged approach. Not only is it offering access to its operating system, but it's also selling access to its rich data sets and using its tech to develop and co-develop its own treatments.
Image source: Recursion Pharmaceuticals.
If all goes as hoped, these multiple tailwinds could turn Recursion stock into a 10-bagger or better -- certainly enough to consider it a millionaire-maker kind of holding. Even if that growth doesn't pan out, though, know that the analyst community's current one-year price target stands at $10.14. That's more than 50% above the stock's present price, which isn't a bad start to whatever upside awaits.
Just be aware that this name still isn't the right kind of pick for everyone's portfolio. As compelling as the story is, it's still a biotech name, and you're still (mostly) buying into the story rather than results. That means there's still a chance of a complete meltdown. If you can't stomach that risk, think twice before diving in.
