Recursion Pharmaceuticals (NASDAQ: RXRX) and 23andMe (NASDAQ: ME) are both popular biotech stocks that are wooing investors with their claims about using artificial intelligence (AI) to supercharge the drug development process. But over the last three years, share prices of Recursion have lost 72% of their value, whereas 23andMe's stock is down 89%.
Given the expanding interest in anything related to AI, however, there's a good chance that the next three years could be better for both of these companies and their stocks.
Let's examine their prospects and determine which of these two biotech stocks is the better investment.
The case for 23andMe
23andMe is famous for its consumer genetic testing business, which accounted for 79% of its $61 million in total revenue for its fiscal 2024 first quarter (ended June 30). You're probably familiar with its model, where people send a sample of their saliva, pay a fee, and get (some of) the mysteries of their genome unlocked and explained succinctly in an online report. The other 21% of its revenue stems from its research services segment, in which it collaborates with biopharma companies like GSK to identify therapy targets and then validate those targets as leads for further drug development.
That's the segment that is driven by its hoard of consumer genetic data derived from around 13 million people and the AI and machine learning models used to analyze that data. If the research platform lives up to what management implies, collaborators could experience shorter drug development times and lower failure rates, and perhaps they'll even be able to make medicines with fewer side effects and greater efficacy.
The biotech also develops its own therapies in-house, though only one of its roughly 50 wholly owned programs is in clinical trials. It's currently in phase 2 trials with that program, testing to see whether it might be useful to treat metastatic tumors in a few different cancers. If that pans out, it'd result in plenty of growth, but it'll be at least a few years before it could happen.
With all these efforts, 23andMe still isn't profitable, despite the sales from its two revenue-bearing segments. Nor is it experiencing much in the way of growth; its quarterly top line shrunk by nearly 6% year over year in Q1. And its core propositions to prospective collaborators, while probably true, have yet to be proven definitively via the commercialization of a medicine produced with the help of a collaboration with the company.
Recursion's ascent is impressive
Recursion's approach is slightly different from 23andMe's because it doesn't have a consumer-facing business. Instead, it aims to sell licenses to biopharma companies so that they can use its AI-driven drug discovery platform and data hoard while also developing programs directly and pursuing collaborations. In Q2 it reported just over $11 million in revenue, and it's nowhere near being profitable, so its three-part business model is still far from validation.
But don't take that to mean it's an earlier-stage company than 23andMe. It's merely devoting its resources to places other than immediate sales, like research and development (R&D) in particular. Its R&D expenditures were over $55 million in Q2, up from $38 million a year prior. As a result, its pipeline has three rare disease programs in phase 2 trials, another that's about to enter phase 2, and a few other earlier-stage efforts.
It's also collaborating with a handful of powerful players. In July, it announced a $50 million-dollar AI collaboration with Nvidia. Beyond that, Roche AG and Bayer Aktiengesellschaft have also committed to development partnerships that could yield hundreds of millions of dollars in milestone payments as well as royalties from any drugs that get approved for sale due to teaming up. Those deals make it more likely that Recursion will survive than go bust, at least in the medium term.
We're still in the early innings
Neither of these stocks is appropriate for risk-averse investors, and it's fully possible that both will fail -- and also that both will succeed. The field of AI-enabled drug development is still very new, and a lot could happen that disrupts these two pioneers.
With that being said, if you're the type that tends to invest in early-stage biotech stocks, Recursion Pharmaceuticals is the better bet at the moment on the basis of its larger and more mature pipeline. Having more shots on goal means that investors can have a bit more confidence that it'll eventually be able to commercialize a therapy, though nothing is guaranteed.
Another wrinkle that makes Recursion slightly more appealing is that its management won't need to be distracted with turning around an underperforming segment in the near term, like 23andMe's will be thanks to its consumer genetic testing.
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Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends GSK and Roche AG. The Motley Fool has a disclosure policy.
