Clinical-stage biotech company Recursion Pharmaceuticals (NASDAQ:RXRX) might be a relatively small company, but it’s taking significant steps toward a stronger future. Wall Street currently forecasts about 23% upside potential in the next 12 months. Plus, Recursion’s strategic partnership with some big names, including NVIDIA (NASDAQ:NVDA), to revolutionize AI in drug discovery has Wall Street optimistic about its long-term potential.
Recursion’s commitment to tackling rare diseases will drive its fundamentals in the right direction, which is why I believe it has the potential to shine bright over the long term. Hence, I am bullish on RXRX stock.
Why is RXRX Likely a Good Long-Term Choice?
Recursion Pharmaceuticals utilizes AI and advanced automation to rapidly identify potential drug candidates and accelerate the traditionally time-consuming process of developing new treatments. By leveraging technology to explore the complexities of rare genetic conditions, the company aims to develop therapies that were previously deemed unfeasible or overlooked.
Biotech companies aiming to cure hard-to-treat diseases will always remain in demand despite macroeconomic conditions. This is probably why famous investor Cathie Wood, who is known for her investments in hyper-growth, disruptive businesses, recently increased her stake in this biotech stock. According to TheStreet, Wood’s flagship ARK Innovation ETF (NYSEARCA:ARKK) purchased around 1.9 million shares of Recursion, amounting to $12.3 million.
In total, ARK holds roughly 9.7 million shares of Recursion, with the investment totaling $80.7 million. Recursion accounts for 0.92% of the ARKK ETF.
RXRX Isn’t Profitable Yet, but It’s Investing in Itself
Clinical-stage biotech companies often take time to be profitable. Recursion’s total revenue in Q3 dipped to $10.5 million compared to $13.2 million in Q3 2022. Its net loss in the quarter came in at $93 million, up from $60.4 million in the prior year quarter. However, Recursion is making every effort to turn its bottom line green.
Currently, it has many promising drug candidates in clinical trials. Also, in July, tech giant NVIDIA made a $50 million investment in Recursion. As part of the deal, Recursion will use NVIDIA’s accelerated computing capabilities to develop its AI foundation models for drug discovery.
In its recent Q3 report, the company announced the expansion of its on-premise supercomputer, BioHive-1, which it expects to complete by the first half of 2024. The company believes that adding NVIDIA’s most popular and efficient H100 GPUs (graphic processing units) will increase BioHive-1’s computational capacity by over 4x.
Management noted that once complete, “BioHive-1 will be in the top 50 most powerful supercomputers in the world across any industry (according to the Top500 list) and will be the most powerful supercomputer owned and operated by any biopharma company.”
Besides NVIDIA, Recursion has collaborations with other prominent healthcare companies, such as Bayer AG and Roche-Genentech, for various oncology programs.
Furthermore, Recursion has a partnership with Tempus to use its “oncology-focused clinical and DNA/RNA molecular observational datasets.” The agreement calls for Recursion to pay Tempus a total of up to $160 million in cash or equity over the next five years.
It is also heavily increasing its research and development (R&D) expenses to expand and strengthen its drug discovery capabilities. In the third quarter, R&D expenses totaled $70 million.
What is the Price Target for RXRX Stock?
Following its Q3 results, Needham analyst Gil Blum reiterated a Buy rating on RXRX, highlighting its strategic partnerships with Tempus and Bayer as one of the reasons for the rating. The analyst is also impressed with the company’s financial status and its pipeline progress. For context, Recursion had a $387.3 million cash balance at the end of the third quarter.
Overall, Wall Street has a Moderate Buy rating on RXRX stock. Out of the three analysts covering the stock, one rates the stock a Buy, while two rate it a Hold. The average price target for RXRX stock is $11.33, implying 23.2% upside potential.
The Verdict on Recursion Pharmaceuticals
Biotech stocks are risky, as trials may fail or the company may fail to get approval for its potential candidates. This could mean that it will be years before RXRX’s bottom line turns green.
That said, disruptive technologies like AI bring a lot of lucrative prospects for companies dipping their hands in this niche. Once its potential candidates get approved and released into the market, doors of opportunity will open for Recursion.
This potential success could lead to more strategic investments and partnerships, which would strengthen the company’s fundamentals and likely turn it profitable. I believe these reasons make a compelling high-risk, high-reward case for Recursion. Hence, I share Wall Street’s enthusiasm for this biotech stock.
