High R&D Burn And Regulatory Hurdles Will Cripple Future Value

Key Takeaways

• High R&D spending and lack of commercial assets expose the company to negative cash flow, dilution, and earnings risk.
  
• Regulatory uncertainty, revenue instability from partnerships, and increasing competition jeopardize growth, margins, and long-term market potential.
  
• Strong pharma partnerships, AI-driven R&D advantage, and operational discipline position Recursion for future growth, clinical milestones, and improved market competitiveness in computational drug discovery.

Catalysts

Operates as a clinical-stage biotechnology company, engages in the decoding biology and chemistry by integrating technological innovations across biology, chemistry, automation, data science, and engineering to industrialize drug discovery in the United States.

• Despite the rapid expansion of Recursion's proprietary AI and computational drug discovery platforms, persistent high research and development burn rates combined with a lack of any late-stage or commercialized assets make the company vulnerable to ongoing negative cash flows and potential dilution, directly threatening future earnings per share.
  
• Increasing global scrutiny and potential regulation of artificial intelligence algorithms in healthcare poses a significant risk to the company's core technology and could lead to delays in regulatory approval and adoption of its platform, negatively impacting revenue growth and partnership deal flow.
  
• Intensifying competition from both new AI-driven biotech entrants and established pharmaceutical companies with superior funding could drive up R&D and talent costs, ultimately compressing margins and eroding Recursion's potential market share.
  
• Growing healthcare cost containment pressures from payers and governments may constrain the pricing and uptake of the novel therapies or platforms Recursion develops, thereby placing long-term stress on revenue potential for both internal drugs and externally-partnered programs.
  
• Heavy reliance on milestone payments from partnerships with large pharmaceutical companies introduces revenue instability; failure to achieve development hurdles or the loss of key partners would further weaken top-line projections and increase risk to Recursion's net margins and future cash runway.

Recursion Pharmaceuticals Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Recursion Pharmaceuticals compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Recursion Pharmaceuticals's revenue will grow by 10.9% annually over the next 3 years.
• The bearish analysts are not forecasting that Recursion Pharmaceuticals will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Recursion Pharmaceuticals's profit margin will increase from -1004.9% to the average US Biotechs industry of 14.1% in 3 years.
• If Recursion Pharmaceuticals's profit margin were to converge on the industry average, you could expect earnings to reach $12.5 million (and earnings per share of $0.02) by about August 2028, up from $-649.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 156.0x on those 2028 earnings, up from -3.6x today. This future PE is greater than the current PE for the US Biotechs industry at 16.9x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.78%, as per the Simply Wall St company report.

Recursion Pharmaceuticals Future Earnings Per Share Growth

Risks

• Recursion has demonstrated the ability to achieve important partnership milestones with major pharmaceutical companies such as Sanofi, Roche, Bayer, and Merck, which can translate to over $100 million in milestone payments by the end of 2026 and directly boost future revenues.
  
• The platform's rapid iteration and continued integration of cutting-edge AI-exemplified by Recursion OS 2.0 and proprietary tools like Boltz-2-could significantly enhance drug discovery efficiency and success rates, potentially reducing R&D costs and improving future net margins.
  
• Multiple internal pipeline programs in oncology and rare disease are advancing toward clinical inflection points, with anticipated clinical trial readouts in the next 18 months, creating catalysts that could drive topline revenue and position the company for potential out-licensing or commercialization opportunities.
  
• The company is achieving operational leverage with a projected 35% reduction in cash burn from 2024 to 2026 and a strong cash position (over $500 million on hand and managed expense guidance), which extends the cash runway through Q4 2027, lowering the risk of dilution and supporting stable earnings per share.
  
• Strategic leadership in AI-driven biopharma, illustrated by open-sourcing industry-standard tools and maintaining proprietary advances, as well as early movement toward a virtual cell computational model, positions Recursion to benefit from the long-term secular trend toward computational drug discovery, increasing its competitiveness and market share prospects.

Valuation

• The assumed bearish price target for Recursion Pharmaceuticals is $3.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Recursion Pharmaceuticals's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $10.0, and the most bearish reporting a price target of just $3.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $88.2 million, earnings will come to $12.5 million, and it would be trading on a PE ratio of 156.0x, assuming you use a discount rate of 6.8%.
  
• Given the current share price of $5.41, the bearish analyst price target of $3.0 is 80.3% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.