Recursion Pharmaceuticals, Inc. (RXRX) Earnings Call Transcript & Summary

Good morning, everyone. I'm Sean Laman, head of U.S. Mid-Cap Biotech Equity Research at Morgan Stanley, and welcome to our Global Healthcare Conference. Before we commence, I'll make you aware of some important disclosures. For those disclosures, please go to the Morgan Stanley Research Disclosure website at www.morganstanley.com/researchdisclosures, and if you have any questions, please reach out to your Morgan Stanley sales representative. So, post that, we now welcome Recursion Pharmaceuticals with CEO and President Najat Khan and CFO Ben Taylor. Welcome to the both of you. Thank you. Maybe do me a favor here and answer sort of three macro type questions. So just think about the rise of China-originated innovation. Does it change your competitive positioning and your R&D and BD playbook?

Yes. Yes, thank you so much, Sean, for the question, and it's great to be here. I would say it, in fact, reinforces what we do. I mean, Recursion started with the whole concept of better understanding and decoding biology. So a huge amount of focus for what we do is around novel biology. I was, in fact, just recently in Shanghai two weeks ago, and just the speed and the execution and the prowess in that, in optimizing known biology, was really impressive to see. And it's also reflected by all of the deals that have been done to date. But that next frontier has to be new and novel biology, really first-in-class targets. And that's evidenced by what we have in our clinical program. REC 4881, REC 1245, we'll talk a little bit more about that I'm sure, which are both first-in-class targets that came from our engine, novel biology, or novel biology linked to the right indication, which is the case for REC 4881. The other thing I'll also say, we recently announced an unexplored new target that was optioned in neuroscience by Genentech. That comes from our proprietary data maps that we've generated. So taken together, that's the so that's the premise of what Recursion was really founded on around novel biology, and I think it becomes even more important, and some could say prescient, in terms of what's happening with the optimization and the speed with in China as well.

Sure, thank you. I'll skip the next question because it's AI related, but you are an AI-derived company. So, you know, which policy variable is it? Is it FDA, Medicare negotiation, MFN, tariffs, or global pricing? Do you think about the most, and what matters most to your business on the regulatory front?

Yes, it's a great question, Sean. I think all of the above are, of course, important to take a drug and actually commercialize and ensure this access to patients. For the stage of the company that Recursion is, FDA regulatory guidance, et cetera, is critically important, and we have a very productive relationship with regulators. I would say, in addition to that, as we think about the commercial potential of our assets, of course, the other policies that you mentioned, MFN and others, are also critical.

Sure, thank you. Some questions here on strategy. So you've been elevated to CEO over the last 12 months. You've cut operating expenses materially. You know, a bit of level setting. How should investors view Recursion now?

Yes, I know, nine months, Sean, nine months. Can't take, I'm just kidding. Here's what I would say, Recursion is a fundamentally different company than 12 to 18 months ago. Yes. You can't take it. You know, Recursion has transitioned from a company with a promise in the novel biology platform to a company where the engine, I like to call it, has been expanded to all parts that you need to make a drug: biology, chemistry, clinical. And to do that, what we have done is we are building the body of evidence in the clinic and beyond into in terms of differentiated outputs that are being generated by that engine. I think that is critical. And you're starting to see repeatability across the progress we're making both in our internal pipeline and also in our partnership. And I'll go through that just in a second. And then the third piece that's materially changed, Sean, as you mentioned, is just our level of productivity. We have really leaned into AI agents, automation, as well as concentrating capital where we have the highest conviction. We do that every single day. And therefore, we've reduced our cost base about 40% pro forma post the integration with Exscientia. Just to give an example, you know, it's it's good to say those three pillars, but just to give an example in terms of where we're seeing that body of evidence translating from the engine. Number 1 is the first-in-class program in our clinic. So REC 4881, first in class for FAP, total addressable market, just to remind everyone, nothing approved. This is an oral drug. It's over $10 billion. We may also have multiple programs with 1, for instance, REC 1245, RBM39, first-in-class target, identified in our platform, the degrader made on our platform, and should have more data later this year. That's just 1. Then we've also made a lot of progress with our partners. We've just crossed over $525 million in up-runs and milestones where we're actually advancing first-in-class or intractable biology programs with our partners. These are not isolated events. I think that's really important to understand. You're seeing this repeatability across from novel biology, novel programs, to the clinic. That's all produced by 1 recursive learning platform that we've been building over a decade. And the fact that we're doing that with better productivity, as I mentioned, 40% less of our cost base, I think it's a testament to if you get better at learning, you should be able to predict more going forward and be able to validate that in the clinic. So in a nutshell, I will say the company is really transformed to a company with differentiated assets, powered by an end-to-end AI engine with repeatability that's coming through both our internal pipeline and our partnership.

