Investors may be familiar with more prominent drug developers, but this small-cap biotech shouldn’t be overlooked.
The inefficiency of drug development is well documented, but let’s put some numbers on it.
Less than 8% of drug candidates that enter Phase 1 clinical trials earn regulatory approval. That suggests companies are doing a poor job tackling the complexity of biology.
Indeed, a survey published in Nature 2016 found that more than 80% of chemists and biologists couldn’t reproduce the results from peer-reviewed papers – generally accepted as the gold standard of scientific research. Worse yet, the survey reported 60% of biologists couldn’t reproduce their own results.
This woeful inefficiency explains why the industry in recent years has cozied up to artificial intelligence. Drug developers hope that computational models and simulations can identify, as quickly as possible, when experimental therapies are likely to fail. Finding chemical compounds with the best odds of success early in drug discovery would help, too.
If they’re right, they might be able to reduce time to market by years and save hundreds of millions of dollars.
Although many of the world’s largest drugmakers are deploying AI internally, they’re increasingly partnering with an emerging crop of compute-first companies.
Investors are likely more familiar with Schrodinger (SDGR) – Get Schrodinger Inc. Report and Recursion Pharmaceuticals (RXRX) – Get Recursion Pharmaceuticals Inc. Report thanks to their inclusion in popular ETFs.
But Exscientia (EXAI) may be better positioned for long-term success.
Using AI to Improve Drug Development
Exscientia was the first company to advance to clinical trials a drug candidate that was designed with artificial intelligence.
Meanwhile, it developed computational models that have demonstrated the ability to optimize cancer treatments for individual patients – also a first.
The U.K. drug developer has built an end-to-end platform that combines experimental data generated in the lab with computational models refined by its scientists.
The novel approach is embodied in the company’s workforce, with 45% of employees in software and 42% in drug discovery.
How does it work? First, Exscientia takes aim at a molecular target responsible for driving a disease. Then, scientists pore over billions of chemical compounds that may have activity against the target and exude acceptable drug-like properties, such as the ability to be excreted by the body or not damage healthy cells.
After they’ve identified promising discovery candidates, the drug candidates are tested in an automated lab run by robots and overseen by nerds in lab coats.
The overall process increases the chances the company finds a successful drug candidate out of billions of possible options, increases reproducibility of the research, reduces preclinical research time frames, and significantly reduces costs.
What does all that mean for investors? Well, a preclinical asset from Exscientia could be worth almost seven times (593%) the industry average, according to one estimate. That could translate into a durable premium for shares of the technology-enabled drug developer compared with more traditional peers.
Can Exscientia Stock Earn a Higher Valuation?
A precommercial drug developer doesn’t have recurring revenue, let alone earnings. That means investors must estimate the net present value of a pipeline – and that’s hardly an exact science.
But reducing failure rates in drug development can significantly increase the calculated total. Exscientia has shared a study showing it could boost the net present value of preclinical assets to $74.2 million from $10.7 million, on average, if the technology platform improves the efficiency of drug development by 5% in each stage of R&D.
Wall Street is still taking a wait-and-see approach with Exscientia. That’s not a bad idea. After all, it can be difficult to separate legitimate advances in artificial intelligence from hype, especially in the early days of technology-enabled drug development.
The small-cap biotech will likely need to deliver multiple successes over the coming years to prove its approach isn’t a fluke.
Luckily, the platform is well positioned to provide markets with an answer. Exscientia held $720 million in cash, had 33 active programs, and 12 drug development collaborations at the end of March 2022. The business earned another $100 million payment after the quarter ended from Sanofi, (SNY) – Get Sanofi Report which tapped the U.K. innovator for a massive partnership.
For now, investors can keep an eye on this under-the-radar biotech stock. If artificial intelligence proves successful in increasing the efficiency of drug development, then Exscientia will likely be one of the companies leading the charge.