Investors looking for an exciting clinical-stage biotech start-up with enormous potential should be paying close attention to Recursion Pharmaceuticals (NASDAQ:RXRX).
The company has emerged as a leader in drug discovery, enabled by artificial intelligence (AI) and a unique platform that it believes could revolutionize medicine. However, Recursion has yet to bring a drug to the market, and its uncertain outlook has resulted in an extremely volatile stock price -- down about 53% in the past year.
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Here are four things you should know if you're thinking of buying Recursion Pharmaceuticals stock.
1. Early innings of AI-powered biotech
Recursion stands out as a pure play in AI-powered biotech, using machine learning algorithms to accelerate drug research and development (R&D).
The company's BioHive-2 supercomputer, powered by Nvidia AI chips coupled with Recursion's proprietary operating system, is recognized as one of the world's most powerful accelerated computing systems. The platform evaluates millions of compounds to pinpoint drug candidates, while also predicting drug properties and optimal patient populations to enhance design.
By automating the traditional workflow, the company expects to reduce the timeline from initial discovery to regulatory approval by multiple years at a lower cost.
2. An extensive candidate pipeline
Recursion has an encouraging pipeline of 10 clinical and pre-clinical technology-enabled programs in areas like rare diseases, oncology, and neuroscience.
Perhaps its most promising prospect is REC-617, which has already delivered positive early phase 1/2 results. It's described as a possible best-in-class CDK7 inhibitor, a type of drug that targets and blocks the activity of a specific enzyme critical to cancer cell division and gene expression.
The company is also optimistic that its REC-994 superoxide could become the first oral therapy for treating symptomatic cerebral cavernous malformation (CCM), a brain hemorrhaging condition. A phase 2 study showed robust safety with a favorable reduction in lesion volume.
The possibility that one of these candidates eventually gains approval as a novel therapy is part of the attraction of Recursion as an investment.
Image source: Recursion Pharmaceuticals.
3. Underwhelming financials
Recursion is currently generating limited revenue through partnerships with larger pharmaceutical leaders like Merck and Sanofi. These collaboration deals provide some cash flow and help validate the technology, but Recursion will need to bring a drug to market for its financial position to materially improve.
For the fourth quarter of 2024, Recursion posted just $4.5 million in revenue. That's down from $10.9 million in the prior-year period, with the decline related to the timing of payments.
For all of 2024, the company posted a net loss of $464 million (a $1.69 loss per share) given the intense spending requirements. According to Wall Street estimates, the earnings picture of 2025 should be similar, with a loss of $1.64 per share predicted. Meanwhile the current market capitalization values the company at $2.4 billion, a lofty number for a largely unproven technology.
The good news is that Recursion maintains ample balance sheet liquidity to support its R&D process. With $603 million in cash on hand at the end of last year, management expects to have a runway through 2027.
Image source: Getty Images.
4. Clinical milestones on the horizon
The market can often overlook a lack of profitability if a company seems to have a stronger longer-term outlook. By this measure, 2025 will be a pivotal year for Recursion to reaffirm that its strategy is on track, with up to 10 programs set to reach either important data readouts, regulatory submissions, or trial initiations over the next 18 months.
Successful outcomes here would likely become a catalyst for the stock to rebound. Conversely, disappointing results might further pressure the stock, a risk investors need to balance.
The big picture
There's a lot to like about Recursion Pharmaceuticals, as a disruptive innovator at the intersection of healthcare and technology. Still, the company has a lot to prove before transforming into a commercially sustainable biotech.
In the meantime, I believe there are enough uncertainties that the prudent move is to avoid the stock for now. Keep Recursion on your investing radar -- but you'll likely find better opportunities elsewhere in the stock market.
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Dan Victor has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Merck and Nvidia. The Motley Fool has a disclosure policy.
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