Thank you. And how should investors think about the key points of differentiation of your platform? And what do you think investors misunderstand or miss the most?

I think what investors haven't fully captured, I would say, is two things. And it's because of this transformation that's happened in the last 12 to 18 months, Sean, as I mentioned. First is actually the inherent value of the assets itself. So I mentioned we have multiple programs, but two that are first-in-class programs. The first one with really high-quality proof of concept data already delivered. I think that is underappreciated today because often people are associating Recursion with the pipeline from a couple of years ago, so I think I think that's 1. The second, when you look at the progress across the pipeline and the partnerships, like I said, these are not disconnected. There's that body of evidence collectively that's being generated. And I think people are underestimating how much the platform has changed. It's not a phenomics platform. You know, when I first joined Recursion, people would say, "Oh, yes, you do some phenomics." Absolutely not. It is expanded from that to multimodal data where we can find novel targets validated by what we just did with Genentech and what we have in the clinic. We can make novel molecules, and we have evidence in the clinic, and I think that's a very different engine than what was around 12 to 18 months ago. And I would always look for that repeatability because if you have an engine, I want to know that you can do that over and over again. So I think those two pieces are underappreciated, and, you know, we have a lot of exciting catalysts coming up to dig into that more.

Awesome. I'll move on to REC 4881 and FAP. Maybe to give some investors, tying the platform and the discovery piece together. So how was the platform used to discover 4881? What are some of the properties of the pipeline candidate that make you most excited?

Yes, so thank you, Sean. This is REC 4881. This is our first-in-class oral asset in FAP. So just to answer the first question, this came, as I like to call our platform, there's three components: the biology, design, and clinical AI. This came from the biology part of the platform. It has been known for 50 years that FAP is driven by a loss of function in the gene APC. But nobody had ever studied and nobody had ever made the unobvious insight that a MEK1-2 inhibitor could actually reverse the challenges caused by APC loss of function. That arc was not known. Nobody had tested it clinically. So what we did is we looked at cells and we knocked out APC. That's the root cause of the disease. And then, using our platform, we screened thousands of compounds to see which compound can actually phenotypically reverse. This is a cell morphology. Reverse the cells from disease state to healthy state. This is where we use ML models. And the top of the list of predictions from our foundation models was this asset, which happened to be a MEK1-2 inhibitor. We did not go in with the hypothesis. So think about how you do discovery today. You have a hypothesis and a mechanism, and you go test it out. Here is an unbiased, going from disease to healthy, and that's the mechanism that came up at the top of the list. But this is where it's really important. The last question you asked me, we generated our own data. We have our own data factory in Salt Lake City. Super important as you think about LLMs, frontier labs, everyone's talking about models being commoditized. What's the next frontier? Having your own high-quality data. But the next step that's really important, actually testing that in the lab. So we did our preclinical model. It looked good with that asset. Then we did our healthy volunteer. It looked good. And as Sean just mentioned, we did our proof of concept study where we saw most rapid and durable polyp burden reduction. Rapid in three months, almost. Almost half the polyps are gone. And what was even more remarkable, especially for KOLs, is when they're off drugs for three months. The effect not only persists but deepens in some patients. And remember, FAP is a chronic disease. It starts when you're 10, 11, even younger. And you're living with this disease for the rest of your life. It is the most penetrant GI cancer compared to, you can compare to BRCA1/2 in breast cancer, 50,000 patients, U.S. and EU5. The standard of care today is surgery. Surveillance and surgery. Patients have more than 50% to 60% of their GI anatomy removed. Imagine losing that. Your colon's removed, parts of your upper GI is removed, your pancreas, your gallbladder. It's incredibly invasive. So if you can get a disease-modifying drug that can slow that progression of the disease, so that you can actually reduce the surgeries, reduce the polypectomies, all of the invasive procedures. That would be incredibly meaningful for patients. And last thing is there is 0 approved drugs. So ours, just to summarize, rapid reduction in polyps, which is, and by the way, every polyp is precancerous. That's the root cause of the disease. Durable even when the patients are off drugs for three months. Oral, which we all know when you get a drug that's oral for patients, it's chronic. And the last thing I didn't mention, which has been a really exciting piece that we're learning more about, we see polyp burden reduction in the upper GI and in the lower GI. Let's take a second to answer why that's important. Even after your colon is removed, the polyps keep growing, upper GI and lower GI. The upper GI is where you have your other organs, pancreas, gallbladder, and so forth. It's really challenging because that's where you end up getting the invasive surgeries. And another thing about the anatomy of the upper GI is thin, means when you remove polyps, the risk of perforation and bleeding is higher. We're the only asset, investigational asset, to date that's shown such rapid, durable polyp reduction and also in the upper GI. So that's really meaningful from an unmet need perspective.

