Recursion Pharmaceuticals

Recursion Pharmaceuticals is a general purpose drug discovery platform empowered by proprietary AI models, supercomputers, and data. The company has a broad pipeline with several treatments undergoing early stage clinical trials.

One key differentiator with Recursion is their approach to data. Recursion uses robotics to automatically generate precise and repeatable reactions, and AI to understand that data, which enables them to generate proprietary data (and discover new treatments) at a volume several orders of magnitude higher than their competition.

They also have strong partnerships with industry juggernauts like Roche and Bayer, which not only provide vital distribution resources, but more importantly, access to an expansive library of proprietary compounds and reactions, which is vital for training + improving their platform. Recursion has made key acquisitions in the space, buying both Cyclica and Valence for ~$90M in all-stock deals.

The company's immediate value will come from landing new partnerships and/or getting FDA approval on any of their drugs undergoing clinical trials. As they prove out their discovery platform, they may generate significant cash-flows not just from in-house drugs, but also through licensed work.

Recursion's pipeline is wide ranging with a focus area on oncology + rare diseases. They have several treatments in phase 2 clinical trials, with a focus on diseases that have no existing cure or a cure with significant limitations / adverse effects. It is extremely important to note that their pipeline, whether a drug fails or succeeds, serves not only to generate revenue, but to train + improve their AI platform. As more drugs move through the pipeline, their models become more accurate/effective.

Given the early stage of the company's pipeline, we only focus on two of their drugs undergoing phase 2 trials, as well as key partnerships.

Cerebral Cavernous Malformation (REC-994)

According to Johns Hopkins Medicine, about 1 in 100 to 200 people have cavernous malformation (0.5-1% of the US population). There is limited public data on the cost to treat it, but estimates from the European Union are around $15,000 per patient. If we assume a 5% adoption rate amongst the potential patient pool, we get a forecast of $1.3B in annual revenue.

Neurofibromatosis Type 2 (REC-2282)

Neurofibromatosis is a very rare disease effecting roughly 1/40,000 people, according to Cancer.net. Despite having no known cure, the disease is typically not fatal. There is limited public data on the cost to treat it, but estimates from India are around $12,000. If we assume a 3x premium for US patients and a 5x premium for being a cure (vs remedy), we can assume a cost of $180,000 per patient. With a 10% adoption rate, we forecast $157M in annual revenue. It is important to note that this drug is being co-developed with Bayer, which may be subject to royalties / revenue shares. More on their partnership below.

Familial Adenomatous Polyposis (REC-4881)

Recursion's leading oncology treatment targets familial adenomatous polyposis, a disease that effects 1 in 10,000 people--according to rarediseases.org. There is no known cure for the disease, and the life expectancy if untreated is roughly 40 years, but treatments can be done to remedy its effects. According to the NIH, these treatments cost about $3,200 per patient per year. If we assume a 40 year treatment duration and apply a 5x premium for being the first ever cure, we forecast a price of $640K per patient. If we assume a 5% adoption rate, we forecast $1.1B in annual revenue.

APC Mutant Cancers (REC-4881)

Recursion believes their same treatment for familial adenomatous polyposis can be used to treat APC mutant cancers. According to FORCE, APC mutant cancers effect 1 in 10,000 people and is typically fatal (limited info on life expectancy). Like their other target disease, there is limited info on the cost to treat this disease; however, we found an NIH paper that cites a $70,000 cost to treat. If we assume a 10% adoption rate, we forecast $245M in annual revenue.

Bayer Partnership

Bayer lead Recursion's Series D financing ($50M invested) and entered into a strategic partnership to co-develop novel treatments for fibrotic diseases. The collaboration has the potential for each program to yield development and commercial milestone payments exceeding $100M, alongside royalties based on future sales. Recursion will be granted an initial payment of $30M for access to the platform. The size + scope of the deal is the most significant of all technology-enabled drug discovery platforms.

Roche Partnership

Recursion Pharmaceuticals has entered into a strategic collaboration with renowned pharmaceutical companies Roche and Genentech, aiming to optimize technology-driven drug discovery using the Recursion Operating System (OS). Pursuant to the agreement, Recursion will be granted an initial payment of $150 million, along with the potential to earn additional research-based milestones based on performance. The collaboration encompasses the possibility of initiating up to 40 programs, jointly pursued by Roche and Genentech. Successful development and commercialization of these programs have the potential to generate substantial financial returns, including development, commercialization, and net sales milestones totaling more than $300 million for Recursion. Additionally, Recursion stands to receive tiered royalties on net sales.

Like most other early-stage biotech companies, Recursion is reliant on equity + debt financing to sustain their business--not revenue. As such, it is important to assess their runway and determine whether further dilution will be required before their first treatment goes live.

In 2022, Recursion had approximately $700M in assets and $215M in liabilities. That same year they lost a total of $250M with a historical record of deepening 50-100% year over year. If we ignore this and assume they keep spend relatively the same, they have a little less than 2 years of runway. In reality, we expect them to continue to ramp up spend as their existing pipeline progresses and as they role out new drugs to prove the efficacy of their discovery platform. As such, and given the fact that profitability is nowhere in their near future, we expect Recursion to issue more shares to fund operations within the next 2 years, which could be a significant headwind for their stock price at that later stage.

Recursion's stock has been off to a rough start, with a drawdown from $28 to as low as $4. It appears to be breaking out of a descending triangle pattern, but is also heading into strong horizontal support turned into resistance. RSI is overbought on the daily timeframe, which signals price may be near a peak in the short-term.

For traders, we have a short-term price target of $13, but we expect price to sell-off from this level and create more attractive entry opportunities for long-term investors. If you are looking to invest, we recommend setting buy orders just north of the $4 support level.

Based on projected revenues (not including IP value), we have a target valuation of 3x revenue, or roughly $7.5B (vs current $1.8B market cap).