RECURSION PHARMACEUTICALS, INC. quarterly report, Q1 FY2022

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Recursion Pharmaceuticals, Inc. — Q1 2022 Form 10-Q

Reporting period: Three months ended March 31, 2022; unaudited. Recursion is a clinical-stage biotechnology company developing medicines through a data- and technology-driven drug-discovery platform. It has no products approved for sale and does not expect significant product revenue for several years.

Financial performance and position

  • Revenue: $5.3 million, versus $2.6 million in Q1 2021. Operating revenue was $5.3 million and grant revenue was $34,000. Revenue was primarily from collaboration agreements, not product sales.
  • Operating costs and losses: Cost of revenue was $7.8 million; research and development was $32.4 million; general and administrative expense was $21.1 million. Operating loss was $56.0 million and net loss was $56.0 million, compared with net loss of $30.7 million a year earlier. Basic and diluted loss per share was $0.33, versus $1.33.
  • Margins: The company reported an operating loss; the filing does not present a margin measure. Given the company’s development-stage, collaboration-based revenue, revenue and loss figures are more informative than a conventional product margin.
  • Cash and liquidity: Cash, cash equivalents and investments totaled $591.1 million at March 31, 2022, up from $516.6 million at December 31, 2021. Cash and cash equivalents were $507.9 million, and short-term investments were $83.2 million. Management expects these resources to fund operations and capital expenditures for at least 12 months.
  • Cash flow: Operating activities provided $77.4 million, versus $30.8 million used in Q1 2021. The 2022 inflow was largely driven by the $150.0 million Roche upfront payment and associated unearned revenue, rather than recurring operating profitability. Investing activities provided $143.3 million, mainly from investment sales and maturities; financing activities provided $2.1 million.
  • Debt and obligations: Notes payable totaled approximately $0.7 million. Operating lease liabilities were $51.4 million. Unearned revenue was $161.4 million, including the Roche upfront payment; this is a contract liability, not borrowing.

Changes versus Q1 2021

  • Revenue increased $2.8 million, primarily reflecting the Roche collaboration that began in January 2022. The company also recorded $7.8 million of cost of revenue, principally related to strategic partnerships; comparable 2021 costs were immaterial and included in R&D.
  • R&D expense increased 34.6% to $32.4 million, as clinical and discovery spending rose; the company cited $9.6 million of partnership-related materials capitalized on the balance sheet as an offset to platform costs.
  • General and administrative expense more than doubled to $21.1 million, reflecting operating growth, including higher salaries, facilities, IT and security costs.
  • Net loss widened to $56.0 million from $30.7 million. Per-share loss decreased, but weighted-average shares rose to 170.7 million from 23.0 million, reflecting the post-IPO capital structure.

Outlook, developments and risks

  • Management expects substantial future operating losses and says additional financing will likely be required. The company cautions that future capital may not be available on acceptable terms or at all.
  • Clinical milestones cited include REC-994’s Phase 2 SYCAMORE trial, which enrolled its first participant in March 2022; planned Q2 2022 first enrollment in the Phase 2/3 POPLAR-NF2 study; and a planned Q3 2022 Phase 2 start for REC-4881. The FDA granted REC-4881 Fast Track designation in April 2022. REC-3964’s Phase 1 study was planned for the second half of 2022.
  • The Roche/Genentech collaboration includes a $150.0 million upfront payment received in January 2022 and potential additional fees, milestones and royalties subject to performance and future events. The filing recognizes the upfront payment over time as research services are performed; estimated completion is 2025. Bayer collaboration work also continued.
  • The company identifies clinical-trial outcomes, regulatory requirements, dependence on collaborators and third parties, financing needs, and the uncertain timing of future revenue as important risks. It reported no material litigation and no material changes to previously disclosed risk factors.
  • Effective January 1, 2022, the company adopted lease accounting standard ASC 842, recognizing lease right-of-use assets and liabilities. A Toronto office lease signed in May 2022 is a subsequent event; fixed payments are expected to total approximately $10.9 million over its 10-year term.

Important facts for investors to verify

  1. Whether collaboration revenue recognition and estimates of remaining research costs, particularly for Roche, change in subsequent quarters.
  2. Clinical enrollment, safety, efficacy and timing against the company’s stated program plans.
  3. Cash burn excluding upfront collaboration receipts, and whether the stated liquidity runway remains adequate as losses and development spending increase.
  4. How the $9.6 million of partnership-related materials capitalized on the balance sheet is accounted for and recognized in future periods.
  5. The impact of lease commitments and the company’s continuing need for future financing; also note that Class B shares held by the CEO and affiliate represented approximately 35% of voting power at quarter-end.