Thank you. We are in active FDA engagement to define a registrational pathway with updated data at CGA, IGC, and regulatory clarity expected this half. Can you provide more color on what we should look for in the second half for those updates?

Yes, great question. As Sean mentioned, there's two important aspects. One is we're sharing additional information at the CGA meeting in early November. This is the Congress, the main Congress for Inherited GI Diseases. So this is essentially our target audience for FAP. A presidential plenary to share additional information on our Phase 2 data, just some of the data I mentioned, but more information. So that's numero uno. Number 2, we are also in active conversations with the FDA. Just to remind everyone, we have orphan drug designation. And then we have fast track designation as well. So it's been a very productive set of conversations with regulators. Our base case is essentially what you see, ERAPA-like progression-free survival. What does that entail? These are the meaningful clinical events that you would want to slow down: surgeries, you know, dysplasia and so forth. That's what we're focused in our conversations with the FDA, and more to come.

Thank you. There has been a history of toxicity with MEK1-2 inhibitors, so maybe talk us through what you're seeing on the safety profile. Also, can we touch on the durability of treatment raises the possibility of intermittent dosing, so can you talk us through how you think about dosing as that potentially part of the registrational package?

So two questions. Let's talk about the safety profile. It's a MEK1-2 inhibitor. Over 85% of the AEs, treatment-related AEs we've seen so far, are Grade 1, 2. The main ones that we see is dermatitis, which is very much in line with what you see with MEK1-2 inhibitors. We've seen some transient CPK changes and so forth. Just to the question Sean asked, there are actually MEK1-2 inhibitors already approved in oncology, but there's also precedence in rare diseases. It's approved in NF1, which is a rare disease for pediatrics and for adults. And from that perspective, I would say what we have seen is this is very much in line. And from that perspective, I would say what we have seen is, this is very much in line. The dermatitis is something that we are also managing proactively with prophylactic solutions, which has really helped. And I would say even in the real world, most of the CPK has been quite transient-driven LVEF. So it's very well known in terms of the profile, given both in ONC and also in rare diseases. That's something we take very seriously. The other thing I just forgot to note is ours is a QD. And we will also be looking at intermittent dosing, just given what we have seen with the durability of this drug. Some of the other MEK1-2 inhibitors that exist are primarily BID. So again, if you think about it from a patient perspective, a QD, especially for chronic dosing, I do take something on a QD basis, and I can tell you even that my adherence isn't always the best. So that's a little bit around the safety profile. Question was great, yes, on the durability, you know, we don't know exactly why, but we have some hypotheses, you know, in terms of we're doing some preclinical work, you know, when you look at polyps on the durability of response. And is there potential that a MEK1-2 is actually evolving both the composition of the polyp as well as the stroma, so the microenvironment of the polyp as well? So there's some translational work we're doing in-house. But I will say what's really interesting from an MOA perspective for this MEK1-2 inhibitor, it acts via a dual mechanism. One is, of course, the MAP kinase pathway suppresses. We call this the evolution pathway for polyps, because as polyps mature, you don't just get the APC mutation. You get KRAS, BRAF, and additional ones. And the dual part is the second part is it also has crosstalk with beta-catenin. So we think that's the other reason that is also effective. It has it has a dual hit in terms of on the polyps. And then some of the work that we're doing in terms of is there potentially you're changing the composition of the cells in the polyp itself and the stromal area, more to come. But look, what we're very excited about and many KOLs, I think this is one of the aspects they found really compelling, is that durability when the patients, not just durability off drugs, nobody's tested it off drugs, and in some cases, even deepening.

