Recursion Pharmaceuticals (RXRX), a trailblazer in AI-powered drug discovery, recently acquired its competitor, Exscientia, in a strategic move that solidifies its leading position in the industry. The combined entity has more than ten clinical and preclinical programs in the pipeline. Also, the company now boasts a significant list of partners and programs with over $450 million upfront and realized milestone payments received from partners out of more than $20 billion possible. The market has embraced the acquisition, driving the shares up roughly 20% over the past month.
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Utilizing state-of-the-art AI, machine learning, and automated biology, Recursion expedites the drug discovery process, saving millions of dollars and crucial time. The company’s vast proprietary database, the Recursion Data Universe, enables millions of lab experiments weekly and provides early indications about drug potential failure. With significant investments from NVIDIA (NVDA) and successful partnerships with healthcare giants like Bayer (BAYRY) and Roche (RHHBY), Recursion is powering a revolution in drug discovery.
Despite its recent Q3 financial results falling short, the company maintains a strong cash position projected to fuel its work through 2027. Its long-term upside potential makes it a compelling option for investors interested in the intersection of AI and biotechnology.
Recursion on the Cutting Edge of AI-based Drug Discovery
The process of bringing a drug to market from discovery to FDA approval can take around 15 years and cost up to $2.5 billion, with a failure rate as high as 90%. Recursion, a company that uses AI to power automated biology, high-throughput screening, and machine learning, aims to speed up the process by more efficiently identifying potential drug targets.
The company owns an extensive chemical and biological database called the Recursion Data Universe, which holds more than 23 petabytes of information related to disease-associated proteins, genes, and pathways. By leveraging AI, Recursion can predict a drug’s potential for failure much earlier in the development process, potentially saving millions of dollars and reducing time to market.
Recursion recently received a $50 million investment from NVIDIA for its AI drug discovery models. It partnered with Bayer and Roche Holding AG to discover new therapeutics. It has expanded its collaboration with Google Cloud (GOOGL) to support its drug discovery platform and explore generative AI capabilities.
Analysis of Recursion’s Recent Financial Results
The company recently published Q3 financial results, posting lower-than-anticipated numbers. Revenue of $26.1 million increased significantly from the same quarter of the previous year, where it was $10.5 million, mainly due to revenue recognized from a partnership with Roche & Genentech and a $30.0 million acceptance fee for a neuroscience project completion. Yet, this fell short of expectations by $3.73 million.
As for expenditures, research and development expenses rose to $74.6 million due to the expansion and upgrade of the company’s platform, including its chemical technology, machine learning, and transcriptomics platform. General and administrative expenses also noted an upward movement, reaching $37.8 million, predominantly due to increased software and lease expenses.
There was a slight increase in net loss, from $93.0 million in Q3 2023 to $95.8 million in Q3 2024, with a loss per share of -$0.34, missing consensus estimates by $0.01.
As of the quarter’s end, cash and cash equivalents stood at $427.6 million. The company’s net cash in operating activities decreased from $72.9 million in Q3 2023 to $59.2 million in Q3 2024, primarily due to the acceptance fee received, which partially offset the higher operating costs from research and development and general and administrative activities.
What Is the Price Target for RXRX Stock?
As a clinical-stage biotech start-up, the company has little revenue to build a valuation model on, so the whims of the collective market mainly drive the share price. This has led to significant volatility (beta of 3.27), as the stock has bounced around between $5 and $15, posting a minimal 2% return over one year. Investors should expect the ride to continue similarly until the company successfully brings a treatment to market.
Analysts following the company are cautiously optimistic about RXRX’s prospects. KeyBanc analyst Scott Schoenhaus recently reiterated an Overweight rating and $12.00 price target on the shares, noting that the acquisition of Exsientia brings together Recursion’s scaled biology exploration with Exsientia’s precision chemistry design and small molecule automated synthesis capabilities, with ten clinical/pre-clinical programs that could have annual peak sales opportunities of $1 billion.
Six analysts recommend Recursion Pharmaceuticals as a Moderate Buy overall. The average price target for RXRX stock is $11.25, representing a potential upside of 48.42% from current levels.
RXRX in Review
With the acquisition of Exscientia, Recursion Pharmaceuticals is now the dominant figure in the AI-powered drug discovery sector. Although Q3 financial results fell below initial projections, Recursion maintains a strong financial standing, backed by considerable investments from NVIDIA, partnerships with healthcare industry leaders, and strategic acquisitions. The company’s resilient cash position and long-term potential from the fusion of AI and biotechnology make it a potentially attractive prospect for investors willing to take on its high-risk, high-reward profile.
