Schrödinger, Inc. (NASDAQ:SDGR) Q1 2023 Earnings Call Transcript

Schrödinger, Inc. (NASDAQ:SDGR) Q1 2023 Earnings Call Transcript May 4, 2023

Operator: Thank you for standing by. Welcome to Schrodinger’s Conference Call to review First Quarter 2020 Financial Results. My name is Joanna, and I will be your operator for today’s call. Please be advised that this call is being recorded at the company’s request. Now, I would like to introduce your host for today’s conference, Ms. Jaren Madden, Senior Vice President of Investor Relations and Corporate Affairs. Please go ahead.

Jaren Madden: Thank you, and good afternoon, everyone. Welcome to today’s call during which we will provide an update on the company and review our first quarter 2023 financial results. Earlier today, we issued a press release summarizing our financial results and progress across the company, which is available on our website at shordinger.com. Here with me on our call today are Ramy Farid, Chief Executive Officer; Geoff Porges, Chief Financial Officer; and Karen Akinsanya, President of R&D Therapeutics. Following our prepared remarks, we’ll open the call for Q&A. I’d like to remind you that during today’s call, management will make statements related to our business that are forward-looking and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including, without limitation, statements related to our outlook for the full year 2023, our quarter ending June 30, 2023, our strategic plans to accelerate the growth of our software business and advance our collaborative and proprietary drug discovery programs, the timing of potential IND submissions and the initiation of clinical trials for our proprietary drug discovery programs, the clinical potential and favorable properties of our compounds, our expectations related to the use of our cash resources as well as our future operating expenses.

These forward-looking statements reflect our current views about our plans, intentions, expectations, strategies and prospects which are based on the information currently available to us and on assumptions we have made. Actual results may differ materially from what we project today due to a number of important factors, including the considerations described in the Risk Factors section and elsewhere in the filings we make with the SEC, including our Form 10-Q for the quarter ended March 31, 2023. These forward-looking statements represent our views only as of today, and we caution you that we may not update them in the future, whether as a result of new information, future events or otherwise. Also included in today’s call are certain non-GAAP financial measures.

These non-GAAP financial measures are not prepared in accordance with generally accepted accounting principles and should be considered only in addition to and not a substitute for or superior to GAAP measures. Please refer to the tables at the end of our press release, which is available on our website for reconciliations of these non-GAAP measures to the most directly comparable GAAP measures. With that, I’d like to turn the call over to Ramy.

Ramy Farid: Thanks, Jaren, and thank you, everyone, for joining us today. We are very pleased with our strong start to the year. We reported quarterly revenue of $64.8 million, a 33% increase over the first quarter of last year. We strengthened our balance sheet significantly, and we continue to advance our pipeline. Schrodinger has been pursuing the vision of conducting molecular discovery through integrating the accuracy of physics with the speed and scale of machine learning. This presented many challenges when we started 33 years ago, but we remain steadfast and eventually overcame them and even founded companies along our journey to help validate our approach. Today, we have many success stories that have validated our approach and we believe the benefits of using our platform are becoming irrefutable.

We are thrilled with the recent progress of the drug discovery programs at companies we co-founded, including Nimbus Structure and Morphic. These programs, which are now in the clinic, serve as very strong validation of our unique approach and give us tremendous confidence in the potential of our own proprietary pipeline. As you will hear from Karen, we have made very important progress with our pipeline this quarter. We now have 2 Phase I studies of our MALT1 inhibitor SGR-1505 underway. And our IND submission for our CDC7 inhibitor, SGR2921 is on track for the first half of this year. We are also making excellent progress across our collaborative programs, including advancing our SOS1KRAS program to development candidate status. This program is partnered with BMS and contributed significantly to our reported drug discovery revenue in the first quarter.

Our computational platform is the engine that enables the discovery of better therapeutics and novel materials faster and at lower cost compared to traditional methods. We continue to invest in our platform to push the frontiers of molecular discovery. Our initiatives include focusing on expanding the number of addressable targets. We, for example, recently published research showing how our computational methods can be used to refine AI-generated protein structures to sufficiently high accuracy to be useful in physics enabled drug discovery. Our Q1 results illustrate the broad opportunities we have to create value from our unique computational platform. We reported strong contributions from our software business, significant milestones and new capital from our collaborations and successfully transitioned our proprietary portfolio into the clinic.

With this strong start, we are well positioned to deliver on our objectives for the year. Before turning the call over to Jeff, I want to highlight that last week, we published our inaugural corporate sustainability report. While we have always been committed to doing the right thing, this report represents a major milestone in formalizing our strategy around key ESG matters. I would also like to take the opportunity to express my deep gratitude for the dedication and hard work of all our exceptionally talented employees who are critical to achieving our mission. Geoff?

