3 Things Investors Need to Know About Recursion Pharmaceuticals

Recursion Pharmaceuticals (NASDAQ: RXRX) is a relatively small player in the biotech industry. The same is true in artificial intelligence (AI), a market where it is barely on the map, given the giant trillion-dollar companies that dominate it. However, its smaller size may offer Recursion Pharmaceuticals significant upside potential, provided it can establish a foothold in the AI drug discovery niche.

Before pulling the trigger, though, there are several things investors should know about Recursion Pharmaceuticals. Here are three them.

1. The largest supercomputer in the industry

Recursion Pharmaceuticals uses AI to develop drugs. The company's goal is to improve and speed up a process that is slow, expensive, and risky. Most medicines that enter the clinic never make it to the market as they fail to prove safe or effective (or both) in clinical trials.

Meanwhile, drugmakers can spend about 10 years and several hundred million dollars -- sometimes even over a billion -- developing a therapy that ultimately fails in phase 3 studies. And even as technology has improved, this problem has only gotten worse.

Image source: Getty Images.

By using an AI-powered operating system (OS) that tests compounds in a virtual library of human cells, Recursion Pharmaceuticals hopes to boost the success rate of investigational drugs entering the clinic. The company also uses AI to plan clinical trials better. It is to those ends that the company partnered with Nvidia to build the largest supercomputer in the pharmaceutical industry, which was completed last year.

That could give Recursion an edge as more drugmakers seek to use AI to develop medicines. And in the meantime, the U.S. Food and Drug Administration has said that it will slowly phase out animal testing in favor of AI-based (and other) testing methods.

2. Recursion's multiple partnerships

Recursion's approach is intriguing, as evidenced by the fact that several of the world's largest pharmaceutical companies have signed deals with it to develop drugs using its AI-based strategy. The list includes Merck, Bayer, Sanofi, and Roche.

These deals serve several purposes for Recursion. First, they add to the body of evidence showing that the company's approach has at least some promise. These drugmakers wouldn't be spending money on this strategy if they didn't see some potential.

Second, it grants Recursion Pharmaceuticals access to more data from these pharmaceutical leaders, which can help the company improve and fine-tune its operating system. Third, beyond data, these larger corporations can lend their expertise in some therapeutic areas to Recursion Pharmaceuticals.

Lastly, they make it easier for Recursion Pharmaceuticals to access non-dilutive funding, which can otherwise be a problem for clinical-stage biotech companies.

3. No tangible proof of success -- yet

Despite Recursion Pharmaceuticals' seemingly impressive approach, the company has yet to reinvent the wheel. We know this because it doesn't have a single approved product yet, despite being founded in 2013. And worse, Recursion currently has no candidates in phase 3 studies.

In fairness, several of the company's pipeline products look promising. For instance, it is developing REC-617, a potential medicine for multiple solid tumors with a novel mechanism of action. Recursion has several other candidates in the pipeline. However, it will be at least a few years before it launches any of them.

Is the stock a buy?

Recursion Pharmaceuticals is an innovative company. It saw the potential of AI to disrupt the industry and improve how we develop drugs, before AI became cool on Wall Street. And with the FDA moving toward AI-based models, that further validates the company's approach.

However, Recursion's lack of impressive clinical and regulatory wins is a major knock against it. And there is also the fact that competition is increasing. Eli Lilly, the world's largest pharmaceutical company, recently announced it would build the industry's largest supercomputer in partnership with Nvidia.

Until Recursion can show solid pipeline progress, it will be hard to win over investors. Recursion Pharmaceuticals has significant upside potential, but the risk is high as well. Invest accordingly.

Prosper Junior Bakiny has positions in Nvidia and Recursion Pharmaceuticals. The Motley Fool has positions in and recommends Merck and Nvidia. The Motley Fool recommends Roche Holding AG. The Motley Fool has a disclosure policy.