Down Over 40%, Is Recursion Pharmaceuticals a Buy on the Dip?

Machine-learning techniques keep improving efficiency in one industry after another. One corner of the economy where investors expect another big leap forward is the world of drug development.

For every commercial-stage drug out there that generates millions and sometimes billions in annual sales, there were thousands of new drug candidates that didn't get across the finish line. You don't need a life-science background to see an opportunity to streamline this process with help from artificial intelligence (AI) and new automation techniques.

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Recursion Pharmaceuticals (NASDAQ: RXRX) has gained a lot of attention in recent years with an AI-powered drug-discovery platform that aims to reduce the amount of trial and error that's required to discover successful new drug candidates.

Around the middle of February, shares of Recursion Pharmaceuticals bounded higher after the company reported phase 2 results for its former lead candidate. Unfortunately, the stock fell by 40.5% between Feb. 19 and March 4. Now that it's been beaten way down, many investors are sniffing around for a possible bargain.

Before you whip out your brokerage app to buy beaten-down Recursion Pharmaceuticals stock, here's a look at what the company's accomplished so far and the upcoming catalysts that could drive its stock price higher over the next couple of years.

Phase 2 success?

On Feb. 5, Recursion stock started soaring after the company announced successful phase 2 results for its most advanced clinical-stage drug candidate. More than a decade ago, Recursion's founder and CEO Chris Gibson pioneered a machine-learning approach to selecting new drug candidates that chose REC-994 as a potential treatment for cerebral cavernous malformation (CCM).

The phase 2 study with REC-994 met its primary safety-related endpoints by not producing any serious side effects. Unfortunately, the experimental treatment didn't produce evidence of a benefit by reducing the size of cerebral lesions. There was a reduction among patients given the highest dose of REC-994 tested, but the benefit measured wasn't strong enough to be considered statistically significant.

Recursion trumpeted the results as if they were successful, but this program isn't going anywhere fast. The company still hasn't announced plans to launch a phase 3 study for REC-994, the candidate it's been developing since 2013.

Red flags

Since CEO Gibson's machine-learning venture recommended REC-994, Recursion has compiled an enormous database of biological data. It also built proprietary software applications and AI models that can predict and navigate trillions of biological and chemical relationships.

In theory, Recursion's AI models tell it which new drug candidates are most likely to succeed once tested with animals and then humans. In practice, though, management isn't advancing any of the candidates it discovered into late-stage clinical trials.

More than a decade after this business was founded with the aim of accelerating the drug development process, its lead candidate is one it acquired from Exscientia last November, not a molecule its AI platform helped select. REC-617 is a small molecule CDK7 inhibitor being developed for the treatment of multiple advanced solid tumor indications.

Recursion didn't just buy a new development pipeline to replace one that isn't working out. It acquired its current lead candidate with money it didn't have to spend. Last November, Recursion acquired Exscientia for $688 million by issuing new shares of stock. Over the past three years, Recursion's outstanding share count has more than doubled. That dilution is going to make it a lot harder for long-term investors to realize a satisfying return.

Before you risk a nickel on this stock, know that GT Apeiron, the company that hired Exscientia to discover REC-614, handed it back for $20 million upfront plus milestone payments and a single-digit royalty percentage on sales if it succeeds.

It's not hard to see why GT Apeiron let go of REC-614 for just $20 million upfront. Among the first 18 cancer patients evaluated in the Elucidate trial, treatment with REC-614 led to a partial tumor size reduction for just one.

After getting severely beaten, Recursion is now sporting a more modest market cap. At $2.6 billion, though, it's still way too expensive for a company with a new lead candidate that produced lackluster phase 1 data. It's probably 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.