Recursion: No News Isn't Good News When It Comes To Vanilla Pipeline

seekingalpha11-21 00:20

Recursion's stock has been consistently rated as "Hold" by this analyst due to skepticism about its AI-driven drug discovery approach and its financial instability.The company's IPO raised over $500 ...

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The best hope for the future is survival, and attracting more investment from semiconductor giant Nvidia.   ac_bnphotos  Investment Overview I have been following Recursion (NASDAQ:RXRX) for some time and sharing regular notes with Seeking Alpha readers, the last one covering the business combination between Salt Lake City headquartered Recursion, and UK based Exscientia (EXAI). I have consistently awarded Recursion stock \"Hold\" recommendations, expressing some scepticism around the company's ability to apply artificial intelligence to speed up and improve the process of developing new and useful drug candidates to treat a range of diseases. Recursion's 2021 Initial Public Offering (\"IPO\") raised >$500m at $18 per share, but by May 2022, the share price had dipped <$6 per share, and aside from brief spikes to $15.5 in July 2023, triggered by a $50m investment received from the semiconductor giant Nvidia (NVDA), and in January thanks to an agreement with German Pharma giant Bayer to in-license a new chemical entity, shares have traded <$10 per share. Across the past 5 days, the stock has fallen by 20% and is currently valued at $6.3, which translates to a market capitalisation of $1.8bn. The losses appear to be related to the company's announcement that shareholders had approved the proposed business combination with Exscientia. Earlier this month the company presented its Q3 earnings and business updates, reporting operating revenue for the quarter of $26m, which comprised \"revenue recognized from our partnership with Roche & Genentech and the $30.0 million acceptance fee for the completion of a neuroscience phenomap\", $74.6m spent on R&D, $37.8m on G&A, and a net loss of $(95.8m), or $(0.34) per share. Year-to-date, operating revenues were reported as $54m, and net loss $(285m), or $(1.12) per share. Cash and equivalents was reported as $427m, so at the current rate of cash burn, Recursion's funding would be exhausted at the end of next year. Unless fresh funding can be secured - which is not unlikely, given the massive potential of AI to improve aspects of drug discovery in the long term - its seems as though Recursion is under pressure to find some new revenues streams, or drastically cut its expenditure, which would likely put downward pressure on the share price. Recursion - Progress With Pipeline I noted in my last post on Recursion that all three of the company's lead drug candidates would deliver data readouts before the end of this year. Below is the pipeline overview the company released alongside its Q3 earnings:   Recursion pipeline (Q3 earnings release) The new Exscientia assets are highlighted and add some diversification to the portfolio, albeit none have progressed beyond the Phase 1 study stage. Data from candidate REC-994's Phase 2 SYCAMORE study was shared in September, and was not well received by the market, with Recursion stock falling from $7 per share, to $6, immediately after its release. Cerebral Cavernous Malformation (\"CCM\") is caused by \"vascular malformations of the spinal cord and brain\", and patients are at \"substantial risk for seizures, headaches, progressive neurological deficits, and potentially fatal hemorrhagic stroke\", according to Recursion, who estimate there are 360k symptomatic individuals in the US and EU, with no pharmacological therapies approved to treat the condition. REC-994 met its primary endpoint of safety and tolerability, however in terms of efficacy Recursion reported that: Time-dependent improvement in these trends at the 400mg dose was also observed in this signal-finding study. Improvements in either patient or physician-reported outcomes were not yet seen at the 12 month time point. Najat Khan, Ph.D., Chief R&D Officer and Chief Commercial Officer of Recursion commented that the \"results provide critical insights that will inform our next study design, including exploring study duration, higher doses, and a larger cohort of patients\", but a more negative interpretation is that Recursion is no closer to knowing if its drug can have a positive impact than it was at the beginning of the trial, and will have to invest substantially more into a larger study to find out. REC-3964, which is \"a novel non-antibiotic small molecule