As investors look to the future and envision which industries are poised to be reshaped and revitalized by artificial intelligence, new drug discovery is quickly emerging as the obvious choice. Every new drug that makes it to market is the product of billions of dollars of investment, and it often takes at least a decade to get there. The path to commercialization tends to be filled with costly trial and error in screening and selecting drug candidates. Only then are compounds put through a rigorous, years-long process known as clinical trials. In clinical trials, vast amounts of data are generated, processed, and submitted for review, all with no guarantee of success. Now, many in the field are hopeful that AI can help speed up this timeline by making one piece of the puzzle more efficient and effective. Analysts who have been tracking cutting-edge companies using generative AI for drug discovery say it's still very early days. But as more AI-assisted drugs make their way through companies' pipelines, excitement and investor interest are growing. Some tech investors looking for companies that will benefit from advances in AI are starting to turn to healthcare. KeyBanc Capital Markets analyst Scott Schoenhaus said Recursion Pharmaceuticals will report clinical results later this year, while AbCellera and Schrodinger expect data in the first half of next year. Schoenhaus said these events combined will help determine the valuation of the group's shares. So far, AI deals have favored the more direct beneficiaries, such as Nvidia, the maker of the processors that run the systems. But for investors who are willing to take the risk and believe AI will lead to more successful and cost-effective drug research and development, here are a few of the biggest companies in the space. Each has its own technology and a variety of business models. Recursion CEO Chris Gibson of Recursion Pharmaceuticals appeared on stage with Nvidia CEO Jensen Huang at an analyst conference on June 24, sparking discussion.The semiconductor company is not only helping to improve Recursion's computing power, it's also an investor, most recently holding a 3.4% stake, according to FactSet. Cathie Wood's ARK Investment Management is the largest institutional investor with a 10.7% stake. But even with all this support, Recursion's stock hasn't been able to pull itself out of a slump. The stock is down 26% since the start of the year. Recursion told analysts it plans to release seven clinical data sets over the next 18 months, including four phase 2 data sets. The news briefly delighted investors, but two days later, the stock plummeted when the company announced a secondary sale of shares to raise cash. Recursion's stock price over the past year. Leerink Partners analyst Mani Foroohar said in a research note that past clinical development delays have raised doubts about the company, leading to a “show me” story. “We struggle to find meaningful near-term catalysts that would negate these concerns and help validate Recursion's advantages in speed of drug development and probability of success,” Foroohar wrote. In other words, the importance of the clinical data Recursion reports is high because it helps support the claim that its tools save companies time and money. Recursion's first chance to prove itself will come in September, when data is expected to be released from a Phase 2 trial of REC-994, a treatment for cerebral cavernous hemangiomas (CCMs), which can lead to bleeding in the brain and spinal cord. There are about 360,000 symptomatic patients with CCMs in the U.S. and European Union, and the treatment has received orphan drug designation in both countries, according to KeyBanc's Schoenhaus. Needham analyst Gil Blum said the study's primary purpose is to evaluate safety, but it's also an opportunity to measure clinical benefit. Combined with other data released over the next 18 months, Recursion may be able to confirm the effectiveness of its platform. If the technology proves out, it could see bigger benefits from partners, including Bayer, who are now working with Recursion. The pharmaceutical company has become a beta user of Recursion's LOWE (Large Language Model-Orchestrated Workflow Engine), and the two companies are also partnering on oncology research. Blum also noted that Recursion owns Biohive-2, the fastest supercomputer in the biopharmaceutical industry. The data it collects creates a flywheel that leads to the creation of other models. “If this is an important area, and you think AI is going to be important in biology in the next five years, I don't think there's any other bet that makes sense,” Blum said in an interview. “Maybe in the private domain, not the public domain.” AbCellera AbCellera's strength is its vast amount of data on immune cells and antibodies, which it can scan to identify drug