RECURSION PHARMACEUTICALS, INC. The following is a discussion and analysis of the financial condition ofRecursion Pharmaceuticals, Inc. (Recursion, the Company, we, us or our) and the results of operations. This commentary should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and accompanying notes appearing in Item 1, "Financial Statements" and the Company's audited consolidated financial statements and accompanying notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in the Annual Report on Form 10-K. This discussion, particularly information with respect to our future results of operations or financial condition, business strategy and plans and objectives of management for future operations, includes forward-looking statements that involve risks and uncertainties as described under the heading "Note About Forward-Looking Statements" in this Quarterly Report on Form 10-Q. You should review the disclosure under the heading "Risk Factors" in the Annual Report on Form 10-K for a discussion of important factors that could cause our actual results to differ materially from those anticipated in these forward-looking statements.
Overview
We are a clinical-stage biotechnology company industrializing drug discovery by decoding biology. Central to our mission is the Recursion Operating System (OS), a platform built across diverse technologies that enables us to map and navigate hundreds of billions of biological and chemical relationships within one of the world's largest proprietary biological and chemical datasets, the Recursion Data Universe. Scaled 'wet-lab' biology and chemistry tools are organized into an iterative loop with 'dry-lab' computational tools to rapidly translate map-based hypotheses into validated insights and novel chemistry, unconstrained by published literature or human bias. Our focus on novel technologies spanning target discovery through translation, as well as our ability to rapidly iterate between wet lab and dry lab in-house and at scale, differentiates us from other companies in our space. Further, our balanced team of life scientists and computational and technical experts creates an environment where empirical data, statistical rigor and creative thinking are brought to bear on our decisions. To date, we have leveraged our Recursion OS to enable three value drivers: i) an expansive pipeline of internally-developed programs, including several clinical-stage assets, focused on genetically-driven rare diseases and oncology with significant unmet need and market opportunities, in some cases expected to be in excess of$1.0 billion in annual sales; ii) strategic partnerships with leading biopharma companies to map and navigate intractable areas of biology, including fibrosis with Bayer and neuroscience with Roche andGenentech , to identify novel targets and translate potential new medicines to resource-heavy clinical development overseen by our partners; and iii)Induction Labs , a growth engine created to explore new extensions of the Recursion OS both within and beyond therapeutics. We are a biotechnology company scaling more like a technology company. [[Image Removed: rxrx-20220331_g1.jpg]] Recursion finished the first quarter of 2022 with a portfolio of clinical stage, preclinical, late discovery and early discovery programs and continued scaling the total number of phenomic experiments to approximately 128 million, the size of its proprietary data universe to over 14 petabytes, and the number of biological and chemical relationships to approximately 247 billion. Data have been generated on the Recursion OS across 44 human cell types, an in-house chemical library of approximately 1.3 million compounds, and an in silico library of 12 billion 20 -------------------------------------------------------------------------------- Table of Content s small molecules, by a growing team of over 450 Recursionauts that is balanced between life scientists and computational and technical experts. [[Image Removed: rxrx-20220331_g2.jpg]]
Summary of Business Highlights
Clinical Programs
•Cerebral cavernous malformation (CCM) (REC-994): InMarch 2022 , we enrolled the first participant in our Phase 2 SYCAMORE clinical trial, which is a double-blind, placebo-controlled safety, tolerability and exploratory efficacy study of this drug candidate in 60 participants with CCM. At this time, multiple participants have been enrolled and dosed. •Neurofibromatosis type 2 (NF2) (REC-2282): We plan to enroll the first participant in our Phase 2/3 POPLAR-NF2 clinical trial, which is a parallel group, two stage, randomized, multicenter study of this drug candidate in participants with progressive NF2-mutated meningiomas, in the second quarter of 2022. •Familial adenomatous polyposis (FAP) (REC-4881): InApril 2022 , theU.S. Food and Drug Administration granted Fast Track designation for REC-4881 for the potential treatment of FAP. We plan to initiate a Phase 2, randomized, double-blind, placebo-controlled study to evaluate safety, pharmacokinetics and efficacy of this drug candidate in the third quarter of 2022.
Preclinical and Discovery Programs
•Clostridium difficile colitis (REC-3964): We made progress in IND-enabling studies for REC-3964 and plan to initiate a Phase 1 study in the second half of 2022. •Oncology pipeline: We continued to make progress advancing numerous oncology programs discovered using our next generation mapping and navigating technology, including programs related to immune checkpoint resistance in STK11-mutant non-small cell lung cancer, cancer immunotherapy target 'alpha', HRD-negative ovarian cancer target 'gamma', hepatocellular carcinoma, small molecule MYC inhibition, ovarian cancer and other indications. We highlighted this progress at the annual meeting of theAmerican Association for Cancer Research (AACR).
