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 trillions 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-20220630_g1.jpg]] Recursion finished the second quarter of 2022 with a portfolio of clinical stage, preclinical and discovery programs and continued scaling the total number of phenomic experiments to over 146 million, the size of its proprietary data universe to over 16 petabytes and the number of biological and chemical relationships to 2.4 trillion. 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 small molecules, by a growing team of over 450 Recursionauts that is balanced between life scientists and computational and technical experts. 21
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[[Image Removed: rxrx-20220630_g2.jpg]]Summary of Business Highlights
Internal Pipeline
•Cerebral cavernous malformation (CCM) (REC-994): InMarch 2022 , we announced the initiation of 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, we continue to actively enroll participants. •Neurofibromatosis type 2 (NF2) (REC-2282): InJune 2022 at theChildren's Tumor Foundation NF Conference , we announced the initiation of our Phase 2/3 POPLAR clinical trial, which is a parallel group, two stage, randomized, multicenter study of this drug candidate in approximately 90 participants with progressive NF2-mutated meningiomas. At this time, we continue to actively enroll participants. •Familial adenomatous polyposis (FAP) (REC-4881): We are on track to initiate a Phase 2, randomized, double-blind, placebo-controlled study to evaluate safety, pharmacokinetics and exploratory efficacy of this drug candidate in FAP in the third quarter of 2022. Recently, theU.S. Food and Drug Administration (FDA) granted Recursion Fast Track designation and theEuropean Commission granted Recursion Orphan Drug Designation for REC-4881 for the potential treatment of FAP. •Clostridium difficile colitis (REC-3964): We made progress in IND-enabling studies for REC-3964 and are on track to initiate a Phase 1 study in the second half of 2022. •Oncology pipeline: We continue to focus our pipeline on oncology and oncology-like programs while advancing numerous programs discovered using our next generation mapping and navigating technology, including programs focused on novel targets and polypharmacology.
Transformational Collaborations
We continue to advance efforts to discover new potential therapeutics with our strategic partners in the areas of fibrotic disease (Bayer) as well as neuroscience and a single indication in gastrointestinal oncology (Roche andGenentech ). 22 -------------------------------------------------------------------------------- Table of Contents Recursion OS •ChemOS: We are preparing to install our automated and scalable drug metabolism and pharmacokinetics (DMPK) platform, which will allow for the processing and evaluation of compounds for protein plasma binding, microsomal stability and cell permeability. Such continuous chemical data generation will help enable us to build machine learning approaches that predict properties for our and our partners' growing libraries of chemical compounds. Furthermore, we are implementing a unified workflow for medicinal and computational chemists to seamlessly access assay data, design molecules and perform predictive analyses to support our internal and partnership programs. •Machine Learning: We continue to improve the ease, scale and biological relevance of our machine learning models and added new benchmarking flows to evaluate how well our models recapitulate known biological relationships associated with protein complexes and pathways. We improved our machine learning models to achieve state-of-the-art results in 9 of 22 absorption, distribution, metabolism, excretion and toxicity (ADMET) benchmark tasks fromTherapeutic Data Commons , and we are leveraging them for our oncology programs. •Transcriptomics: We continued building out our scaled transcriptomics platform, with infrastructure, automation and operational processes that will enable the robust validation of inferences from our maps of biology and chemistry. We have now been able to carry out and analyze up to 13 thousand near-whole exomes per week, creating another growing relatable dataset that we can integrate in our Recursion OS for continued improvement of our inferences across compounds and biology at scale. •Compounding Cycles of Discovery: The visualization below frames how additional datasets and capabilities compound cycles of discovery to potentially translate novel insights into clinical candidates. In this technology stack graphic, bold text signifies capabilities that have been built to some meaningful scale already, italic text signifies capabilities that are in the process of being built and standard text signifies capabilities that Recursion intends to incorporate in the future. [[Image Removed: rxrx-20220630_g3.jpg]]
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 unrestricted cash, cash equivalents and investments of$515.4 million as 23 -------------------------------------------------------------------------------- Table of Contents ofJune 30, 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$65.6 million and$121.5 million during the three and six months endedJune 30, 2022 , respectively. Our net losses were$43.4 million and$74.1 million during the three and six months endedJune 30, 2021 , respectively. As ofJune 30, 2022 , our accumulated deficit was$521.6 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.