Sure. Thank you. Moving on to REC 1245 and the broader pipeline. So REC 1245 targets RBM39, which came out of your maps. How was the molecule discovered?

Yeah, the discovery of the molecule came from the same map that I just mentioned for REC 4881. This is what I mean. Non-obvious insights from the same engine starts to get interesting. And just recently, we had a new target by Genentech from the same type of engine. So this is what I mean, that you start to see the repeatability. So let me just explain for REC 1245. So at Recursion in Salt Lake City, we have a large data factory where we can manufacture millions to billions to trillions of cells. And we knock out every single gene in that in those cells, so 20,000. And you can measure not just phenomics, transcriptomics, and then for validation, we add proteomics and other assays to the list. Very different from the Recursion 12 to 18 months ago. So we're at REC 1245, looking at CDK12. I'm sure many of you know that CDK12 has been a target of interest for some time for DDR modulation and so forth. But it's been hard to drug because of the similarity to CDK13. So we looked at what are other potential entry points by looking at all of the other genes that we knocked out that have potential shared biology to CDK12. That's when RBM39 came out. That was a non-obvious insight. And the next thing that we did was we rapidly, within 18 months, designed a novel degrader. Then we went into the clinic, and what we have so and by the way, there's two big paths, I like to call this asset, potentially multiple doors that you can open. One is the genomically unstable tumors, think about heavily pretreated patients with solid tumors that are genomically unstable. The other is pediatric, you know, transcription tumors, like Ewing, for instance. So the beauty of it is, I think there's a potential, and you know, we'll let the data drive it for us, monotherapy, if we see increasingly high dependency in RBM39, you can actually put those cells over the edge monotherapy, or potentially combo, you know, think about the PARP, PRMT5. So there is multiple options, that's it, that's why they address patient population, about 100,000 patients is quite high, but this is a novel target, same engine that I talked about, 4881, same engine that's creating the novel targets for Genentech, and the design platform that made this molecule, same engine as what we're doing with Sanofi, where we've gotten five milestones to date, another important one up in I&I. So that's how we had discovered the target. And at that point, there was not this connection between RBM39 and CDK12 and the pathway and mechanistic understanding. So it's not just a novel target. Is going is once you understand the target, you actually get a better understanding of the patient population you'd want to enrich. That's powerful before you dose a single patient. We've been talking about it for the long time, but we're making some good headway there. But we have more data coming on that later this year.

Sure, and you've got other programs, multiple programs advancing. How does the data set look or the news flow look over the next six, 12, and 24 months?

Yes, I mean, we have multiple other programs. For instance, we just initiated our PI3K1047 program, DASP. We have IND enabling programs in ENPP1. We have LSD. I think the way, if I step back, Sean, I would think about it as, we are constantly looking at our programs. I mean, because we have a repeatable engine, we have multiple shots on goal. And like we did last year, we continue to look at the programs and say, where do we have the highest conviction? And double down. And we already have some great examples to pick from from the multiple programs that are coming up. All of these programs and some sort of catalyst coming up in the next year.