2023-09-21 10:00:00 ET
Summary
- Recursion Pharmaceuticals' Q2 revenue rose 43% to $11.0M, boosted by Roche-Genentech partnership, but R&D expenses spiked, widening net loss to $76.7M.
- Strong liquidity position with $455.9M in cash, but concerning cash burn rate of $23.5M/month; 19-month cash runway post-NVIDIA's $50M investment.
- Investment recommendation: Rate as "Buy" due to promising TechBio pipeline and strategic partnerships, but monitor cash burn and upcoming clinical trial data closely.
At a Glance
Recursion Pharmaceuticals ( RXRX ) is carving out a vanguard role in TechBio by synergizing wet-lab biology with advanced computational tools. The firm's Q2 earnings revealed a dual narrative: impressive YoY revenue growth of 43% to $11.0M, buoyed by its Roche-Genentech ( RHHBY ) partnership, yet offset by escalating R&D expenses, pushing net losses to $76.7M. Meanwhile, a cash runway of about 19 months, bolstered by NVIDIA's ( NVDA ) recent $50M investment , indicates a robust but closely watched liquidity position. While Recursion's diverse clinical pipeline and alliances with industry heavyweights signify a multidimensional growth strategy, the increasing cash burn rate and looming commercialization challenges warrant investor vigilance.
Earnings Report
To begin my analysis, looking at Recursion's most recent earnings report for Q2 2023, a noteworthy point is the 43% YoY growth in revenue to $11.0M, largely attributed to advancements in the Roche-Genentech collaboration. This suggests potential maturation in their collaborative pipeline, signifying a strong research partnership. However, R&D expenses escalated significantly to $55.1M, a 43.5% uptick from Q2 2022, chiefly due to platform augmentation efforts. Concurrently, G&A expenses rose by 33.5% to $28.3M, attributed to $3.0M in additional salaries and depreciation costs. The widening net loss of $76.7M, up from last year's $65.6M, indicates an aggressive investment in capabilities
Financial Health & Liquidity
Turning to Recursion's balance sheet , the company reported $405.9M in cash and cash equivalents as of June 30, 2023. Adding the recent $50M investment from NVIDIA elevates the total liquid assets to $455.9M. Over the last six months, the net cash used in operating activities was $140.8M, translating to a monthly cash burn rate of approximately $23.5M. Incorporating the NVIDIA investment, the recalculated cash runway now stands at about 19 months ($455.9M / $23.5M per month). Bear in mind that these calculations are predicated on historical data and might not be reflective of future performance.
The liquidity position seems relatively robust with the NVIDIA investment, taking total liquid assets to $455.9M against current liabilities of $113.9M. However, the rate of cash depletion remains a concern, given the substantial outflow in H1 2023. Debt, albeit modest, adds another layer of financial commitment, with notes payable of $676,000 in current and $1.2M in non-current liabilities. The NVIDIA investment surely provides some breathing room, but if the cash burn continues at the current rate, additional capital sourcing strategies may need to be considered. These are my personal observations, and other analysts might interpret the data differently.
Capital, Growth, Momentum, & Ownership
According to Seeking Alpha data, Recursion's capital structure suggests adequate liquidity with substantial cash reserves, but the rate of cash burn raises questions about the longer-term viability without additional capital infusions. The market cap of $1.82B and low debt levels indicate moderate leverage, offering financial flexibility but increasing equity dilution risk. Growth prospects are mixed; robust YoY revenue growth is promising, but analysts project a significant revenue decline by 2025, perhaps reflecting both the uncertain revenue associated with partnerships and Recursion being a few years away from commercialization. Stock momentum has underperformed SPY in the 1-year frame but has shown resilience in shorter intervals.
Ownership is predominantly institutional (64.72%), including heavyweights such as ARK, Vanguard, and BlackRock, which lends credibility but also heightens sensitivity to broader market trends and analyst sentiments. The presence of sovereign wealth and PE/VC firms could imply long-term confidence in the technology and potential strategic moves.