Components of Operating Results
Revenue
To date, our business has generated revenue from two sources: (i) operating revenue and (ii) grant revenue.
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.
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.
Cost of Revenue
Cost of revenue consists 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;
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Table of Contents •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.
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 June 30, Change Six months ended June 30, Change
(in thousands, except percentages) 2022 2021 $ % 2022 2021 $ % Revenue Operating revenue$ 7,653 $ 2,500 $ 5,153 >100%$ 12,952 $ 5,000 $ 7,952 >100% Grant revenue 21 49 (28) (57.0) % 55 111 (56) (50.2) % Total revenue 7,674 2,549 5,125 >100% 13,007 5,111 7,896 >100% Operating costs and expenses Cost of revenue 14,227 - 14,227 n/m 22,026 - 22,026 n/m Research and development 38,439 29,624 8,815 29.8 % 70,880 53,733 17,146 31.9 % General and administrative 21,199 13,854 7,345 53.0 % 42,273 22,791 19,482 85.5 % Total operating costs and expenses 73,865 43,478 30,387 69.9 % 135,179 76,524 58,654 76.6 % Loss from operations (66,191) (40,929) (25,262) (61.7) % (122,172) (71,413) (50,758) (71.1) % Other income (loss), net 631 (2,472) 3,104 74.6 % 633 (2,705) 3,338 76.6 % Net loss$ (65,560) $ (43,401) $ (22,158) 51.1 %$ (121,539) $ (74,118) $ (47,420) 64.0 % n/m = Not meaningful 25
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Summary
Our financial performance during the three and six months endedJune 30, 2022 compared to the prior periods included; (i) a decrease in platform research and development costs due to a reallocation of spending to cost of revenue for our strategic partnerships; (ii) an increase in revenue recognized due to our strategic partnership with Roche; and (iii) the incurrence of cost of revenue due to our strategic partnerships. 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 Six months ended
June 30, Change June 30, Change
(in thousands, except
percentages) 2022 2021 $ % 2022 2021 $ %
Revenue
Operating revenue $ 7,653 $ 2,500 $ 5,153 >100% $ 12,952 $ 5,000 $ 7,952 >100%
Grant revenue 21 49 (28) (57.0) % 55 111 (56) (50.2) %
Total revenue $ 7,674 $ 2,549 $ 5,125 >100% $ 13,007 $ 5,111 $ 7,896 >100%
For the three and six months ended
Cost of Revenue
The following table summarizes our cost of revenue:
Three months ended June Six months ended June
30, Change 30, Change
(in thousands, except percentages) 2022 2021 $
% 2022 2021 $ % Total cost of revenue$ 14,227 $ -$ 14,227 n/m$ 22,026 $ -$ 22,026 n/m For the three and six months endedJune 30, 2022 , the increase in cost of revenue compared to prior period was due to our strategic partnerships. For the three and six months endedJune 30, 2021 , cost of revenue was insignificant 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:
(in thousands, except Three months ended June 30, Change Six months ended June 30, Change percentages) 2022 2021 $ % 2022 2021 $ % Research and development expense Platform$ 10,686 $ 11,338 $ (652) (5.7) %$ 16,000 $ 21,870 $ (5,870) (26.8) % Discovery 12,398 8,847 3,551 40.1 % 24,759 16,586 8,173 49.3 % Clinical 12,551 5,581 6,970 >100% 23,663 8,536 15,127 >100% Stock based compensation 2,165 1,143 1,022 89.4 % 3,929 1,771 2,158 >100% Other 639 2,715 (2,076) (76.5) % 2,528 4,970 (2,442) (49.1) % Total research and development expense$ 38,439 $ 29,624 $ 8,815 29.8 %$ 70,879 $ 53,733 $ 17,146 31.9 % 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 26 -------------------------------------------------------------------------------- Table of Contents 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 and six months endedJune 30, 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 a reallocation of spending to cost of revenue for our strategic partnerships.