Roche and Genentech Collaboration
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We have initiated laboratory efforts and are scaling our pilot work to create our first partnership-specific maps in an oncology indication. We have also begun the initial work for development of phenomaps in neuroscience.
Bayer AG Collaboration
We have profiled Bayer's compound library for next generation map-based drug discovery and are actively navigating the map to seed potential programs. We have multiple first-generation brute-force programs related to the potential treatment of fibrotic diseases progressing simultaneously with our partner.
Recursion OS
•Transcriptomics: We automated key processes in our transcriptomics platform, TrekSeq, to enable higher scale and robustness related to the acquisition of transcriptomics data for use as an industrialized orthogonal validation assay. •InVivomics: We completed studies to enable the simultaneous monitoring of multiple mice and their respective individual digital biomarkers within the same cage and the tracking of digital biomarkers related to group social behaviors.
Financing and Operations
We were incorporated inNovember 2013 . OnApril 20, 2021 , we closed our Initial Public Offering (IPO) and issued 27,878,787 shares of Class A common stock at a price of$18.00 per share, raising gross and net proceeds of$501.8 million and$462.4 million , respectively. Prior to our IPO, we had raised approximately$448.9 million in equity financing from investors in addition to$30.0 million in an upfront payment from our collaboration with Bayer AG (Bayer). InDecember 2021 , we announced a collaboration with Roche and received an upfront payment of$150.0 million inJanuary 2022 . See Note 9, "Collaborative Development Contracts" to the Condensed Consolidated Financial Statements for additional information. We use the capital we have raised to fund operations and investing activities across platform research operations, drug discovery, clinical development, digital and other infrastructure, creation of our portfolio of intellectual property and administrative support. We do not have any products approved for commercial sale and have not generated any revenues from product sales. We had cash, cash equivalents and investments of$591.1 million as ofMarch 31, 2022 . Based on our current operating plan, we believe that our cash, cash equivalents and investments will be sufficient to fund our operations for at least the next twelve months. Since inception, we have incurred significant operating losses. Our net losses were$56.0 million and$30.7 million during the three months endedMarch 31, 2022 and 2021, respectively. As ofMarch 31, 2022 , our accumulated deficit was$456.1 million . We anticipate that our expenses and operating losses will increase substantially over the foreseeable future. The expected increase in expenses will be driven in large part by our ongoing activities, if and as we: continue to advance our platform; continue preclinical development of our current and future product candidates and initiate additional preclinical studies; commence clinical studies of our current and future product candidates; establish our manufacturing capability, including developing our contract development and manufacturing relationships and building our internal manufacturing facilities; acquire and license technologies aligned with our platform; seek regulatory approval of our current and future product candidates; expand our operational, financial and management systems and increase personnel, including personnel to support our preclinical and clinical development, manufacturing and commercialization efforts; continue to develop, grow, perfect and defend our intellectual property portfolio; and incur additional legal, accounting, or other expenses in operating our business, including the additional costs associated with operating as a public company. We anticipate that we will need to raise additional financing in the future to fund our operations, including the commercialization of any approved product candidates. Until such time, if ever, as we can generate significant product revenue, we expect to finance our operations with our existing cash and cash equivalents, any future equity or debt financings and upfront, milestone and royalty payments, if any, received under current or future license or collaboration agreements. We may not be able to raise additional capital on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, results of operations and financial condition may be adversely affected. 22 -------------------------------------------------------------------------------- Table of Content s Components of Operating Results
Revenues
To date, our business has generated revenue from two sources: (i) grant revenue and (ii) operating revenue.
Grant Revenue-We recognize grant revenue in the period in which the revenue is earned in accordance with the associated grant agreement, which is the period in which corresponding reimbursable expenses under the grant agreement are incurred.
Operating Revenue-Operating revenue is generated through research and development agreements derived from strategic alliances. We are entitled to receive variable consideration as certain milestones are achieved. The timing of revenue recognition is not directly correlated to the timing of cash receipts.
Cost of Revenue
Cost of revenue consist of the Company's costs to provide services for drug discovery required under performance obligations with partnership customers. These primarily include materials costs, service hours performed by our employees and depreciation of property and equipment.
Research and Development
Research and development expenses account for a significant portion of our operating expenses. We recognize research and development expenses as they are incurred. Research and development expenses consist of costs incurred in performing activities including:
•costs to develop and operate our platform;
•costs of discovery efforts which may lead to development candidates, including research materials and external research;
•costs for clinical development of our investigational products;
•costs for materials and supplies associated with the manufacture of active pharmaceutical ingredients, investigational products for preclinical testing and clinical trials;
•personnel-related expenses, including salaries, benefits, bonuses and stock-based compensation for employees engaged in research and development functions;
•costs associated with operating our digital infrastructure; and
•other direct and allocated expenses incurred as a result of research and development activities, including those for facilities, depreciation, amortization and insurance.