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Geoff Porges: Thank you, Ramy, and good afternoon, everyone. Shorting had an excellent quarter in Q1. We made significant progress with our pipeline. We reported a record quarterly revenue results. We showed continued positive trends in our expense and margin performance, and we strengthened our balance sheet materially. Our results were consistent with our overall expectations and financial guidance for the quarter, and we remain very positive about our business outlook for the year. Let me turn to the financial results for the quarter. Software revenue for the quarter was $32 million, which was just under the $33 million we reported in Q1 2022. Q1 2022 benefited from several large multiyear deals that were not up for renewal in Q1 2023.

As expected, our software revenue declined compared to Q4 as we implemented the multiyear annual software contracts that were signed in the last few weeks of 2022. Drug Discovery revenue for the quarter was $32.6 million and more than doubled compared to Q1 2022. We if the revenue was associated with the recognition of a milestone in our BMS collaboration that reached development candidate status during the quarter. The rest of our Discovery revenue came from a variety of collaborations and programs. Total revenue was $64.8 million and increased by 33% compared to Q1 last year and by 14% compared to Q4 2022. Our results this quarter reflect the benefits of our balanced business model with software and discovery collaborations, contributing similar revenue and driving total revenue to our highest ever quarterly total.

Cost of revenue for the quarter was $19 million and decreased by 8% compared to Q1 2022, but increased by 5% compared to Q4. The decrease year-over-year reflects the progression of our drug discovery business, reallocation of internal discovery teams from collaboration programs to proprietary programs and reduced royalty obligations in our software business. The overall gross margin increased to 71% this quarter compared to 58% in the same quarter of 2022. As we indicated previously, we expect our software gross margin to generally trend in line to slightly higher than last year and also anticipate that the profitability of our drug discovery business will trend positively, although it will bounce around widely from quarter-to-quarter depending on milestone payments and revenue recognition.

Total operating expenses were $76 million compared to $57 million in the same quarter a year ago. R&D was $41 million and increased by 46% from $28 million in Q1 2022. The increase was driven by increased headcount as we added staff to support new programs and advance our existing programs into late preclinical and clinical development and as we reallocate our teams from collaborations to proprietary programs. This quarter, we are also absorbing the forecast of our Structural Biology solutions organization, formerly known exile, who have now been deployed exclusively to the characterization of protein structures for our internal drug discovery and collaboration activities. CRO expenses also increased year-over-year, driven by the progress of our existing programs and the addition of early undisclosed programs to our portfolio.

Technology spending also increased as our portfolio broadened and advanced. We expect our R&D expenses to increase through the year as we progress the most advanced programs in our portfolio into clinical development and increase our investment into our earlier molecules and programs. We intend to outline the progress and potential of the most advanced programs and also discuss several of the earlier programs at our first roading Pipeline Day, which we are planning for September this year. During the quarter, our sales and marketing expense was $9 million, an increase by 37% compared to the prior year Q1. The increase was mainly due to increased staffing to support our geographic expansion to commercialize into new industry verticals and to support our growing number of global accounts.

Our sales and marketing expense is likely to follow the distribution of our software revenue for the rest of the year. Our G&A expense was $26 million in Q1, which is an increase of 19% compared to Q1 2022. This increase was due to higher headcount, royalty obligations associated with the Nimbus distribution and accelerated amortization of intangible assets related to our Extel acquisition in Q1 2022. Travel and lease expenses have also increased, and we expect quarterly G&A to be relatively stable through the balance of 2023. We Overall, our loss from operations was $30.5 million in Q1 compared to $28.6 million in Q1 2022 and $28.5 million in Q4 2022. Other income items were highly significant this quarter. We recognized a gain of $147 million from Nimbus in Q1 as a result of the sale of the TYK2 program to Takeda Pharmaceuticals.

We also reported a gain of $35.7 million from a change in fair value of equity investments, which compares to a loss of $6.2 million in Q1 2022. This change reflects the mark-to-market valuation for our equity ownership in structured Therapeutics and the market adjustment and valuation of our ownership stake in Morphic. Other income was $2.9 million and reflects the higher interest we are receiving on our investment portfolio. Overall, total other income was $186 million, and we reported a noncash tax expense of $26.4 million. As a result of these items, we reported net income of $129 million and earnings per share of $1.75 on a fully diluted basis. We expect the tax liability that we reported in Q1 to be progressively reversed through the remaining quarters of the year as we incur expected operating losses in future quarters.

Our non-GAAP net loss for the quarter was $27.5 million, and cash used in operating activities during the quarter was $31 million. Based on the results and events in the quarter, our cash balance improved significantly. As of March 31, 2023, we reported cash resources and marketable securities of $532 million compared to $456 million at the end of December 2022. Subsequent to the end of the quarter, we received the cash from our partner BMS for the development milestone and the second part of the distribution from Nimbus. While these payments were included in our Q1 2023 results, the cash added $61 million to our cash and marketable securities balance subsequent to the end of the quarter. I’ll now discuss our financial guidance. Our revenue guidance for the year is unchanged at 13% to 17% growth for software revenue and $79 million for drug discovery revenue.

