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This Beaten-Down Artificial Intelligence (AI) Stock Just Got Some Great News: Time to Buy?

Source The Motley Fool

Artificial intelligence (AI) is taking over the world. Individuals and corporations are implementing the technology in their day-to-day lives and operations; governmental institutions are doing the same. The U.S. Food and Drug Administration (FDA) recently announced it would phase out animal testing in drug development in favor of other methods, including AI-based testing.

That's good news for Recursion Pharmaceuticals (NASDAQ: RXRX), a biotech company that's already pioneering the use of AI in drug development. Recursion's shares soared on the news, but the stock remains down significantly over the trailing-12-month period. Should investors purchase shares today?

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More details on Recursion's approach

Recursion Pharmaceuticals built the largest AI supercomputer in the pharmaceutical industry with the help of tech giant Nvidia. The company's operating system (OS) features a library of human genes, and helps predict whether various clinical compounds would effectively treat certain diseases. The most promising compounds get to move on to clinical trials.

It can take a while for drugmakers to move their programs to clinical studies after the inception phase. Recursion claims that its approach can significantly decrease the time and money that typically goes into this phase. If true, that would mean stronger revenue for drugmakers, since their therapies would spend more time on the market before losing patent exclusivity.

Lower expenses associated with drug development would also translate into higher profits and margins for pharmaceutical leaders.

Recursion could also build a network effect within its OS by fine-tuning it following the success (or failure) of the clinical compound it predicted would perform well in studies.

One of Recursion's goals is to license its OS out to other pharmaceutical companies, a business that would carry far higher margins than developing drugs. That's why the recent decision from the FDA is such a big deal for the company. Recursion is ahead of its time; if things go well, it could help revolutionize how drugs are developed and make a fortune while delivering excellent results to its shareholders.

Risk-averse investors should look elsewhere

That said, there's more to the story. While Recursion looks more attractive than it did a month ago, thanks to these recent developments, the stock is hardly a slam dunk at this point.

For one thing, despite its claims that its approach can cut the time (and the money) required to develop drugs, it has yet to produce tangible results. Recursion doesn't have a single drug on the market. Worse, it doesn't even have any investigational candidates in phase 3 studies. It's hard to make convincing claims about transforming the way we develop drugs without having crossed the final clinical and regulatory roadblocks leading to approval.

Furthermore, now that the FDA is moving in this direction, it will likely incentivize other companies to build their own AI initiatives. Some have already made significant strides in that direction. Novo Nordisk helped build a supercomputer in Denmark, where it's based, to help accelerate innovation in the medical field. We can expect more developments along those lines from corporations with far more money than Recursion.

True, the biotech has a first-mover advantage and the backing of several major players in the pharmaceutical industry, including Roche Holding, Bayer, Merck, and Sanofi. These partnerships make it less likely that the smaller biotech will run into funding issues, but they hardly make the stock attractive. Recursion's shares could skyrocket provided its master plan comes to fruition, but they could also remain southbound if it fails to deliver solid clinical and regulatory progress.

Recursion Pharmaceuticals isn't for risk-averse investors. But if you're comfortable with heightened volatility, you might consider initiating a small position in the stock.

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

Disclaimer: For information purposes only. Past performance is not indicative of future results.

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