We monitor research and development expenses directly associated with our clinical assets at the program level to some degree, however, indirect costs associated with clinical development and the balance of our research and development expenses are not tracked at the program or candidate level.
We recognize expenses associated with third-party contracted services as they are incurred. Upon termination of contracts with third parties, our financial obligations are generally limited to costs incurred or committed to date. Any advance payments for goods or services to be used or rendered in future research and product development activities pursuant to a contractual arrangement are classified as prepaid expenses until such goods or services are rendered.
General and Administrative
We expense general and administrative costs as incurred. General and
administrative expenses consist primarily of salaries; employee benefits;
stock-based compensation; and outsourced labor for personnel in executive,
finance, human resources, legal and other corporate administrative functions.
General and administrative expenses also include legal fees for corporate and
patent matters; professional fees for accounting, auditing, tax and
administrative consulting services, insurance costs, facilities and depreciation
expenses.
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We expect that our general and administrative expenses will increase in the
future to support personnel in research and development and to support our
operations as we increase our research and development activities and activities
related to the potential commercialization of our drug candidates.
Other Income (loss), net
Other income (loss), net consists of interest earned primarily from investments, interest expense incurred under our loan agreements and gains and losses from investments. Results of Operations
The following table summarizes our results of operations:
Three months ended March 31, Change
(in thousands, except percentages) 2022 2021 $ %
Revenue
Operating revenue $ 5,299 $ 2,500 $ 2,799 >100%
Grant revenue 34 62 (28) (44.8) %
Total revenue 5,333 2,562 2,771 >100%
Operating costs and expenses
Cost of revenue 7,799 - 7,799 n/m
Research and development 32,441 24,109 8,332 34.6 %
General and administrative 21,074 8,937 12,137 >100%
Total operating costs and expenses 61,314 33,046 28,268 85.5 %
Loss from operations (55,981) (30,484) (25,497) (83.6) %
Other income (loss), net 2 (233) 235 98.7 %
Net loss $ (55,979) $ (30,717) $ (25,262) 82.2 %
n/m = Not meaningful
Summary
Our financial performance during the three months ended March 31, 2022 compared
to the prior period included; (i) a decrease in platform research and
development costs due to partnership-related materials of $9.6 million , which
has been capitalized on the Condensed Consolidated Balance Sheet; (ii) an
increase in revenue recognized due to our strategic partnership with Roche; and
(iii) cost of revenue due to the strategic partnership with Roche. Additionally,
our financial results reflected added funding to support our emerging early- and
mid-stage pipeline assets and continued growth of the Company.
Revenue
The following table summarizes our components of revenue:
Three months ended March 31, Change
(in thousands, except percentages) 2022 2021 $ %
Revenue
Operating revenue $ 5,299 $ 2,500 $ 2,799 >100%
Grant revenue 34 62 (28) (44.8) %
Total revenue $ 5,300 $ 2,500 $ 2,799 >100%
For the three months ended March 31, 2022 , the increase in revenue compared to
prior period was due to revenue recognized from our strategic partnership with
Roche, which commenced in January 2022 .
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Cost of Revenue
The following table summarizes our cost of revenue:
Three months ended March 31, Change
(in thousands, except percentages) 2022 2021 $ %
Total cost of revenue $ 7,799 $ - $ 7,799 n/m
For the three months ended March 31, 2022 , the increase in cost of revenue
compared to prior period was due to our strategic partnerships. For the three
months ended March 31, 2021 , cost of revenue was immaterial and was included
within "Research and development" in the Condensed Consolidated Statement of
Operations.
Research and Development
The following table summarizes our components of research and development expense:
Three months ended March 31, Change
(in thousands, except percentages) 2022 2021 $ %
Research and development expenses
Platform $ 5,314 $ 10,532 $ (5,218) (49.5) %
Discovery 12,361 7,739 4,622 59.7 %
Clinical 11,112 2,955 8,157 >100%
Stock based compensation 1,764 628 1,136 >100%
Other 1,890 2,255 (365) (16.2) %
Total research and development expenses
Significant components of research and development expense include the following allocated by development phase: Platform, which refers primarily to expenses related to screening of product candidates through hit identification; Discovery, which refers primarily to expenses related to hit identification through development of candidates; and Clinical, which refers primarily to expenses related to development of candidates and beyond. For the three months endedMarch 31, 2022 , the increase in research and development expenses compared to prior period was due to an increased number of pre-clinical assets being validated and increased clinical costs as studies progressed. These increases were partially offset by a decrease in platform costs due to partnership-related materials of$9.6 million , now capitalized on the Condensed Consolidated Balance Sheet.
