The Biotech Stock That's Too Risky for Most Investors

Key Points

• Recursion Pharmaceuticals is applying artificial intelligence to the drug discovery process.

• Recursion has several cancer therapy candidates in early-stage clinical trials.

• Drug trials often fail.

• 10 stocks we like better than Recursion Pharmaceuticals ›

The artificial intelligence (AI) revolution has the potential to alter just about every business operation for the better. One area where investors are extra excited about productivity improvements is the drug development business.

The vast majority of experimental drugs that enter clinical trials never become marketable products, but by applying AI to the discovery process, Recursion Pharmaceuticals (NASDAQ: RXRX) plans to become a top-performing biotech stock.

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The handful of analysts following the stock seem to agree that AI-powered drug discovery could give the company an advantage. Among five analysts following the stock, none have a sell rating, and expectations are high. The average analyst following the company thinks the stock price can rise 53% from its closing price on Sep. 24, to $7.25 per share over the next 12 months.

So, investment bank analysts are convinced this is a good stock to buy, or at least worth holding. And the company sports a $2.1 billion market cap despite having no idea when it will start recording product sales. This indicates that everyday investors probably don't appreciate how much risk they're taking on with the shares.

Recursion's most advanced new drug candidate, REC-617, is in its first clinical trial. It's a novel CDK7 inhibitor that could become the first cancer treatment of its kind, if this study and subsequent trials succeed and approval is granted. Earlier this year, Recursion advanced REC-617 to the phase 2 portion of its ongoing study. Top-line results are expected in 2028.

Investors new to biotech need to remember that a majority of cancer drugs that pre-commercial companies advance from phase 1 to phase 2 clinical trials never earn approval or generate sales. Even if we assume AI-powered drug discovery allows Recursion to pick winners twice as often as its peers, there's still a very strong chance that its lead candidate will fail to generate any sales. For most investors, it's best to watch this stock's story play out from a safe distance.

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Cory Renauer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.