Is Recursion Pharmaceuticals a Buy Ahead of Its Merger With Exscientia?
It's been a rough few years for investors excited about new biopharmaceutical companies that use artificial intelligence (AI) to select new drug candidates. Less than three years after raising $510 million in its initial public offering, Exscientia (NASDAQ: EXAI) has thrown in the towel and agreed to merge with Recursion Pharmaceuticals (NASDAQ: RXRX), another AI-driven drug developer.
In a nutshell, these businesses are trying to convince big pharma that their AI technology can pick successful new drug candidates at a higher rate than traditional discovery methods. Their stock prices are way down because there isn't much clinical evidence yet to back up their claims.
Evidence that AI-fueled drug discovery is the way forward is hard to find now, but that could change in 2025. After merging with Exscientia, Recursion will have 10 clinical readouts to look forward to over the next 18 months.
Should you buy Recursion Pharmaceuticals now that it's likely to become the largest AI-fueled drug discovery business on the planet? To find out, we need to weigh reasons to buy this stock now against reasons to avoid it.
Reasons to buy Recursion Pharmaceuticals now
Both Recursion and Exscientia are using AI to improve the drug discovery process, but they've taken different approaches. Recursion runs millions of experiments and banks the data they throw off. Then, the company mines its data trove for potential new drug targets.
Exscientia mines published data and patient samples to discover candidates for targets that clinical trials have already validated. Adding Exscientia's precision chemistry tools to Recursion's scaled biology capability could enable the merged company to discover higher-quality medicines much faster than either company can on its own.
If the proposed deal completes as expected, Recursion Pharmaceuticals could report results from 10 clinical trials over the next 18 months. These are early clinical-stage studies, so it's hard to predict the outcomes. If AI-fueled discovery works as intended, at least a few should go on to become approved drugs.
Once merged with Exscientia, Recursion will have agreements with Sanofi, Bayer, Merck KGaA, and Roche. Potential milestone payments from these partners could total more than $20 billion, and that doesn't even include potential royalties.
With a recent market cap of about $1.6 billion, Recursion is richly valued for a clinical-stage drugmaker that hasn't even begun a phase 3 trial yet. If we assume its rather large pipeline has a better-than-average chance of producing approved drugs, though, its present valuation is just a fraction of what it should be.
Reasons to avoid Recursion Pharmaceuticals stock
As far as big pharma partners are concerned, Recursion's value proposition isn't a big deal. Every step along the drug development pathway is exponentially more expensive than the one before it. The only part of the process that pharma-tech companies like Recursion aim to improve, though, is near the beginning.
For a company that promises to speed up the drug development process, Recursion isn't moving very fast. It was founded over a decade ago but still hasn't begun a phase 3 trial for any new drug candidates.
The company that hired Exscientia to discover GTAEX617, GT Apeiron, handed it back in July. This strongly suggests the client doesn't expect it to work as intended.
Despite not advancing any new drug candidates past phase 2 clinical trials, Recursion Pharmaceuticals accumulated a deficit of $1.2 billion as of June 30, 2024.
Wait and see
Exscientia isn't Recursion's first technology acquisition since it went public with a promise to make drug discovery more efficient. Last year, it shelled out a combined $97 million for Cyclica, a chemistry software company; and Valence Discovery, an AI-fueled chemistry company.
It isn't always bad when a pre-commercial business built around a technology platform spends heaps of money it hasn't earned to bolster its platform. That said, it is a warning sign that investors ignore at their own peril.
Investors with a huge risk tolerance could come out way ahead over the next 18 months if planned clinical trial readouts succeed. For the rest of us, though, it's better to wait for clinical data that proves Recursion's technology platform works as intended.
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Cory Renauer has no position in any of the stocks mentioned. The Motley Fool recommends Roche Ag. The Motley Fool has a disclosure policy.
