As investors look to the future to envision industries ripe for AI-powered reshaping and revitalization, drug discovery is quickly emerging as an obvious choice. Every new drug that hits the market is the product of billions of dollars in investment, and it often takes at least a decade to get there. The road to commercialization tends to be filled with costly trial and error as drug candidates are screened and selected. Only then can a compound be put through the rigorous, years-long process of clinical trials, where vast amounts of data are generated, processed and submitted for review — all with no guarantee of success. Now, many in the field expect AI to help speed up that timeline by making the pieces of the puzzle more efficient and effective. Analysts who have been following companies on the cusp of using generative AI for drug discovery say it’s still very early days. But excitement and investor interest are growing as more AI-powered drugs move through companies’ pipelines. Some tech investors looking to find companies that stand to benefit from AI advances are taking a closer look at health care. Recursion Pharmaceuticals is due to have clinical readings in the second half of this year, while AbCellera and Schrodinger are expected to have data in the first half of next year, said Scott Schoenhaus, an analyst at KeyBanc Capital Markets. Together, those events will help determine the group’s stock valuations, Schoenhaus said. So far, the AI trade has favored more direct beneficiaries like Nvidia, the maker of the processors the systems run on. But for those investors with an appetite for risk, and a belief that AI will lead to more successful and cost-effective drug research and development, here’s a look at several of the leading companies in the field. Each has its own technology, and different business models. Recursion Pharmaceuticals Recursion CEO Chris Gibson made waves at an analyst meeting on June 24 by appearing on stage with Nvidia CEO Jensen Hwang. The semiconductor company isn’t just helping fuel Recursion’s computing power, it’s also an investor, recently owning 3.4%, according to FactSet. Cathie Wood’s ARK Investment Management is the largest institutional investor, with a 10.7% stake. But those endorsements haven’t lifted Recursion shares out of the doldrums. The stock is down 26% year to date. Recursion told analysts it expects to share seven clinical readouts over the next 18 months, including looking at four Phase 2 data sets. The news briefly cheered investors, but the stock fell two days later when the company announced a secondary stock sale to raise cash. RXRX 1Y Mountain shares of Recursion over the past year. In a research note, analyst Mani Foroohar of Leerink Partners said previous clinical development delays have raised doubts about the company, making it a “show me” story. “We are struggling to find meaningful catalysts in the near term that could serve to rebut these concerns and demonstrate Recursion’s advantage in speed and likelihood of success in drug development,” Forouhar wrote. In other words, the stakes are high for Recursion’s clinical data, which will help prove that its tools will save companies time and money. Recursion’s first chance to prove itself comes in September, with data expected from a phase 2 trial of REC-994, a treatment for cerebral cavernous malformations (CCM), a condition that can lead to bleeding in the brain or spinal cord. There are about 360,000 patients with CCM in the U.S. and the European Union, and the treatment has received orphan drug designation in both, KeyBanc’s Schoenhaus said. The primary goal of the study is to assess safety, but it’s also an opportunity to gauge its clinical utility, said Needham analyst Jill Bloom. Along with other readings that will follow over the next 18 months, Recursion could begin to validate its platform. Once its technology is proven, there could be even greater benefits from its partners, which now include Bayer. The drugmaker will be a beta user of Recursion’s LOWE (Large Language Model Organized Workflow Engine) software, and the pair are also collaborating on oncology research. Bloom also noted that Recursion has the fastest supercomputer in biopharma, Biohive-2. The data it collects creates a flywheel that can drive other models. “If you think this is an important space, and you think AI is going to be important in biology in the next five years, I don’t think you have another bet that makes sense,” Bloom said in an interview. “Not in the public domain; in the private domain, maybe.” AbCellera’s strength lies in the vast amount of data it has on immune cells and antibodies, which it can scan to identify drug candidates. The database has already been shown to help partner Eli Lilly find a monoclonal antibody, bamlanivimab, to treat Covid-19. AbCellera has prioritized collaborations, and its partners include Prelude