Crunching Data, Curing Diseases: Recursion's Game Plan
As AI continues to revolutionize the biopharmaceutical industry, Recursion is at the forefront, poised to lead in the integration of computational power into drug discovery and development. The company's diversified pipeline , ranging from Cerebral Cavernous Malformation to ovarian cancer, showcases its commitment to tackling complex health challenges. Key late-stage candidates like REC-994 and REC-2282 are in well-designed Phase 2/3 trials, and their results, expected in H2 2024, could provide pivotal evidence of the company's AI-augmented approach to drug discovery. Their early-stage candidates are also making steady progress, with safety and tolerability largely established.
Partnerships amplify Recursion's strengths. The recent $50M investment and collaboration with NVIDIA not only bolsters the company's financials but also its technical arsenal. With NVIDIA’s computational resources, Recursion has conducted massive ligand-protein interaction analyses, screening approximately 36 billion compounds. These strategic partnerships with computational giants like NVIDIA, and pharmaceutical leaders like Roche-Genentech and Bayer, indicate a well-balanced approach to innovation and commercial viability.
The blend of a strong pipeline, robust partnerships, and a focus on AI-driven research makes Recursion well-suited to lead in this burgeoning arena. However, the proof will lie in the successful transition from clinical to commercial stages for its lead candidates, an often challenging leap that has stymied many promising biotechs.
My Analysis & Recommendation
In conclusion, Recursion Pharmaceuticals' role as a vanguard in the TechBio sector cannot be overstated. The AI-led mechanism bypasses traditional drug development bottlenecks like errant target selection, allowing for unprecedented scale and speed in preclinical assessments. Herein lies the true potential of AI in drug discovery; the capability to analyze vast datasets at an extraordinary pace, thereby shortening the drug discovery timeline. That's not just hype—it's a quantum leap in capabilities. And let's not underestimate the value of Recursion's partnerships with NVIDIA and Roche-Genentech; these alliances could expedite the development of therapeutics and secure lucrative revenue streams. For instance, the NVIDIA partnership is about more than just funding—it's a computational muscle that enhances Recursion's algorithmic potency.
Yet, a word of caution is necessary: this is early innings for Recursion. Even with a promising pipeline and burgeoning revenues from collaborations, we are essentially placing bets on the conversion of clinical success into commercial triumph. Investors should pay keen attention to the initiation of new clinical studies, especially randomized controlled trials, and any updates on strategic partnerships. While the cash position seems robust, the cash burn rate is a red flag; liquidity can evaporate quickly in biotech. Efficacy data from lead candidates in the next year could be a watershed moment, either validating the firm's AI-driven approach or leading to questions about its execution.
As for an investment recommendation, given the early but promising trajectory of Recursion, the robustness of its proprietary technology, and the immediate financial cushion provided by its partnerships, I would rate the stock as a "Buy" at this time. However, investors should maintain a prudent eye on the company's rate of cash burn, upcoming clinical trial data, and potential new collaborations. This is not a stock for the risk-averse, but for those comfortable with the inherent volatilities and vast opportunities of biotech, Recursion offers a compelling case for long-term value creation.
Risks to Thesis
While my final recommendation is a "Buy," there are some potential oversights and biases to consider:
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Market Adoption: I may be overestimating the speed at which Recursion's technology will be adopted in the healthcare ecosystem. Even if it's a game-changer, incumbents might resist change.
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Partnership Erosion: Recursion's value is partly predicated on its partnerships. Any disengagement from major partners like NVIDIA or Roche-Genentech could impact its value proposition and revenue streams.
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Clinical-to-Commercial Transition: There's a tendency to focus on clinical results while underestimating the hurdles in commercial scaling, including manufacturing, sales, and reimbursement complexities.
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Regulatory Risks: I've not emphasized potential FDA setbacks or new compliance requirements that can derail timelines and increase costs.
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Data Security: As a data-heavy enterprise, the risk of data breaches could jeopardize both operations and reputation.
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Overvalued Capabilities: We could be mistaking computational efficiency for clinical efficacy. The algorithm's prowess doesn't necessarily translate to marketable drugs.
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Short-term Resilience vs Long-term Lag: While the stock has shown short-term resilience, it's underperformed in longer time frames, indicating possible overemphasis on near-term catalysts.
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Investor Composition: The high institutional ownership might make the stock more sensitive to market trends, an aspect that hasn't been deeply analyzed.
For further details see:
Recursion Pharmaceuticals: Wet Lab Meets Silicon, A Tale Of Two Bottom Lines