The strongest companies can raise money in any environment.
Recursion Pharmaceuticals (RXRX) recently raised $150 million in gross proceeds from a private placement of common stock, including half from a single fund that has never before invested in the company. A private placement means all shares were sold directly to investment funds rather than offered to the public. Such transactions typically occur at more favorable prices than public offerings of common stock.
The new capital will pad a balance sheet that held about $454 million in cash at the end of June, which will be burned quickly by the company's ambitious drug development strategy. For example, the drug developer has initiated four new clinical trials in 2022 alone.
It's also a promising sign of strength for investors, although long-term performance will be driven by execution and clinical trial data.
Mapping Biology to Discover New Drugs
Recursion Pharmaceuticals is a technology-enabled drug developer. It's part of an emerging field that utilizes supercomputers, machine learning, and automated robotic labs to conduct discovery-stage R&D within the context of drug development. The idea is that the combination of such tools can enable scientists to evaluate chemical compounds with drug-like potential on much larger scales and much quicker timelines than with traditional chemistry and biology approaches.
Each company in the field has a slightly different approach. Recursion Pharmaceuticals is building maps of biology to understand how genes interact with one another and their role in disease. The company's scientists perform whole-genome sequencing (WGS) to understand the activity level of every gene in a specific disease model, which allows new discoveries to be made.
For example, most drug developers target the same dozens of genes when developing cancer drugs. If the KRAS gene is found to play a central role in many solid tumor cancers, then companies will search for chemicals that can neutralize KRAS proteins as a potential treatment method. Companies may also explore what happens when inhibiting genes that interact directly with KRAS. These are called metabolic pathways.
By contrast, Recursion Pharmaceuticals looks at all genes when studying KRAS-driven cancers. It may discover that genes far away from known metabolic pathways are also active. No other companies are exploring these parts of the genome (or even know they might be involved), allowing the drug developer to develop truly novel and unique drug candidates.
The difference between traditional drug development and mapping biology is the speed and scale of discovery. Recursion Pharmaceuticals may be able to make these discoveries across rare diseases, cancers, and other ailments in months instead of years or years instead of decades.
Recursion's Approach Is Novel, But Also Expensive
The upside of mapping all of biology to make new discoveries in drug development is that Recursion Pharmaceuticals will generate massive and valuable datasets at a scale and speed never before possible. The downside is it will be prohibitively expensive to develop all the discoveries.
Case in point: The pre-commercial drug developer counts dozens of programs in its pipeline including discovery and pre-clinical assets. Most young companies have less than 10 total programs.
Recursion Pharmaceuticals will need billions of dollars to bring dozens of programs through clinical trials, regulatory milestones, and eventually to market. The company has expertly managed and balanced these capital needs to date. The business has raised hundreds of millions of dollars through both public and private offerings of common stock. It has also formed lucrative partnerships with Bayer (BAYRY) and Roche (RHHBY) that brought in an additional $230 million in upfront cash.
A collaboration with Bayer could bring in an additional $1.2 billion in milestone payments for over 12 programs focused on treating fibrosis. Meanwhile, the collaboration with Roche has a unique component baked in.
Recursion Pharmaceuticals is helping Roche map biology to develop up to 40 neuroscience programs. The pre-commercial drug developer could earn up to $300 million per program. Historical success rates suggest only two to four programs might reach the market, but that would still result in handsome payouts.
Additionally, Roche has the option to purchase datasets from Recursion Pharmaceuticals for hundreds of millions of dollars, which might be an industry first. The ability to sell access to the data--the actual maps of biology--provides a unique opportunity to fund further development of the broader technology platform and pipeline.
The latest private placement won't be the last fundraising event or the last chunk of dilution for shareholders, but pulling it off in the current market environment is a sign of strength for Recursion Pharmaceuticals. Investors still need to see clinical programs deliver meaningful success in mid- and late-stage clinical trials before getting too carried away. Nonetheless, the company's unique technology-enabled approach has helped it fund development so far. Execution and clinical readouts will follow.
