3 Things About Recursion Pharmaceuticals That Smart Investors Know

When it comes to complex biotech stocks like Recursion Pharmaceuticals (RXRX -2.76%), skilled investors are likely to have an outsized advantage in understanding how the future will play out. Whether it's a matter of how to judge developments like new collaborations, how to interpret clinical trial data, or how to analyze software licensing sales, there are a lot of moving parts to consider. 

Let's get up to speed on three important things about this company so that you'll be on the same page as the smartest investors. Then, if you decide to buy this stock, you'll better know what you're getting into and what expectations to have.

1. Its programs generally target rare diseases

Some biotechs aim to develop medicines for conditions that affect many people worldwide. It's no surprise why, as the more people that are afflicted, the bigger the market. Plus, common illnesses are, to state the obvious, common, which means that there's seldom much trouble when it comes to identifying and recruiting enough people for clinical trials.

Recursion is taking the opposite approach, preferring to develop medicines for rare diseases. For example, its phase 2 program for neurofibromatosis type 2 could one day treat around 33,000 people if it gets approved for sale. That might seem like quite a small population to target, but smart biotech investors know that a strategic choice to pursue such small markets has a few benefits.

Government programs like the Orphan Drug Act enable rare disease drug developers to realize tax credits for their clinical trial expenses, waive a few regulatory process fees, and market commercialized medicines with total exclusivity for seven years. Plus, there's rarely any established competition in rare disease markets.

And if Recursion's artificial intelligence-enabled drug discovery platform is all it's claimed to be, it could have an advantage in bringing its candidates to market too. 

2. It's collaborating with Nvidia for drug discovery

In July, Recursion made waves when it announced that Nvidia would invest $50 million so that the pair could collaborate to improve their respective drug discovery platforms empowered by artificial intelligence.

Smart investors recognize that while Nvidia's foray into drug discovery is still nascent, the buzz surrounding the stock and its AI ambitions will likely now spill over to Recursion stock too. And that could be great for shareholders as it means this biotech stock's fortunes are now tied to one of the most powerful businesses in the world.

The partnership's long-term benefits to Recursion could be tremendous. If Nvidia can help it to improve its machine-learning models for determining which candidates have the highest chances of success in the clinic, it'll become a much more valuable collaborator for other biopharmas. That could drive more revenue directly if those companies want to license from Recursion, and it'll also open the door to teaming up on drug programs directly.

But investors will probably need to wait a year or so for the new partnership to bear tangible fruit, so stay tuned. 

3. Its services segment has yet to prove its value 

Recursion has three segments: Its pipeline, discovery collaborations, and software licensing. Its pipeline projects are still early-stage, so they aren't approved for sale. So far, only its collaborations have provided significant revenue.

Wise investors understand that drug development collaboration agreements typically only provide one-off milestone payments until the jointly made medicines are commercialized, assuming they ever are. After that, they can yield royalties, assuming the deal allows for it. Therefore, collaborations aren't great for generating recurring revenue, so the company could experience a funding shortfall if it can't make enough cash elsewhere.

And for Recursion, its software licenses simply aren't making up for that shortfall whatsoever. In the second quarter, it only brought in $11 million, with the only difference from a year prior stemming from some more collaboration revenue. At the same time, its research and development (R&D) expenses were more than $55 million for the period. 

Its roughly $406 million in cash and equivalents means that it isn't about to run out of money. But shareholders should appreciate that until its software platform gains traction in the market, it'll be tough for the company to grow consistently, at least until it commercializes one of its medicines.