We anticipate that Q2 software revenue will be in the range of $27 million to $31 million and expect the balance of our drug discovery revenue guidance to be distributed more towards Q3 and Q4 than Q2. Compared to Q4, Q2 offers relatively few of the large customer renewal and new business opportunities that drive our incremental revenue. And for that reason, we do not forecast being growth in the quarter. Our expectations for profitability and expense growth are unchanged, and we continue to expect our cash position at year-end to be above our cash position at the start of the year. I’ll now provide a brief update on corporate and business development activity. The last few months have seen remarkable progress for shorting as partner companies.

Our partners number Therapeutics and Morphic Therapeutic and structured therapeutics of all advanced companies and as drug developers. In all 3 of these companies, Schrodinger as a founder, investor and drug discovery partner. They have all been long-standing beneficiaries of our technology and our scientists had key roles in the discovery of their drug cabinets that are in clinical development. We congratulate all 3 companies on their success and are proud of the contributions our staff and technology have made to their innovations. As equity holders in these companies, there remain significant sources of value for Schrodinger, and we see opportunities for further success and value creation for each of them in the future. More importantly, the success of these companies provides even more validation for our technology platform, and it’s the same technology platform and team that are building our proprietary portfolio.

We have other equity investments in emerging companies in our portfolio now and are actively considering more opportunities to invest our time, technology and capital into other entrepreneurial ventures. Beyond our new company activity, we continue to be engaged in discussions about new collaborations and specific program partnerships with companies across the industry. With the value of our inventions becoming even more apparent, we plan to be selective and thoughtful about our commitments to new partners. We have the resources and increasingly the capabilities to advance programs on our own account and will only partner them when we believe the terms match our assessment of the risk-adjusted value of the program, including the value of the unique product attributes and features that our technology confers.

We see many opportunities for our venture corporate and business development activities to continue to add value to Schrodinger in 2023 and well into the future. I’ll now turn the call over to Karen to discuss our collaborations and our pipeline.

Karen Akinsanya: Thank you, Jeff, and good afternoon, everyone. We are really pleased with the advancements we’ve made so far this year across our pipeline of proprietary and collaborative programs. We continue to see success from our drug candidates discovered with our collaborators such as Morphic alpha 4 beta 7 inhibitor. We currently have 9 collaborative programs in the clinic, highlighting our strong research team who work with our partners to design differentiated molecules, leveraging the full power of our computational platform. This quarter, we also reported that the SOS1 KRAS Precision Oncology program, which we licensed to BMS as part of a multi-target collaboration has advanced a development candidate status. Now that our therapeutics team has transitioned the program to BMS for preclinical and clinical development, we have the opportunity to add additional development, regulatory and commercial milestone payments as well as royalties on sales as the program progresses.

We are continuing to work with BMS on oncology, immunology and neurology programs within the collaboration, and we are pleased with how these programs are progressing. The achievement of this significant milestone payment represents an important turning point for our therapeutics business and shows the value creation opportunity from our more recent drug discovery business development activities and partnered programs. Turning to our wholly owned programs. I’ll start with an update on SGR-1505, our MART-1 inhibitor. Our clinical development team is pursuing a global development strategy to gather safety pharmacokinetic pharmacodynamics and preliminary antitumor activity. We are pleased that dosing is underway in patients with advanced B-cell malignancies.

We’ve also begun dosing in a second study of SGR 1505 in healthy subjects. This study is designed to generate additional data on the profile of SGR 1505 to support our clinical development plans. The healthy subject study includes drug-drug interaction and food effect cohorts, and we plan to leverage the data from these pharmacology assessments to inform our ongoing and planned trials in B-cell malignancies and potentially other indications. Moving to SGR2921, our CDC7 inhibitor, we are nearing the completion of our IND-enabling studies and are on track for an IND submission to the FDA in the first half of this year. SGR2921 exhibits strong antitumor activity in multiple preclinical patient-derived AML models independent of genetic drivers, both as monotherapy and in combination with standard of care agents.

Based on these data, we are planning to initiate a Phase I study in patients with relapsed/refractory AML. Earlier this year, we selected our Wen development candidate, SGR3515, which has shown durable antitumor activity in preclinical models used to study more advanced 1 inhibitors. Clinical data from other companies we won programs has provided encouraging evidence of clinical activity in several forms of cancer with high unmet need, including proof of concept in uterine and ovarian cancers. We are excited about the profile of SGR-3515 and believe it may offer advantages over prior inhibitors, including minimal drug-drug interaction potential and optimized kinase selectivity. In addition, our translational work has progressed substantially with the identification of potential synthetic lethality relationships and sensitive tumor types to inform our Phase I trial design.