General and Administrative Expense
The following table summarizes our general and administrative expense:
Three months ended June 30, Change Six months ended June 30, Change
(in thousands, except percentages) 2022 2021 $ % 2022 2021 $ %
Total general and administrative
expense $ 21,199 $ 13,854 $ 7,345 53.0 % $ 42,273 $ 22,791 $ 19,482 85.5 %
For the three and six months ended June 30, 2022 , the increase in general and
administrative expense compared to prior period was due to the growth in size of
the Company's operations including increased salaries and wages of $1.8 million
and $8.4 million , respectively, a fixed asset write-down during the three and
six months ended June 30, 2022 of $2.8 million , increased rent expense during
the three and six months ended June 30, 2022 of $1.0 million and $1.8 million ,
respectively, and increases in other administrative costs associated with
operating a public company.
Other income (loss), net
The following table summarizes our components of other income (loss), net:
(in thousands, except Three months ended
Six months ended June 30, Change
percentages) 2022 2021 $ % 2022 2021 $ %
Interest expense $ (14) $ (2,501) $ 2,488 (99.4) % $ (28) $ (2,750) $ 2,721 (99.0) %
Interest income 652 29 622 >100% 739 45 693 >100%
Other (7) - (7) n/m (78) - (78) n/m
Other income (loss), net $ 631 $ (2,472) $ 3,103 (125.5) % $ 633 $ (2,705) $ 3,336 (123.4) %
For the three and six months ended June 30, 2022 , the increase in other income
(loss), net 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. Unrestricted cash, cash equivalents and investments totaled$515.4 million and$516.6 million as ofJune 30, 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$65.6 million and$121.5 million during the three and six months endedJune 30, 2022 , respectively. Our net loss was$43.4 million and$74.1 million during the three and six months endedJune 30, 2021 , respectively. As ofJune 30, 2022 andDecember 31, 2021 , we had an accumulated deficit of$521.6 million and$400.1 million , respectively.
We have financed our operations through the private placements of preferred
stock and an IPO. As of
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InJanuary 2022 , we received an upfront payment of$150.0 million from our strategic partnership with Roche. InOctober 2020 , we received a$30.0 million upfront payment from our strategic partnership with Bayer. See Note 9, "Collaborative Development Contracts" to the Condensed Consolidated Financial Statements for information on these collaborations.
Cash Flows
The following table is a summary of the Condensed Consolidated Statements of Cash Flows for each of the periods presented below:
Six months ended June 30 ,
(in thousands) 2022 2021
Cash provided by (used in) operating activities$ 15,765 $ (64,408) Cash provided by (used in) investing activities 148,244 (25,628) Cash provided by financing activities
4,752 465,839
Net increase (decrease) in cash and cash equivalents
Operating Activities Cash provided by operating activities increased from the six months endedJune 30, 2021 as we received an upfront payment of$150.0 million from our strategic partnership with Roche. Cash inflows were partially offset by cash used for cost of revenue, research and development and general and administrative expenses. Cash used by operating activities increased from the six months endedJune 30, 2020 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 six months endedJune 30, 2022 was driven by sales and maturities of investments of$169.1 million , partially offset by purchases of property and equipment of$20.8 million . Cash used by investing activities during the six months endedJune 30, 2021 consisted of property and equipment purchases of$25.6 million , which included$17.9 million for the purchase of a Dell EMC supercomputer. Financing Activities Cash provided by financing activities during the six months endedJune 30, 2022 primarily included proceeds from equity incentive plans of$4.8 million . Cash provided by financing activities during the six months endedJune 30, 2021 primarily included$462.4 million of net proceeds from the IPO. Financing cash flows also included$3.0 million of proceeds from equity incentive plans.
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 six months endedJune 30, 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
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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
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