inhibitor of C. difficile toxins\" completed a Phase 1 study in healthy volunteers with data also released in early September. No treatment related serious adverse events (\"SAEs\") were reported, and there were no study discontinuations. Recursion says that a \"Phase 2 proof-of-concept trial is expected to initiate in 2024 to further study the attributes of this molecule\". Finally, REC-2282 has not yet reported results from its Phase 2/3 study in patients with progressive NF2-mutated meningiomas. The drug is an \"orally bioavailable small molecule inhibitor of class I and class IIB HDACs\". According to ScienceDirect, HDAC's, or histone deacetylases: belong to a family of enzymes that remove acetyl groups from lysine residues located on the amino-terminal tails of histone proteins, producing chromatin compaction, and thus, reduced gene expression NF2 mutant meningioma is a genetic disease that \"causes tumors to arise on nerves, particularly those in the skull and spine, though other nerves can be affected\" (source: Johns Hopkins Medicine), and symptoms include dizziness, tinnitus, and difficulty walking. The condition can sometimes lead to patients developing cancerous tumors, and there are no approved treatments for the disease. Recursion frames NF2 as a 33k patient market, with \"potential to expand into additional NF2 mutant populations including mesothelioma, MPNST (malignant peripheral nerve sheath tumor) and EHE (Epithelioid hemangioendothelioma)\", however, first it must deliver some positive clinical data. It is worth noting that vorinostat is an HDAC inhibitor marketed and sold by Pharma giant Merck & Co (MRK) under the brand name Zolinza, approved in 2006 for the treatment of cutaneous T-cell lymphoma (CTCL). Belinostat is another HDAC inhibitor approved to treat peripheral T-cell lymphoma (PTCL), licensed by Spectrum Pharmaceuticals - now part of Assertio (ASRT). Both products are old and barely make a revenue contribution today, somewhat undermining the case for the HDAC class of drugs. REC-4881 has a Phase 2 readout due in Familial Adenomatous Polyposis (\"FAP\"), a genetic condition that causes polyps to grow in the colon, upcoming in H125, and in AXIN1/APC-mutant cancers. The drug is the only small molecule therapeutic targeting these mutations in cancer patients, but the study is a small one, enrolling just 20 patients. Finally, REC-3964 will share Phase 2 data in prevention of recurrent c. difficile (an infection that causes diarrhea) next year, management says, estimating a patient population of ~175k. The study has enrolled 80 patients and the primary endpoint is rate of recurrence. Management says preclinical studies showed superiority to bezlotoxumab in a \"gold standard hamster model\". Bezlotoxumab is approved as Zinplaza and marketed and sold by Merck, which does not provide a revenue figure for the drug, suggesting it generates <$100m per annum. The Exscientia Effect Arguably the biggest positive the Exscientia deal brings is cash - Recursion says (in a recent corporate presentation) that it will have >$750m in cash once the deal completes, which could extend its runway into 2027. While Recursion has partnerships in place with Roche (OTCQX:RHHBY), via its drug development subsidiary Genentech, and Bayer, Exscientia boasts partnerships with French Pharma giant Sanofi (SNY), Merck, and Bristol-Myers Squibb (BMY). According to Exscientia's 2023 annual report / 10K submission, the BMY deal could pay out up to $250m in milestones plus royalties on sales of marketed products, while the Sanofi deal could pay \"up to $5.2 billion in total milestone payments plus tiered royalties\". The trouble with milestone-based deals is that they tend to be weighted towards paying out small sums to begin with, which increase as later stage study milestones and approval milestones are achieved. It seems that Exscientia has no Sanofi partnered assets in the clinic - although the company did report in October that it had received $15m in milestones from Sanofi based on the advancement of two additional discovery programs. Exscientia and BMY have also shared \"positive\" results in relation to their partnered PKC-theta inhibitor EXS4318, although based on this presentation I found online, the evidence provided to date seems wafer thin. Exscientia's only other clinical stage asset, EXS617, targeting CDK7, is yet to read out any data of significance. Analysis - That Positive News Flow Is In Short Supply Is Hardly Surprising AI-driven drug discovery companies have been tasked with achieving the almost-impossible - turning an expensive