Therapeutics and Incyte, which focus on oncology, and Biogen, which is working to discover antibodies that can deliver treatments across the blood-brain barrier. ABCL 1Y mountain AbCellera shares over the past year. AbCellera’s internal research is in its very early stages. One program in metabolic and endocrine diseases could lead to a first-of-its-kind treatment, according to KeyBanc’s Schoenhaus. An investigational new drug application is expected to be filed by early next year. Schoenhaus said applications are expected to be filed for atopic dermatitis, which will have a $17 billion market opportunity by 2032, and for inflammatory bowel disease next year. While the company’s market value has more than halved this year, analysts across the board rate it a buy. The average price target, according to FactSet, is $14.63. That’s well above where AbCellera closed on Wednesday, just above its 52-week low of $2.69. “With a proven engine, a strong balance sheet, a mature strategy focused on high-value strategic partnerships, and, most importantly in our view, a greater willingness to take internal assets to higher value inflection points prior to partnerships, we like the long-term setup for this name — especially as we gain more visibility into both internal and partnership programs,” Piper Sandler analyst Allison Bratzel wrote in a research note in late May. Relay Therapeutics has focused on how proteins interact with other compounds, applying that strategy to targeted tumors and genetic diseases. The company said its Dynamo platform has been able to reduce the time it takes to find drug candidates. For example, it said it took 18 months to target RLY-4008 for bile duct cancer, compared with the industry average timeline of three to five years. “I would almost argue that Relay has shown us proof of concept at this point,” Goldman Sachs analyst Salvin Richer said in an interview. “They’ve really been able to take a kinetics-based drug design and apply it to either improve existing targets or pursue targets.” However, ongoing work on its lead drug candidate, RLY-2608, is being closely watched because it could provide a commercial opportunity for Relay. An update on the Phase 1b trial of RLY-2608, which treats a form of breast cancer, is expected in the fourth quarter of this year. Relay has also indicated that RLY-2608 may have benefits outside of that type of breast cancer as well. In May, Barclays analyst Peter Lawson raised Relay’s shares to overweight, saying he believed the RLY-2608 trial update would show superior efficacy and safety. Lawson put a 70% chance of positive data from the trial, expecting the stock to lift. But for now, shares are down 43% so far this year, with some recent insider selling weighing on sentiment. RLAY 1Y Mountain Relay Therapeutics stock has been on a tear over the past year. However, Wall Street is united in its view on Relay, with all analysts covering it rating the stock a buy. Schrödinger’s computational platform takes a physics-focused approach to help find better drug targets. The company licenses the software to other biopharmaceutical companies. It recently began developing its own pipeline and has collaborations with other companies, including Japan’s Takeda Pharmaceutical. By later this year or early next year, Schrödinger should be able to share Phase 1 data on SGR-1505, an experimental MALT1 inhibitor for treating non-Hodgkin’s B-cell lymphoma. That will be followed by data on its other drug candidate, SGR-2921. A Phase 1 dose-escalation trial for a third drug, SGR-3515, is set to begin this quarter. Like other companies in the space, the stock has struggled this year, falling 42%. SDGR shares have been 1Y Mountain Schrodinger over the past year. On Tuesday, Leerink’s Foroohar initiated coverage of the stock with an Outperform rating and a $29 price target, implying a 44% upside from Wednesday’s close. “Despite near-term (quarter-to-quarter) software revenue volatility as large customers transition from on-premises to hosted licenses (partly due to accounting/timing impacts), SDGR’s physics-based modeling software remains the most stable in place,” Foroohar wrote. He expects Schrodinger to benefit from the improving biotech funding environment that is likely to occur next year. If that happens and new customer growth returns to a high pace, Foroohar sees about $9 upside from his price target. He said the stock could also exceed his target if the company’s collaborations or internal research yield positive results. Some dissenters have been concerned that Schrodinger could be hurt as the tech-enabled drug discovery industry becomes more crowded and big pharma companies like Amgen go after its internal efforts, but Foroohar said that’s “unlikely.”
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Investors may get evidence in the second half of the year that AI is helping drug discovery.
