As investors look to the future to imagine which industries are ripe for reshaping and powering AI, drug discovery is quickly emerging as an obvious choice. Every new drug that hits the market is the product of billions of dollars of investment, often taking at least a decade to get there. The path to commercialization tends to be littered with costly trial and error in screening and selecting drug candidates. Only then can a compound undergo the rigorous, years-long process of clinical trials, where vast amounts of data are generated, processed and reviewed—all with no guarantee of success. Now, many in the industry expect AI to help speed up that timeline by making the pieces of the puzzle more effective—and more efficient. Analysts who follow companies at the forefront of using generative AI for drug discovery say it’s still very early days. But investor excitement and interest are growing as more AI-powered drugs move through companies’ pipelines. Some tech investors looking for companies that will benefit from AI advances are turning their attention to the health care sector. KeyBanc Capital Markets analyst Scott Schoenhaus said Recursion Pharmaceuticals is expected to have clinical results in the second half of this year, while AbCellera and Schrodinger are expected to have data in the first half of next year. Together, those events will help shape valuations for the group’s stocks, Schoenhaus said. So far, the AI trade has favored more direct beneficiaries like Nvidia, which makes the processors that run the systems. But for risk-on investors who believe AI will lead to more successful and profitable drug research and development, here’s a look at several leading companies in the field. Each has its own technologies, and business models vary. Recursion Pharmaceuticals Recursion CEO Chris Gibson made a splash at its June 24 analyst meeting by appearing on stage with Nvidia CEO Jensen Huang. The semiconductor company not only helps power Recursion’s computing power, it’s also an investor, most recently owning 3.4%, according to FactSet. ARK Investment Management, Cathie Wood’s investment management firm, is the largest institutional investor with a 10.7% stake. But that backing hasn’t lifted Recursion’s stock out of its slump. The stock is down 26% year to date. Recursion told analysts it plans to share seven clinical results over the next 18 months, including analyses of four Phase 2 data sets. The news briefly cheered investors, but the stock fell two days later when the company announced a secondary sale of shares to raise cash. RXRX 1Y has sent Recursion’s shares soaring over the past year. In a research note, Leerink Partners analyst Mani Foroohar said past clinical development delays have raised doubts about the company, making it a story not to be missed. “We are struggling to find meaningful near-term catalysts that could serve to rebut these concerns and validate Recursion’s advantage in terms of speed and probability of success in drug development,” Foroohar wrote. In other words, the stakes are high for the clinical data Recursion will report, because it will help demonstrate that its tools will save companies time and money. Recursion’s first chance to prove itself will come in September, with data expected from a phase 2 trial of REC-994, a treatment for cerebral cavernous malformation (CCM), a condition that can cause bleeding in the brain or spinal cord. KeyBanc’s Schoenhaus said there are about 360,000 symptomatic CCM patients in the U.S. and European Union, and the treatment has been granted orphan drug designation in both. Needham analyst Gil Blum said the study’s primary goal is to assess safety, but it’s also a chance to evaluate its clinical benefit. With more results coming in over the next 18 months, Recursion could begin to validate its platform. Once its technology is proven, bigger advantages could emerge from its partners, which now include Bayer. The pharmaceutical company will be a beta user of Recursion’s large language model-driven workflow engine (LOWE), and the two are also partnering on oncology research. Blum 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 a big field and you think AI is going to matter in biology in the next five years, I don’t think you have another bet that makes sense,” Blum said in an interview. “Not in the public domain; in the private domain, maybe.” AbCellera AbCellera’s strength lies in the massive amount of data it has on immune cells and antibodies, which it can analyze to identify drug candidates. The database has been shown to have helped its partner Eli Lilly find a monoclonal antibody, bamlanivimab, to treat Covid-19. AbCellera has prioritized collaborative relationships, and its partners include Prelude Therapeutics and Incyte, which focus on oncology, and Biogen, which is working on discovering antibodies that can deliver treatments across the blood-brain barrier. AbCellera’s stock has climbed 1-year highs over the past year. AbCellera’s internal research is in its early stages. A program in metabolic and endocrine diseases could lead to a first-in-class treatment, according to KeyBanc’s Schoenhaus. He expects an investigational new drug application to be submitted early next year. Applications for a treatment for atopic dermatitis, which is estimated to have a $17 billion market opportunity by 2032, and for inflammatory bowel disease are expected next year, Schoenhaus said. Although the company’s market value has more than halved this year, analysts as a whole rate it as a buy. The average price target is $14.63, according to FactSet. That’s well above where AbCellera closed Wednesday, just pennies off its 52-week low of $2.69. “With a validated engine, a strong balance sheet, a maturation strategy focused on high-value strategic partnerships, and, most importantly in our view, a greater willingness to bring internal assets to larger value inflection points before partnering, we like the long-term setup of this name — particularly as we gain visibility into internal and partnered programs,” Piper Sandler analyst Allison Bratzel wrote in a late May research note. Relay Therapeutics Relay Therapeutics has focused on how proteins interact with other compounds, applying that strategy to targeted oncology and genetic diseases. The company said its Dynamo platform has helped reduce the time it takes to find drug candidates. For example, it said it took 18 months to target RLY-4008 for the treatment of biliary tract cancer, compared to an industry average of three to five years. “I would almost say Relay has shown us proof of concept at this point,” Goldman Sachs analyst Salveen Richter said in an interview. “They’ve really been able to take motion-based drug design and apply it to either improve existing targets or go beyond targets.” Still, ongoing work on its lead drug candidate, RLY-2608, is being closely watched because it will provide a commercial opportunity for Relay. An update on a phase 1b trial for 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 upgraded Relay’s stock to overweight, saying he believed the update on the RLY-2608 trial would show superior efficacy and safety. Lawson put the probability of positive data from the trial at 70%, expecting it to send the stock higher. But so far, shares are down 43% year to date, with some recent insider selling weighing on sentiment. RLAY 1Y has driven Relay Therapeutics stock higher over the past year. Wall Street, however, is unanimous in its view of Relay, with all analysts who cover it rating the stock a buy. Schrodinger Schrodinger’s computational platform takes a physics-based approach to help find better drug targets. The company licenses that software to other biopharmaceutical companies. More recently, it has begun working on developing its own pipeline and has collaborations with other companies, including Japan’s Takeda Pharmaceutical. By the end of this year or early next year, Schrodinger should be able to share phase 1 data on SGR-1505, an investigational MALT1 inhibitor to treat non-Hodgkin B-cell lymphoma. Data on its other drug candidate, SGR-2921, will follow. A phase 1 dose-escalation trial for a third drug, SGR-3515, is expected to begin in the current quarter. Like others in the sector, shares have struggled this year, falling 42%. SDGR 1Y Mountain Schrodinger stocks 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 the near-term volatility in software revenues [quarter to quarter] “With large customers transitioning from on-premises to hosted licenses (partly an accounting/timing impact), SDGR’s physics-based modeling software remains the most proven in its niche,” Foroohar wrote. He expects Schrodinger to benefit from an improved biotech funding environment that will likely occur next year. If that plays out and new customer growth returns to a healthy pace, Foroohar expects his price target to rise about $9. The stock could also surpass his target if the company’s collaborations or internal research yield positive results, he said. Some naysayers worry that Schrodinger could be hurt as the technology-based drug discovery industry becomes more crowded and big pharma companies like Amgen pursue their own in-house efforts, but Foroohar called that “unlikely.”