General and Administrative Expenses
The following table summarizes our general and administrative expense:
Three months ended March 31, Change
(in thousands, except percentages) 2022 2021 $ %
Total general and administrative expenses $ 21,074
>100%
For the three months ended March 31, 2022 , the increase in general and
administrative expenses compared to prior period was due to the growth in size
of the Company's operations including an increase in salaries and wages of $6.6
million , facilities costs, information technology and security costs and other
administrative costs associated with operating a growth-stage company.
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Other income (loss), net
The following table summarizes our components of other income (loss), net:
Three months ended March 31, Change
(in thousands, except percentages) 2022 2021 $ %
Interest expense $ (14) $ (249) $ 235 (94.3) %
Interest income 87 16 71 >100%
Other (71) - (71) n/m
Other income (loss), net $ 2 $ (233) $ 235 (100.8) %
For the three months ended March 31, 2022 , the decrease in expense compared to
the prior year was driven by a decrease in interest expense from the 2021 the
Midcap loan settlement and an increase in interest income from our investment
portfolio. See Note 3, "Supplemental Financial Information" to the Condensed
Consolidated Financial Statements for additional details on the Midcap loan
agreement and see Note 4, "Investments" for additional details on the investment
portfolio.
Liquidity and Capital Resources
Sources of Liquidity
We have not yet commercialized any products and do not expect to generate revenue from the sales of any product candidates for at least several years. Cash, cash equivalents and investments totaled$591.1 million and$516.6 million as ofMarch 31, 2022 andDecember 31, 2021 , respectively. We have incurred operating losses and experienced negative operating cash flows and we anticipate that the Company will continue to incur losses for at least the foreseeable future. Our net loss was$56.0 million and$30.7 million during the three months endedMarch 31, 2022 and 2021, respectively. As ofMarch 31, 2022 andDecember 31, 2021 , we had an accumulated deficit of$456.1 million and$400.1 million , respectively. We have financed our operations through the private placements of preferred stock and an IPO. As ofMarch 31, 2022 , we have received proceeds of$448.9 million from the sale of preferred stock. We received net proceeds of$462.4 million from the IPO. See Note 8, "Common Stock" to the Condensed Consolidated Financial Statements for additional details on the IPO. InJanuary 2022 , we received an upfront payment of payment of$150.0 million from our strategic partnership with Roche. InOctober 2020 , we received a$30.0 million upfront payment from our strategic partnership with Bayer. See Note 9, "Collaborative Development Contracts" to the Condensed Consolidated Financial Statements for information on these collaborations. Cash Flows The following table is a summary of the Condensed Consolidated Statements of Cash Flows for each of the periods presented below: Three months ended March 31, (in thousands) 2022 2021 Cash provided by (used in) operating activities$ 77,388 $ (30,755) Cash provided by (used in) investing activities 143,304 (19,416) Cash provided by financing activities 2,084 2,134
Net increase (decrease) in cash and cash equivalents
Operating Activities Cash provided by operating activities increased during the three months endedMarch 31, 2022 as we received an upfront payment of payment of$150.0 million from our strategic partnership with Roche. Cash inflows were partially offset by cash used for research and development and general and administrative expenses. Cash used by 26 -------------------------------------------------------------------------------- Table of Content s operating activities increased during the three months endedMarch 31, 2021 as a result of higher costs incurred for research and development and general and administrative expenses due to the Company's growth. Investing Activities Cash provided by investing activities during the three months endedMarch 31, 2022 was driven by sales and maturities of investments$147.6 million . Cash used by investing activities during the three months endedMarch 31, 2021 consisted of property and equipment purchases of$19.4 million , which included$17.9 million for the purchase of a Dell EMC supercomputer. Financing Activities Cash provided by financing activities during the three months endedMarch 31, 2022 and 2021 primarily included proceeds from equity incentive plans of$2.1 million and$2.2 million , respectively.
Critical Accounting Estimates and Policies
A summary of the Company's significant accounting estimates and policies is included in Note 2, "Summary of Significant Accounting Policies" in our 2021 Annual Report. There were no significant changes in the Company's application of its critical accounting policies during the three months endedMarch 31, 2022 .
Recently Issued and Adopted Accounting Pronouncements
See Note 2, "Basis of Presentation" in Item 1 of this Quarterly Report on Form 10-Q for information regarding recently issued and adopted accounting pronouncements.
Emerging Growth Company
The Company is an emerging growth company (EGC), as defined by the Jumpstart Our Business Startups Act of 2012 (the JOBS Act). The JOBS Act, among other things, exempts EGCs from compliance with new or revised financial accounting standards until private companies are required to comply. Recursion has elected to use the extended transition period for new or revised financial accounting standards during the period in which we remain an EGC. However, the Company may adopt certain new or revised accounting standards earlier. This could make comparisons of the Company's financial statements with other public companies difficult because of the potential differences in applicable accounting standards.
Recursion may remain an EGC until the earlier of (1)
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