#426: Recursion And Exscientia Are Merging To Form An AI-Enabled Drug Discovery Powerhouse, & More

Last week, Recursion and Exscientia agreed¹ to a merger that we believe is a visionary step forward in the AI-driven transformation of drug discovery. Uniting Recursion's pioneering biological exploration capabilities with Exscientia's AI precision chemistry, the partnership could catapult the biopharma industry into a new way of discovering and developing medicines.

Like Facebook’s acquisition of Instagram and Google’s acquisition of YouTube, the Recursion/Exscientia merger should be transformative. Importantly, the merged company will harness AI to integrate biological data with precision-designed chemistry, accelerating the journey from discovery to clinical development with lower costs and shortened timelines.

The financial ramifications of this merger are compelling. With a well-capitalized balance sheet including $850 million in cash and cash equivalents, the combined entity is positioned to invest aggressively in an innovative pipeline targeting oncology, rare diseases, and infectious diseases with potentially ten clinical readouts during the next 18 months.

The merger also involves partnerships that could unlock more than $200 million in near-term milestone payments, as well as ~$20 billion in long-term revenue potential before royalties.² Given the expertise of Recursion and Exscientia, we believe those partnerships could usher in a new era in which AI-driven drug discovery first complements and then surpasses traditional discovery methods.

Last Monday, US investors awoke not only to a 12% plunge³ in Japan’s Nikkei equity index, raising the probability of a global recession, but also to concerning rumors that a substantial unwinding of the carry trade between Japanese and US interest rates was wreaking havoc across markets. Digital assets sold off heavily in response, both bitcoin and ether dropping more than 20% from Sunday through Monday. Across centralized and decentralized venues, more than $1 billion in futures⁴ liquidated, including $340 million in ether and $420 million in bitcoin.

While large drawdowns in crypto asset prices are common during bull cycles, on-chain data during this one sent signals that something other than normal volatility might be at work. Jump Crypto unwound a staked ether position totaling more than $315 million⁵ and sent it to exchanges. Why sell during a period of heightened volatility, market fear, and price swoons? In our view, Jump’s actions seemed to convey an emergency. Given its involvement with the TerraLuna crash,⁶ the Wormhole hack,⁷ the FTX debacle,⁸ and rumors of a CFTC⁹ investigation, followed by its CEO’s departure in late June, many investors already had been questioning the health of Jump Crypto.

The crypto community is quite familiar with the dangers of carry trades. In the last two and a half years, several companies—3AC, Celsius, BlockFi, and Genesis—went bankrupt after leveraging carry trades involving the Grayscale Bitcoin Trust (GBTC) and the Grayscale Ethereum Trust. In those trades, companies subscribed to GBTC at net asset value (NAV) by purchasing new shares with a six-month lockup from Grayscale, anticipating that the shares would continue to trade at a premium once they could sell them on the open market. To amplify the expected gains, the companies leveraged the trade by borrowing bitcoin and rehypothecating positions.

While no clear evidence exists that the recent on-chain transactions and market selling are related to the Japanese carry trade, hedge funds and algorithmic trading firms typically operate with highly leveraged balance sheets that could cause counterparty risk for companies operating in the crypto space. Although the Bitcoin blockchain is not subject to counterparty risk, when Japan started trading last Sunday, bitcoin and other crypto currencies may have been the most liquid ways to satisfy margin calls associated the unwinding carry trade on a 24/7 basis. As a result, we were not surprised to see their rapid rebound during the balance of the week.

Informed by Wright’s Law, ARK’s research indicates that, with the exception of WWII, US electricity prices fell consistently from the late 1800s until 1974, as shown below.

Source: ARK Investment Management LLC, 2024, based on data from U.S. Energy Information Administration 2024a, 2024b; Smil 2000; and Potter 2023.¹⁰

What happened in 1974? The 1974 Energy Reorganization Act split the Atomic Energy Commission into the Nuclear Regulatory Commission and the Energy Research and Development Administration. More than a coincidence, in our view, nuclear energy cost declines reversed, as shown below. After the 1974 Energy Reorganization Act, nuclear costs turned up, preventing a further decline in electricity prices.

Source: ARK Investment Management LLC, 2024, based on data from Lovering et al. 2016; IAEA 2023; EIA 2022; and World Nuclear News 2022 as of October 2023.¹¹ For informational purposes only and should not be considered investment advice or a recommendation to buy, sell, or hold any particular security.

Now that small modular reactors are limiting the risks associated with large-scale nuclear energy projects, if regulators were to shift from hindering nuclear development to supporting it, then overnight construction costs could drop from ~$10,000 per kW hour today back to and below the ~$1,000 achieved during the early 1970s.

If so, the capital costs associated with nuclear would be comparable to those associated with utility solar and wind today. That said, the higher utilization rate of nuclear compared to intermittent energy sources like solar and wind could lead to much lower baseload power costs—an exciting opportunity.

Now that nuclear energy is regaining support from regulators and environmentalists, execution risk—particularly cost overruns—is likely to be the primary concern for capital allocators during the years ahead.