This clinical-stage drugmaker's AI platform could speed up the development process, but initial results were disappointing.
The artificial intelligence (AI) revolution is pushing up the overall stock market, but not every AI stock is performing well. Shares of Recursion Pharmaceuticals (RXRX 1.51%) are down by more than half from a peak they set this spring.
The start-up drugmaker disappointed investors with lackluster results for its lead candidate in September. Luckily, it has a deep pipeline of less-advanced candidates that could allow its AI-powered platform to redeem itself.
Recursion Pharmaceuticals shares have been a disaster for investors who've been holding them. After falling by more than half in less than a year, though, the stock could be a bargain now.
Here's a look at what went wrong and some upcoming catalysts that could push the stock higher down the road to see if this stock is a bargain at its beaten-down valuation.
Recursion has built a platform that uses AI and automation to select therapeutic targets and new drug candidates that act on them. Recently, it lowered the time it takes to advance a new program from target selection to clinical-stage testing to under 18 months. This means its already robust pipeline of clinical-stage new drug candidates could get a lot larger.
In early September, Recursion reported results from the first placebo-controlled trial with one of its candidates, REC-994. The company is testing it as a treatment for cerebral cavernous malformation (CCM), a progressive condition that affects over 360,000 diagnosed patients in the U.S. and EU.
The brains and spinal cords of patients with CCM are fed by malformed blood vessels. Oxidative stress is thought to be responsible, so REC-994, a superoxide dismutase inhibitor also known as tempol, could alleviate the condition.
Any drug developer worth their salt probably doesn't need an AI platform to tell them a condition caused by oxidative stress could be alleviated with an antioxidant. Nevertheless, that's the story investors bought with both hands when this stock's market cap shot above $6 billion in 2021. According to the company, tempol's potential in CCM was demonstrated using the earliest version of the company's foundational technology.
Recursion's stock price got hammered in September because tempol wasn't very effective, which could mean its AI platform is a dud too. After 12 months of treatment, patients who received the highest dose tested showed a trend toward improvement compared to those randomized to receive a placebo. Unfortunately, the measurements weren't strong enough to be considered statistically significant.
In August, Recursion told investors to expect data from 10 clinical trials over the next 18 months. The REC-994 program is the only one that's produced results so far, which suggests there will be nine more readouts over the next 16 months.
In June 2022, Recursion began the phase 2/3 Poplar trial with REC-2282. This is a pan-HDAC inhibitor for the treatment of brain and spinal cord tumors that are driven by NF2 mutations. Top-line results from the initial, open-label portion of the study should be ready before the end of 2024.
In the first half of 2025, there should be results from an open-label phase 2 trial with REC-4881 and a variety of cancer patients with inoperable tumors driven by AXIN1 or APC mutations. We'll also see how REC-4881 performs in a placebo-controlled trial with familial adenomatous polyposis (FAP) patients.
After REC-994's disappointing data, expectations aren't nearly as high as they used to be. The company's market cap has fallen to about $1.9 billion at recent prices.
A rousing success for REC-2282 this year, or REC-4881 in 2025, could reignite some confidence in Recursion's platform and drive the stock higher. Unfortunately, $1.9 billion is still a rich valuation for a clinical-stage company that hasn't produced convincing placebo-controlled results for any of its candidates yet.
Recursion will take a lot of shots on goal over the next 16 months. Unfortunately, there still isn't any reason to assume the candidates its AI platform selects have a better chance of becoming commercial-stage products than candidates discovered the old-fashioned way.
The best move for everyday investors is to stay on the sidelines until after Recursion shows successful results from a controlled study and proves its platform has some value.