2 Reasons to Buy Recursion Pharmaceuticals, and 1 Reason to Sell
By Alex Carchidi – Oct 31, 2023 for The Motley Fool
https://stockcharts.com/h-sc/ui?s=RXRX
KEY POINTS
Recursion is forging key relationships with powerful collaborators.
The young biotech's valuation is also looking a lot better now.
However, its finances are nowhere near breakeven yet.
NASDAQ: RXRX
Recursion Pharmaceuticals
Market Cap
$1B
Today's Change
(13.00%) $0.68
Current Price
$5.91
Price as of November 3, 2023, 4:00 p.m. ET
Pioneering businesses tend to carry big risks, but also the potential for big rewards.
Discovering new drugs is no easy task, and one young company that aims to help in that process is Recursion Pharmaceuticals (RXRX 13.00%). Though it still hasn't brought a product to market just yet, it's begun to receive some attention already for its innovative approach -- and so now is a good time to consider its merits and risks as a long-term investment.
In particular, there are two main reasons to think about buying Recursion, and one key reason to sell or avoid buying it. Let's start with the big-picture view of why it's worthwhile.
Buy: It'll give 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 in both those niches quite nicely. It's seeking to develop an AI platform to help guide drug discovery and selection of therapy candidates; its goals are to lower costs and time spent on the drug development process, and to reduce the risk of expensive late-stage pre-clinical or clinical failures.
With that platform in hand, it plans to identify and test its own leads with the goal of eventually commercializing medicines developed in-house. Right now, it has three rare-disease programs in phase 2 trials as well as a pair of programs in phase 1. Those projects will need a few more years before they're ready for regulatory review.
In the meantime, Recursion is hoping to license its platform to the biopharma industry at large to generate some revenue. It already has buy-in from major pharmaceutical competitors like Bayer AG, with which it's collaborating to find leads for drugs to treat fibrosis. Such a vote of confidence isn't a reason to buy the stock on its own, but it's still a positive indicator for the future.
Buy: It's no longer priced at a huge premium
In July, Recursion inked 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 the biotech's stock flying overnight to an inflated price-to-sales (P/S) multiple near 60.
Since then, the hype surrounding Nvidia has continued, but Recursion's time in the spotlight has drawn to a close for now. Its shares are priced roughly the same as they were prior to the announcement and with a P/S ratio of about 20. So if you were bullish on the company's future before but were scared off by the prospect of overpaying for hyped-up shares, now's a better time to consider making a move.
Sell: Until its business model is validated, it's burning money
One thing that might encourage current investors to ditch shares of Recursion is that it hasn't proven yet its business model is actually viable. It lacks persuasive evidence for its core claims that its AI-based approach cuts research and development (R&D) expenditures, shortens pre-clinical timelines, and results in fewer late-stage failures. Investors who buy the stock now take on the risk that it won't be able to live up to those goals, which are vital to the company's long-term value.
Furthermore, with a net loss of $77 million in the second quarter, Recursion is nowhere near being profitable on the basis of its collaboration activities and sales of software licenses. Nor is it consistently adding to the top line with either segment; its quarterly revenue fell by more than 19% year over year in Q2, to a relatively paltry sum of $11 million. That means even if it has a few powerful collaborators in its corner, there isn't yet enough social proof to drive new customers to its platform in large numbers.
The company might continue to be unprofitable until shortly after it commercializes its first medicine, assuming that happens. Its $406 million of cash and equivalents should be sufficient to fund it through all of next year, and perhaps the first quarter of 2025. To continue operating after that, it'll need to take out a big loan, issue more shares, sign on another big collaborator, or meet one of the milestones for its existing collaborations.
Recursion will likely be able to find the funding it needs. But if that uncertainty bothers you, it's best to sell this stock, as there'll be even more uncertainty on the way for at least a few more years.
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