On May 8, Recursion Pharmaceuticals (RXRX 3.12%) announced that it was going to buy a pair of AI-enabled drug discovery biotechs, Cyclica and Valence, for a total of $87.5 million — paid in stock.
Management says that the moves will help the company use digital chemistry and machine learning to calculate promising targets for drug development, which — if this is the first time you’re hearing about Recursion — has always been its entire shtick. The deal is expected to close before the end of the second quarter of this year.
But is Recursion’s stock a smart investment, and do these purchases change anything? Let’s find out.
Why this biotech is worth knowing about
Recursion’s pitch to its customers, which are major biopharma companies, is that collaborating with it will reduce research and development (R&D) costs and timelines. To accomplish that, it employs a handful of AI-enabled methods to identify the biological targets and pre-existing or novel molecules that are the most likely to be effective.
Plus, it maintains a gargantuan hoard of chemical and biological data that it says includes upwards of 3.1 trillion different relationships between components, many of which could be targets for drug development efforts.
Powerful players like Roche and Bayer are already among its patrons. The new acquisitions are aimed at making it even more effective at its core capabilities although it’s unclear exactly how that will translate into increasing revenue by securing more collaborations, or bringing milestone payments from existing collaborations into reach. But if it can prove that its approach driven by AI and machine learning does what it claims, it should have collaborators lining up around the block.
Aside from its drug discovery capabilities, Recursion also has a development pipeline of its own, featuring three programs in phase 2 clinical trials, all of which are intended for rare diseases. For example, one of its programs is for neurofibromatosis type 2, which it estimates affects only 33,000 people worldwide.
In the long term, its pipeline projects could bolster its top line significantly, though it might struggle to satisfy shareholders if its rare disease markets prove to be too small for the costs of development. On the other hand, favorable clinical trial results would also help substantiate its claims about the merits of its discovery platform.
Key aspects of the business model are still only theoretical
Recursion’s deepening delve into AI is a positive development for investors, especially considering that the deals didn’t use any of the company’s cash. But the risks of an investment are significant right now despite the opportunity for a large upside in the long run.
While first-quarter revenue rose from $5.3 million last year to reach $12.1 million, growth is a key concern since at the moment the company is entirely reliant on milestone payments. In the trailing-12-month period, Recursion burned through nearly $134 million in cash, leaving it with around $473 million. The company will eventually need to become profitable, too.
Of course, there’s the risk that its clinical trials will go off the rails, or that its drug discovery platform won’t actually provide as much value to collaborators as it hopes. Given the presence of similarly positioned competitors like Schrödinger, 23andMe, and several others, there’s also a substantial risk of the biotech getting its lunch eaten; it doesn’t presently have a demonstrable competitive advantage.
Nonetheless, there’s a solid chance that as the costs and timelines of drug development continue to increase, Recursion’s AI-forward strategy will pay off. Don’t invest in this business unless you are comfortable with plenty of risk and you’re willing to wait a handful of years for its value to be revealed. If that doesn’t bother you, buy away — just understand that you’re investing in a biotech that’s relatively early-stage despite the impressive-sounding capabilities of its platform.