The bull case for the recursive pharma stock just got stronger. Here’s why.

Recurring pharmaceuticals (RXRX 0.75%) and Exscience (EXAI 0.38%) made headlines on August 8 when they announced plans to merge into a single business, forming the world’s largest biotech dedicated to developing drugs powered by artificial intelligence (AI). The deal is expected to close sometime in early 2025. And now the bull case for Recursion stock is more formidable than it was before.

Here’s what you need to know about what this merger will accomplish for shareholders and why it will likely be a long-term net positive.

The merged player will have a lot of resources and catalysts in the short term

There are a handful of advantages to merging Recursion with Exscientia.

First, all of Exscientia’s programs will become Recursion, which gives it many more opportunities to commercialize a drug and start generating revenue for the first time.

Since both currently depend on their collaborators to pay referral fees to help with research and development (R&D) costs, both will now benefit from the other’s benefactors. These include powerful international pharmaceutical companies such as Bayer, Roche, Bristol Myers Squibband Sanofias well as a preeminent AI hardware company Nvidia. It is difficult to overstate the importance of having such a deep list of allies in multiple areas of medicine and information technology.

In terms of the new company’s pipeline, the focus will be on a combination of rare disease therapies and precision oncology treatments, with a secondary focus on infectious disease drugs. There is no overlap between the two companies’ pipelines, and at this point there don’t appear to be any plans to drop any programs during the merger.

Combining the pipelines of the two biotechs opens the door to improvements in shareholder value each time favorable clinical trial data is published. According to management estimates, the pair has up to 10 readings expected in the next 18 months. Four programs are now in Phase 2 clinical trials, so it may only be a few years before Recursion has a chance to commercialize anything.

The new entity combining Exscientia and Recursion will retain the Recursion name as well as its CEO, Chris Gibson, who is trained as a scientist. Exscientia’s interim CEO, David Hallett, will become Chief Scientific Officer (CSO). That job change is odd, but not bad by any means, considering he was also trained as a scientist. With these two experienced leaders at the helm, trust for the Recursion mastermind is likely to punch above its weight.

Critically, the merger will also result in a well-capitalized business that will not need to issue new shares or take on new debt for some time. In addition to the estimated $100 million in cost synergies that are anticipated, the new company will have approximately $850 million in cash, equivalents and short-term investments. That means it’s set for cash until early 2027.

Key questions still need to be answered, and that will take some time

There are plenty of reasons to be optimistic about the new Recursion, but the reality is that these two biotechs are in uncharted waters in more ways than one, and the new venture will be quite risky, just like the old ones.

The main driver of these risks is that no competitor has yet demonstrated that the use of AI and other advanced information technologies can actually make drug development cheaper, faster or more reliable. Nor is there any evidence that drugs created with these methods will be safer or more effective than drugs with traditional origins. And while the presence of many high-powered contributors who want to get a piece of the action is a positive sign, there is no definitive proof yet that they will actually gain value by partnering with Recursion. It’s doubtful whether the big fish will stick around if the clinical trial failures start piling up.

However, given the new and improved capabilities that Recursion will have next year, the odds of success are in its favor for now. With so many shots on goal lined up, so many collaborators, so much money, and arguably the largest concentration of AI drug development experts in the world, the bull’s case is now stronger than ever.

If you can accept the relatively high level of risk, it’s worth taking some action sooner rather than later.