REC-617 And REC-994 Trials Will Drive Future AI-Driven Drug Discovery Success

Key Takeaways

• Successful clinical trials and expanded pipeline indicate promising future revenue growth and earnings from potential drug market entries.
  
• Strategic partnerships and operational synergies enhance cash flow, efficiencies, and computational capabilities, supporting robust future earnings growth.
  
• Early-stage clinical uncertainties, reliance on partnerships, and high R&D expenses, combined with significant cash burn and integration challenges, pose risks to financial stability.

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.

• The positive clinical data readouts from Recursion's REC-617 and REC-994 trials, including the potential best-in-class efficacy signals, suggest future revenue growth potential as these drugs move through further development and potentially to market.
  
• The launch of multiple additional trials and continued pipeline expansion with new promising molecules signal future increases in revenue streams and potential for higher earnings upon successful development milestones.
  
• The merger with Exscientia has resulted in operational synergies and enhanced data-driven capabilities, indicating improved net margins and increased efficiencies that could impact future earnings positively.
  
• Strong partnerships with major pharmaceutical companies like Roche and Sanofi provide milestone payments and validate Recursion's technology, contributing to robust cash flows and improved revenue growth expectations.
  
• The development of the BioHive-2 supercomputer with NVIDIA enhances Recursion's computational capabilities, likely leading to faster drug discovery processes, reduced costs, and future growth in earnings and revenue through more efficient operations.

Recursion Pharmaceuticals Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Recursion Pharmaceuticals's revenue will grow by 45.2% annually over the next 3 years.
• 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 -788.0% to the average US Biotechs industry of 19.3% in 3 years.
• If Recursion Pharmaceuticals's profit margin were to converge on the industry average, you could expect earnings to reach $34.8 million (and earnings per share of $0.07) by about March 2028, up from $-463.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 152.9x on those 2028 earnings, up from -5.8x today. This future PE is greater than the current PE for the US Biotechs industry at 20.4x.
• 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 6.31%, as per the Simply Wall St company report.

Recursion Pharmaceuticals Future Earnings Per Share Growth

Risks

• The relatively early stage of clinical evidence and reliance on signal-finding studies for programs like REC-617 and REC-994 may introduce uncertainties in proving efficacy, potentially affecting long-term revenue and profitability if these initial results do not lead to successful commercialization.
  
• Dependence on achieving milestones and maintaining partnerships for a significant portion of revenue creates variability, as milestone payments are unpredictable and not guaranteed, impacting cash flow and earnings stability.
  
• The ambitious technological vision for creating a virtual cell and associated high reliance on complex data and supercomputing capabilities may involve substantial R&D expenses without immediate financial return, affecting net margins and financial sustainability.
  
• The market risk of competition or potential industry shifts in the AI-driven drug discovery space could reduce Recursion's perceived competitive edge, potentially impacting future revenue growth and market share.
  
• High cash burn rates and the complex integration challenges from the merger with Exscientia may dilute net earnings if expected synergies and operational efficiencies do not materialize as planned.

Valuation

• The analysts have a consensus price target of $9.0 for Recursion Pharmaceuticals based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $11.0, and the most bearish reporting a price target of just $6.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $180.3 million, earnings will come to $34.8 million, and it would be trading on a PE ratio of 152.9x, assuming you use a discount rate of 6.3%.
  
• Given the current share price of $6.68, the analyst price target of $9.0 is 25.8% higher.
  
• 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.