Everything touching artificial intelligence (AI) is hot right now, so it's no surprise that the biotech Recursion Pharmaceuticals (RXRX 2.53%) could be positioned to ride the ongoing wave of hype to great heights. Between its AI-first approach to designing new drugs and its positioning as a valuable collaborator for other companies, the company is worth paying attention to at a minimum.
But does that make the stock worth buying right now, given the considerable uncertainties surrounding the actual merit of its AI-heavy approach? Let's dive in and figure it out.
There's a compelling narrative here
For the uninitiated, Recursion wants to become the go-to provider of AI-based drug discovery and development services for the biopharmaceutical industry. It's also developing a handful of therapies for cancers and rare diseases with its in-house research and development (R&D) capabilities.
There are a few ongoing key trends in biopharma that mesh tightly with the company's mission. It's getting costlier to develop new medicines, and much of the low-hanging fruit in biomedicine has been picked. Generally speaking, what remains is to develop new treatments for the more stubborn (and typically rarer) illnesses; to make refinements to existing treatment paradigms for the sake of greater efficacy (or sometimes greater tolerability); and to pioneer wholly new approaches with advanced biotechnologies. Implementing AI in drug development is thus quite trendy right now, as it's widely thought that these computationally intensive approaches might be able to improve research efficiency at a time when progress is getting harder to make.
Recursion only had $26 million in revenue during the third quarter, all of which it captured from its development collaborations. That's a clear sign that its ambitions are not yet realized. But its roster of powerful collaborators indicates that some savvy players are placing bets on its ability to deliver on easing drug-development pain points.
It's collaborating with European pharma juggernauts like Roche, Bayer, and Sanofi, each of which has committed to paying out milestone fees worth billions of dollars, provided that Recursion's platform leads to the desired clinical objectives. There is absolutely no guarantee that the business will ever realize those potentials. After all, it has yet to commercialize even a single medicine, and many of its claims regarding increasing the efficiency of the development process are unproven. Still, these collaborations are a vote of confidence, and big pharmaceutical companies don't get big by collaborating with biotechs that they view as unlikely to succeed.
So, a big part of the investment thesis for buying Recursion is that it could one day prove that its drug development platform is valuable in the course of securing massive payouts from its benefactors, which would be a very potent cocktail for its share price.
There aren't many major catalysts coming up soon
It's very possible that Recursion's stock will perform well as it announces new collaborations and new advancements with its pipeline programs, most of which are early stage. But for the stock to be a buy, there needs to be a compelling reason for investors to allocate their funds to it now instead of to an alternative investment. And that's where the argument for buying this company starts to break down.
Thanks to the resources it secured via its recent merger with Exscientia (another AI-based, drug-developer biotech) on a pro forma basis, it had $752 million in cash, cash equivalents, and short-term investments on hand as of the close of Q3.
That means it has plenty of financial flexibility. Nonetheless, there aren't many upcoming catalysts in 2025 that have a high chance of driving the stock upward.
Based on the company's own schedule, it won't even be reporting any late-stage data in any form this year. While it'll be initiating new studies and executing on its early-stage clinical trials, in my experience biotech stocks rarely react much at all to such events. Therefore, investors who buy the stock soon will likely need to hold it for at least three-to-five years before seeing a decent run-up -- if one occurs. They'll be exposed to plenty of downside risk in the form of stumbles in clinical trials along the way, too.
Overall, if you're patient and willing to endure a bit of that potential volatility, it could make sense to make a small investment in Recursion today. If the field of AI-driven drug development eventually proves its worth, and it probably will, the business will be a leader solely by virtue of being early and having strong players backing it. On the other hand, there's no rush to invest here; it's perfectly prudent to wait another year or so and then circle back to see if anything has changed for the better.
