Should You Buy the Dip in This AI-Driven Drug Stock?

Several high-profile companies are looking to leverage artificial intelligence (AI) capabilities to disrupt the healthcare sector. That's because drug development is risky, expensive, and time-consuming. It can cost billions, and easily take a decade to go from concept to clinical trials and regulatory approval. 

In late 2023, Google (GOOG)(GOOGL) unveiled MedLM, a suite of healthcare-specific AI models designed to help clinicians carry out complex studies, summarize doctor-patient interactions, and much more. The product offering signaled the tech giant’s attempt to monetize its healthcare-focused AI tools amid competition from Microsoft (MSFT) and Meta (META). Google has also announced plans to introduce healthcare-specific versions of its AI model, Gemini. 

Recently, AI darling and market bellwether Nvidia (NVDA) announced deals with giants such as Johnson & Johnson (JNJ) for the use of generative AI in surgery. It also inked a deal with GE Healthcare (GEHC) to improve medical imaging, while launching two dozen new healthcare-focused AI tools. 

According to a CNBC report, around 40% of biotech CEOs said they are looking to leverage generative AI capabilities and gain a competitive advantage over peers. Given that AI is poised to gain massive traction in the healthcare segment, let’s take a deeper look at one popular AI-driven drug stock to see if it's a good buy right now. 

An Overview of Recursion Pharmaceuticals

Valued at $1.7 billion by market cap, Recursion Pharmaceuticals (RXRX) is a clinical-stage biotech company that integrates automation, AI, machine learning, and in vivo validation capabilities to discover novel medicines. 

Its Recursion operating system enables advanced machine learning approaches to reveal drug candidates, action mechanisms, novel chemistry, and potential toxicity with a goal of decoding biology and advancing new therapeutics that improve lives. 

The company went public in April 2021, and has since lost close to 80% in market value. Last week, RXRX stock fell over 13% in a single trading session after announcing the pricing of an underwritten public offering where it raised $200 million. A company that raises equity capital dilutes the wealth of existing shareholders, which generally results in a sell-off. 

Nvidia is an Investor

Today, Recursion Pharmaceuticals doesn’t have a single approved drug. The company is burning through cash, and reported a net loss of $91.4 million in Q1 of 2024, higher than the year-ago loss of $65.3 million. 

Recursion ended Q1 with $300 million in cash, and its recent equity offering should provide the company with enough liquidity for the next 18 months, given its cash burn stood at $102.3 million in the March quarter. 

However, chip giant Nvidia has invested $50 million in Recursion, and the two companies are working on AI-powered drug development. Recursion emphasized that its datasets exceed 23 petabytes and that it has about 3 trillion searchable gene and compound relationships. Recursion aims to deploy Nvidia’s advanced computing capabilities to accelerate drug discovery processes for pharma companies. 

In an interview with CNBC, Recursion CEO Chris Gibson stated, “To find the drug and get it into the clinic, I think we can shorten that from five or six years and hundreds of millions of dollars into, perhaps, one or two years and just $10 million or $20 million.”

What's the Target Price for RXRX Stock?

Out of the seven analysts covering RXRX stock, one recommends “strong buy,” one recommends “moderate buy,” and five recommend “hold,” for a consensus opinion of “moderate buy."

The average target price for RXRX stock is $12.83, indicating expected upside potential of 74.6% from Wednesday's close.