supercomputer into a drug hunting machine. Granted, supercomputers can evaluate trillions of potential drug compounds in the blink of an eye, but when you are searching for a needle in a haystack, but don't know what the needle looks like, you are basically chasing your tail. This is why Big Pharma tends to target proteins it knows have been effective at treating patients in the past, rather than trying to start from scratch, as AI-driven drug discovery companies seem to want to do. As I have noted in the past, listed AI-driven drug discovery companies have performed extremely poorly for shareholders - witness the below graph showing 5-year performance of six of the most prominent, including Recursion and Exscientia.   Share price performance of AI driven drug discoverers (TradingView) This graph provides a fairly compelling reason not to invest in Recursion or indeed in any company in this sector, but investors' hopes are often raised by the hope that a company like Nvidia might get involved, a miraculous drug will be discovered, a lucrative partnership struck with a Big Pharma, or a production line of effective drugs with unique mechanisms of action (\"MoAs\") will be established. The latter is highly unlikely to happen this decade, or perhaps ever, because drug discovery is not only maths and engineering, but biology and chemistry too - in short, it's too complicated for AI to figure out. Perhaps that will change over time, and that is where a company like Recursion or Exscientia can offer value, but asking these companies to churn out successful drug candidates year-after-year is asking too much at present. Recursion's candidates target disease indications that have been largely overlooked by the rest of the Pharma industry, which may suggest these are not lucrative indications, or that surgery is, in fact, the best form of therapy in most cases. With that said, SpringWorks Therapeutics (SWTX) has had success developing a first ever approved therapy for desmoid tumors, securing approval and rewarding shareholders, so it is possible that Recursion could do something similar - but it may take years, and although SpringWorks enjoys a market cap valuation of $2.8bn at present, Ogsiveo earned <$50m of revenues last quarter, up <25% quarter-on-quarter. Concluding Thoughts - I'm Leaning Towards Pessimism For me, not much has changed in my approach to Recursion - most of the companies' share price losses occurred in its first two years as a listed company, and shares have held relatively steady since. Unfortunately, I don't see any exciting catalysts in view for the company at this time, except for, possibly REC-4881 in solid tumors, but if Recursion were a standard biotech developing this drug candidate, I believe the market would value that opportunity at ~$100m. I suspect that the AI hype continues to inflate Recursion's market cap to an unrealistically high-level relative to the opportunities in play. I am not sure whether CCM or FAP are viable market opportunities, and even if they are, there is no compelling evidence to suggest Recursion's candidates can be effective - it may take years to find out. Exscientia brings little in the way of pipeline prospects - one \"positive\" Phase 1 data readout, and one other clinical stage candidate - and although its brings cash, it also brings 300 staff and a hefty R&D bill, so it seems highly likely the combined company will need to raise a significant sum of money soon to keep the business afloat. I don't want to be critical of the valuable work Recursion is doing, laying the groundwork for an industry - AI-driven drug discovery - that may work one day, but doesn't today. The company is operating on the fringes of the Pharma industry targeting niche indications - possibly unnecessarily - but it has to start somewhere, and the research it is doing is worthwhile. Unfortunately, that does not make the company a good investment opportunity at this time, and a market cap of $1.8bn when funds are close to being exhausted and there are no viable revenue generating assets in late-stage clinical studies seems too high.  As such, I am expecting a near term correction in the share price, but if Recursion/Exscientia can survive the next year or so their best hope of success may be to attract Big Pharma or technology industry investment into their R&D efforts. The pipeline is objectively not worthy of a $1.8bn valuation in my view. It may be time to reach out to Nvidia again.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.2","shortVersion":"4.29.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2485419271"}