Discovering new medicines is no easy task, and a young company that wants to help is Recursion pharmaceutical products (NASDAQ: RXRX). Although it still hasn’t launched a product yet, it’s already starting to get some attention for its innovative approach – and so now is a good time to consider its benefits and risks as a long-term investment.
In particular, there are two main reasons to think about buying Recursion, and one main reason to sell it or not buy it. Let’s start with the big picture of why it’s worth it.
Buy: It gives you exposure to AI in the healthcare sector
It’s probably a good idea to have at least some exposure to the healthcare sector in your portfolio. The same goes for artificial intelligence (AI) stocks, and Recursion Pharmaceuticals fits both niches very well. It seeks to develop an AI platform to help guide drug discovery and selection of therapy candidates; The goals are to reduce the costs and time spent on the drug development process, and reduce the risk of expensive preclinical or late-stage clinical failures.
With that platform in hand, it plans to identify and test its own leads with the goal of eventually bringing internally developed drugs to market. Currently, it has three rare disease programs in Phase 2 trials, as well as a few programs in Phase 1. These projects will need a few more years before they are ready for regulatory review.
In the meantime, Recursion hopes to license its platform to the biopharmaceutical industry at large to generate some revenue. It already has buy-in from major pharmaceutical competitors, such as Bayer AG, with which it is collaborating to find leads for drugs to treat fibrosis. Such a vote of confidence isn’t a reason to buy the stock in and of itself, but it’s still a positive indicator for the future.
Buy: It’s no longer priced at a huge premium
In July, Recursion signed a deal with Nvidia, the chipmaker and perhaps the most hyped AI stock. Nvidia invested $50 million in Recursion to secure its help in building a cloud-based generative AI service for drug discovery and development. The deal sent biotech stocks flying to a price-to-sales (P/S) multiple of nearly 60 overnight.
Since then, the hype surrounding Nvidia has continued, but Recursion’s time in the spotlight has come to an end for now. The shares are priced about the same as before the announcement and with a price-to-earnings ratio of around 20. So if you were previously optimistic about the company’s future but were put off by the prospect of paying too much for hyped-up shares, this is a better time to consider making a move.
Sell: Until the business model is validated, it burns money
One thing that might encourage current investors to dump shares of Recursion is that it hasn’t yet proven that its business model is actually viable. There is a lack of compelling evidence to support the core claims that the AI-based approach reduces research and development (R&D) expenditures, shortens preclinical timelines, and results in fewer late-stage failures. Investors who buy the shares now face the risk that they will not be able to achieve the objectives, which are essential to the long-term value of the company.
Furthermore, with a net loss of $77 million in the second quarter, Recursion is nowhere near profitable based on its collaboration business and software license sales. It also does not consistently add anything to revenue in either segment; quarterly revenue fell by more than 19% year-over-year in the second quarter, to a relatively paltry amount of $11 million. That means that even if it has a few powerhouse employees in its corner, there isn’t enough social proof to attract new customers to its platform in large numbers.
The company could remain unprofitable until shortly after it brings its first drug to market, assuming that happens. The $406 million in cash and equivalents should be enough to fund the year, and perhaps the first quarter of 2025. To continue operating beyond that, it will need to take out a large loan, issue more stock and have to register. another major collaboration partner, or achieve one of the milestones for its existing collaborations.
Recursion will likely be able to find the financing it needs. But if that uncertainty bothers you, it’s best to sell this stock, as more uncertainty is likely to come for at least a few more years.
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Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.