Recursion Pharmaceuticals, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Unaudited results; financial amounts below are in millions of dollars unless noted.
Business context
Recursion is a clinical-stage biotechnology company using automation, machine learning and biological datasets to discover medicines. It had no approved products or product-sales revenue. Revenue came from research and development collaborations and grants. At quarter-end, its platform encompassed more than 146 million phenomic experiments, over 16 petabytes of data and 2.4 trillion biological and chemical relationships.
Financial results and liquidity
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Total revenue | $7.7 | $2.5 | $13.0 | $5.1 |
| Operating revenue | $7.7 | $2.5 | $13.0 | $5.0 |
| Cost of revenue | $14.2 | — | $22.0 | — |
| Research and development | $38.4 | $29.6 | $70.9 | $53.7 |
| General and administrative | $21.2 | $13.9 | $42.3 | $22.8 |
| Operating loss | $(66.2) | $(40.9) | $(122.2) | $(71.4) |
| Net loss | $(65.6) | $(43.4) | $(121.5) | $(74.1) |
| Basic and diluted loss per share | $(0.38) | $(0.31) | $(0.71) | $(0.91) |
- Cash and investments: $515.4 at June 30, 2022, excluding restricted cash, compared with $516.6 at December 31, 2021. The balance sheet reported $453.9 cash and cash equivalents and $61.6 investments.
- Cash flow, first half: Operating activities provided $15.8, versus $64.4 used in the prior-year period; investing activities provided $148.2, primarily from $169.1 of investment sales and maturities; financing activities provided $4.8. Net increase in cash, cash equivalents and restricted cash was $168.8.
- The operating cash inflow included a $150.0 Roche upfront payment recorded as unearned revenue. It should not be read as evidence that recurring operations were cash-generative.
- Balance sheet: Total assets were $672.5, total liabilities $234.9 and stockholders’ equity $437.6. Notes payable totaled $0.7; operating lease liabilities totaled $53.0. Unearned revenue was $153.7, including $150.0 associated with Roche.
- The company reported an accumulated deficit of $521.6. No income tax expense was recorded.
Changes versus prior comparable periods
- First-half revenue increased to $13.0 from $5.1, primarily as revenue recognition began under the Roche collaboration. The company received the collaboration’s $150.0 non-refundable upfront payment in January; the payment was largely recorded as unearned revenue rather than current-period revenue.
- Cost of revenue was $22.0 in the first half, compared with none reported in 2021, reflecting partnership work. Research and development increased 31.9% and general and administrative expense increased 85.5% year over year.
- First-half net loss widened to $121.5 from $74.1. The prior-year comparison included IPO-related effects on share count; loss per share was $(0.71), compared with $(0.91) in the first half of 2021.
- Other income improved to $0.6 for the first half from a $2.7 loss, reflecting higher interest income and lower interest expense after repayment of the Midcap loan in 2021.
- Cash and investments were broadly stable versus year-end despite continuing losses. The company adopted lease accounting Topic 842 on January 1, 2022, recognizing lease right-of-use assets and liabilities; prior-period figures were not restated.
Outlook, developments and risks
- Management stated that existing cash, cash equivalents and investments were expected to fund operations and capital expenditures for at least the next 12 months. It also expects substantial future operating losses, anticipates needing additional financing, and cautioned that financing may not be available on acceptable terms or at all.
- Management expects no significant product revenue for at least several years and expects expenses and operating losses to increase as it advances the platform, pipeline, clinical development and infrastructure.
- Pipeline: REC-994 Phase 2 SYCAMORE and REC-2282 Phase 2/3 POPLAR trials were enrolling. REC-4881 Phase 2 was targeted to start in Q3 2022; it received FDA Fast Track and European Commission Orphan Drug designations. REC-3964 was progressing through IND-enabling work, with a Phase 1 study targeted for the second half of 2022. These are management plans, not reported outcomes.
- Collaborations: Roche/Genentech’s collaboration covers gastrointestinal oncology and neuroscience, with potential additional fees, milestones and royalties contingent on work, options and development or commercial success. Bayer’s fibrosis collaboration continued. Future contingent payments are not assured.
- Unusual items: A $2.8 fixed-asset impairment was recorded in Q2 after the company decided not to use certain leasehold improvements. Operating cash flow benefited materially from Roche’s upfront payment. The investment portfolio had unrealized losses primarily related to interest-rate movements, with no impairment recorded.
- Risks: Clinical and regulatory outcomes, dependence on collaborations and third parties, future financing needs, rising costs including inflation, and the possibility that additional capital cannot be raised. Class B shares held by the CEO and affiliates represented about 33% of voting power at June 30. Management reported disclosure controls effective and no material change in internal control during the quarter; the company also described public-company compliance and emerging-growth-company risks.
Important facts for investors to verify
- Whether reported collaboration revenue, future fees and milestones translate into cash receipts on the expected schedule; distinguish recognized revenue from the substantial unearned-revenue balance.
- Cash runway under actual operating and capital-spending trends, particularly given continuing losses and management’s stated future financing need.
- Enrollment, timing and eventual safety and efficacy results for the clinical programs, and whether stated trial-start targets were achieved.
- How partnership service costs, clinical spending, hiring and infrastructure investment affect margins and the pace of cash use.
- Potential dilution from equity awards and the effect of the dual-class voting structure on stockholder influence.