Recursion Pharmaceuticals, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. The company is a clinical-stage TechBio drug-discovery business with no approved products or product-sale revenue; operating revenue primarily comes from research and development collaborations.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $11.0 million | $7.7 million | $23.2 million | $13.0 million |
| Operating costs and expenses | $92.7 million | $73.9 million | $174.7 million | $135.2 million |
| Operating loss | $81.7 million | $66.2 million | $151.6 million | $122.2 million |
| Net loss | $76.7 million | $65.6 million | $142.1 million | $121.5 million |
| Net loss per share, basic and diluted | $0.38 | $0.38 | $0.71 | $0.71 |
Q2 gross profit, calculated as revenue less cost of revenue, was approximately $1.6 million (15% gross margin), versus a $6.6 million gross loss in Q2 2022. For the first half, gross profit was approximately $1.3 million (6% margin), versus a $9.0 million gross loss in the prior-year period.
- Revenue growth: Operating revenue rose 44% in Q2 and 79% for the first half, primarily as the Roche collaboration progressed to Phenomap-building work and additional cell-type evaluation.
- Expense growth: R&D increased 43% in Q2 and 44% for the first half, led by platform investment, including chemical technology, machine learning and transcriptomics. G&A increased 33% and 21%, respectively, reflecting higher salaries, software and depreciation.
- Cash and liquidity: Cash and cash equivalents were $405.9 million at June 30, down from $549.9 million at year-end 2022. Current assets were $431.0 million and current liabilities $114.0 million. Management said cash and cash equivalents should fund operating expenses and capital expenditures for at least 12 months.
- Cash flow: First-half operating cash use was $140.8 million, versus $15.8 million provided in the prior-year period. The comparison was affected by the $150 million Roche upfront payment received in first-half 2022. Investing cash use was $7.4 million; financing cash provided was $5.7 million.
- Debt and obligations: Notes payable totaled $1.8 million. Operating lease liabilities were $51.1 million. Unearned revenue totaled $105.5 million, including $73.1 million current.
- Other income: Net other income was $5.0 million in Q2 and $9.5 million for the first half, mainly interest earned on cash and money-market funds.
Material changes and developments
- In May, Recursion acquired Valence Discovery and Cyclica to expand digital chemistry and AI capabilities. Aggregate consideration was approximately $105.9 million, primarily equity, with cash consideration for Cyclica. The acquisitions added $59.7 million of goodwill; purchase price allocations remained preliminary.
- Shares outstanding increased to 206.7 million at June 30 from 191.0 million at December 31, 2022, including shares issued in the acquisitions. Potentially dilutive awards are excluded from reported diluted loss per share because the company reported a loss.
- After quarter-end, Recursion sold 7.7 million Class A shares to NVIDIA for approximately $50 million gross proceeds. On August 8, it established an at-the-market program allowing up to $300 million of additional share sales; the filing said no ATM sales had occurred.
Outlook, commentary and risks
- Clinical milestones: REC-994’s Phase 2 CCM study was fully enrolled; proof-of-concept data were expected in H2 2024. REC-2282 Phase 2 data were expected in H2 2024. REC-4881 FAP Phase 2 data were expected in H1 2025; its Phase 2 study for AXIN1/APC-mutant cancers was expected to start in Q4 2023. REC-3964 Phase 1 safety and pharmacokinetic data were expected in Q3 2023.
- The company expects continuing substantial losses and anticipates needing additional financing. It does not expect significant product revenue until successful development milestones, which it expects will take years. Access to future capital is not assured.
- Management cited ongoing investment in its platform and pipeline, and described the NVIDIA collaboration as supporting foundation-model development and access to computing resources. These are forward-looking plans, not guaranteed outcomes.
- Legal contingency: A landlord sued Recursion in June 2023 over a laboratory and office lease, alleging anticipatory repudiation and breach of contract. The company filed a motion to dismiss in July; it said it could not estimate possible damages and had recorded no liability because an unfavorable outcome was not considered probable.
- Other disclosed risks include clinical and regulatory uncertainty, acquisition integration and synergy execution, future financing and dilution, inflation and market volatility, and increased exposure to Canadian-dollar currency movements following the acquisitions. The company has no formal foreign-currency hedging program.
Investor verification priorities
- Track cash burn against management’s at-least-12-month liquidity estimate, including the impact of the July NVIDIA proceeds and any ATM share sales.
- Monitor R&D and platform spending, collaboration revenue recognition, and whether Roche or Bayer options or milestones produce additional payments.
- Verify progress and timing of the stated clinical data readouts and study starts; these are expectations, not assurances.
- Review final acquisition purchase-price allocations, integration costs, and evidence that the acquired platforms deliver expected benefits.
- Follow the landlord litigation and any subsequent change in the company’s assessment of potential loss.
- Assess dilution from acquisition shares, equity compensation and any future equity issuance, including the ATM program.