candidates. The database proved useful to partner Eli Lilly in finding the monoclonal antibody bamlanivimab as a treatment for COVID-19. Absela prioritizes collaborations, and its partners include oncology-focused Prelude Therapeutics and Incyte, as well as Biogen, which is working to find antibodies that can deliver drugs across the blood-brain barrier. ABCL 1Y mountain shared by Absela over the past year. Absela's internal research is still in the very early stages. One program, in metabolic and endocrine diseases, could lead to a first-in-class treatment, according to KeyBank's Schoenhaus. He expects an investigational new drug application to be submitted by early next year. Schoenhaus said applications for atopic dermatitis and inflammatory bowel disease, which have a $17 billion market opportunity by 2032, are expected next year. Although the company's market capitalization has fallen by more than half this year, analysts generally rate the company the equivalent of a buy. The average price target is $14.63, according to FactSet. That's well above Absela's 52-week low of $2.69, just a few cents above its Wednesday closing price. “We like the stock's long-term position given its proven engine, strong balance sheet, maturity strategy focused on high-value strategic alliances, and most importantly, its willingness to take its internal assets to greater value inflection points before partnering, especially as it gains more visibility into both its internal and partnered programs,” Piper Sandler analyst Allison Bratzel wrote in a research note in late May. Relay Therapeutics Relay Therapeutics focuses on how proteins interact with other compounds and applies this strategy to targeted oncology and genetic diseases. The company says its Dynamo platform has enabled it to reduce the time it takes to discover drug candidates. For example, the company says it took 18 months to develop targets for its cholangiocarcinoma drug RLY-4008, compared with the industry average of three to five years. “It's fair to say Relay has demonstrated 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 improving existing targets or pursuing targets.” Still, the study of the front-runner drug, RLY-2608, is attracting attention because it offers commercial opportunities for Relay. An update on the Phase 1b trial of RLY-2608, which treats a type of breast cancer, is expected in the fourth quarter of this year. Relay has also suggested that RLY-2608 may have benefits beyond this type of breast cancer. In May, Barclays analyst Peter Lawson upgraded Relay shares to overweight, saying an update on the RLY-2608 trial would show good efficacy and safety. Lawson estimates a 70% chance of positive data from the trial, which he expects will drive the stock higher. But for now, the stock is down 43% year to date, with recent insider selling weighing on sentiment. RLAY 1Y Mountain Relay Therapeutics shares have risen over the past year. However, Wall Street is unanimous in its view of Relay, with all analysts covering the company recommending the stock as a buy. Schrödinger Schrödinger's computational platform takes a physics-focused approach to help discover better drug targets. The company licenses the software to other biopharmaceutical companies. More recently, it has begun developing its own pipeline and has partnered with other companies, including Japan's Takeda Pharmaceutical. By late this year or early next, Schrödinger expects to be able to share Phase 1 data for its experimental MALT1 inhibitor SGR-1505, a treatment for non-Hodgkin's B-cell lymphoma. A Phase 1 dose-escalation trial of a third drug, SGR-3515, is expected to begin this quarter. Like other companies in the space, the stock has struggled, down 42% this year. SDGR 1Y Mountain Schrödinger Stock Over the Past Year. Last Tuesday, Leerink's Foroohar initiated coverage of the stock with an outperform rating and a $29 price target.That suggests a 44% upside from Wednesday's closing price. “Despite short-term fluctuations in software revenues [quarter to quarter] “SDGR's physics-based modeling software remains the most proven in its niche, due in part to the shift of large customers from on-premise to hosted licenses (some accounting/timing effects),” Foroohar wrote. He expects Schrödinger to benefit from an improving biotech financing environment, which will likely occur next year. If that happens and new customer growth returns to a high-teens pace, Foroohar sees an upside of about $9 from his target price. He also said the stock could surpass its target if the company's collaborations and in-house research produce favorable results. Some critics worry that the technology-enabled drug discovery industry will become crowded and Schrödinger will be hurt by big pharma companies like Amgen pursuing their own in-house efforts, but Foroohar said that's “unlikely.”
