Is Recursion Pharmaceuticals Stock a Buy?

Companies whose breakthroughs revolutionize industries often end up being massively successful. Think Netflixhis move from DVDs to streaming or AppleHis breakthrough smartphone that killed Blackberryits competing franchise.

It could Recurring pharmaceuticals (RXRX 0.75%) are you experiencing similar success? After all, biotech is working hard to introduce a major paradigm shift in the industry. Let’s find out what Recursion is working on and whether the company’s stock is worth buying.

Eroom’s Law and Artificial Intelligence

The process of developing new drugs is notoriously complicated, expensive and lengthy. While you might think it’s getting faster and cheaper thanks to technological advances, the opposite is true. This phenomenon is known as Eroom’s Law (the inverse of Moore’s Law), the observation that drug discovery slows down and becomes more expensive.

Any company that can reverse this process could be incredibly successful. That’s what Recursion is working on. The biotech is as much a technology company as it is a drug developer. Thanks to an artificial intelligence (AI)-powered algorithm that constantly tests different clinical compounds against a virtual library of human biology, Recursion hopes to identify highly promising candidates to begin testing in clinical trials.

Many early-stage compounds never reach the market. But suppose recursion can significantly increase the likelihood that a new compound entering clinical trials will prove effective and ultimately win regulatory approval. The company would spend less on research and development than its peers while launching innovative therapies. The result would be (all else being equal) higher operating and net profits and margins than its competitors.

If its AI-based platform proves as effective as hoped, Recursion will be able to license it to other drugmakers. In fact, this approach has attracted the attention of some major players. Recursion has signed drug development agreements with leading manufacturers Bayer and Roche Holdings. It also partnered with Nvidiawhich helped the biotech build an AI-powered supercomputer, the largest in the pharmaceutical industry.

The interest from these big-name players at least suggests that Recursion is on to something.

Should you buy the stock?

Recursion Pharmaceuticals is still only a clinical-stage company. None of its products are in Phase 3, although it expects more than half a dozen data readings in the next 18 months. The company will first need to demonstrate that its technology-centric approach to drug development works; this will involve getting approval for one or (preferably) more candidates, while having a much higher success rate than other drugmakers in identifying early-stage compounds that eventually reach the market.

Even clinical failures could be useful in helping Recursion adjust its algorithm to provide more accurate predictions. Unfortunately, the company is not there yet. For now, it generates little revenue from collaboration agreements. Meanwhile, other drug makers, including Novo Nordiskis working on somewhat similar AI-centric projects that could help transform — or at least improve — the drug development process.

Where does this leave Recursion Pharmaceuticals? Right now, the company is at the “proof of concept” stage, in my opinion. Sure, the project looks incredibly interesting. If it’s anywhere near as successful as the company hopes, expect something approaching generational returns over the long term.

However, the company’s downside is just as massive, making it a risky biotech stock. If you are a risk-averse investor, you might consider initiating a small position. Perhaps the company will merit much stronger attention from other investors as it begins to gain approval for its products, or even if its future data is positive.