We are continuing to characterize SGR3515 as we move through IND-enabling studies to enable an IND submission to the FDA next year. To date, we have primarily pursued programs and design challenges for targets with previously known protein structures. Following the integration of our structural biology capabilities in 2022, we are making important strides in obtaining novel protein structures to further support first-in-class product opportunities for targets with strong evidence of activity in humans. We are continuing to initiate new programs that we may elect to partner or advance independently to key inflection points. We have several undisclosed programs at various discovery stages in multiple areas, including oncology and immunology. In summary, we are very pleased with the progress we have made this quarter and expect continued advancements in 2023 across our pipeline of collaborative and proprietary programs.

We are excited about the work we are doing to advance better medicines to patients, and we look forward to sharing more details about our work at Pipeline Day in late September. I will now turn it back over to Ramy.

Ramy Farid: Thank you, Karen. As you can hear, we are off to a strong start this year and are very well positioned to deliver on our goals for the year. We look forward to keeping you updated on our progress over the coming months. At this time, we’d be happy to take your questions.

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Q&A Session

Operator: Thank you. First question comes from Vikram Purohit of Morgan Stanley.

Vikram Purohit: So we had 2 on drug discovery revenues. First, do you still hold $100 million as a potential target for this line item? And then secondly, for the $70 million to $90 million guidance, could you just remind us what the bookends of this guidance contemplate?

Ramy Farid: Sure, Vikram. So yes, we still have the goal of achieving $100 million this year. Our guidance is $70 million to $90 million. We had a really good quarter, as you can see in Q1 with the achievement of the Solan milestone from BMS — and we see a number of paths to getting to certainly into the guidance range for the year, but also to getting to that strategic goal. As we indicated when we provided the guidance, we are contemplating significant business development activity to achieve the goal, but it’s not necessary to — that we get a significant contribution to get to the low end of the guidance range by any means. So we’re still maintaining that guidance. And as I indicated in my commentary, though, the revenue outlook is going to be skewed towards the back half of the year just because of the timing of all the elements that contribute to that range.

Vikram Purohit: Understood. And if I could ask a follow-up on that question then. So if there is a point in the year at which you could revisit the guidance and think of potentially moving it upwards, would it then be in the second half of the year when you’d have that clarity?

Ramy Farid: Look, as I just suggested, part of this is contingent upon progressing business development discussions. We don’t want to signal how the cadence of those discussions or the timing. If there’s something to announce, then we’ll announce it. But then, of course, we’d aim to update our guidance on the quarterly call just as we would normally do throughout the year.

Operator: The next question comes from Michael Yee at Jefferies.

Unidentified Analyst: This is Vision for Michael have a question on software guidance for next quarter. So looking at previous years, the cadence and decrease in Q2 is not unusual. But just curious on the year-to-year guidance midpoint, which is just below your last year revenue, which I believe was $30 million for software. Like what are some factors here that might have driven this increase? And do you have any comments on whether this might be the trend for the rest of the year, keeping in mind a full year guidance unchanged 13% to 17%.

Geoff Porges: So yes, thanks for the question. Our Q2 guidance reflects our current expectations for our renewals and continuing software contracts during the quarter. The outlook is affected by the size and number of contracts that are up for renewal in the period and the opportunities that those contracts present for significant increases in scale and value. Put simply, the customers in Q2 are relatively small in terms of their annual contract value. Because of this mix of customers, the absence of biotech IPO and follow-on financing activity is most acutely felt in this period. The opportunities for growth in our business and also the alignment with our commercial activities are increasingly focused on the large global customers and the renewals for those customers are increasingly concentrated at the end of the year.

Now to look towards the end of the year, we are already actively discussing new million dollar plus software contracts and increases in existing contracts with more than a dozen global biopharma customers. A number of these are likely to be multimillion dollar multiyear contracts. We also expect the large multiyear contracts that we signed in Q4 of 2021 to be renewed in Q4 this year. It’s these discussions and their potential but out to pin our confidence in our guidance for the full year. Ramy, is there anything you’d like to add?

Ramy Farid: Yes. Thanks, Jeff. That was perfectly stated. I agree with all of that. I just want to emphasize that we’re feeling really confident about the outlook for the year, given the stage of these discussions, the number of them and the enthusiasm that we’re seeing from our customers to really deploy our platform on their discovery programs at scale, and that’s the key. I think you know I’ve been doing this for a long time, and I can see a real clear shift and the nature of these discussions. I think it can actually be summarized by saying that companies are feeling more of a sense of urgency to fully deploy our technology on their programs. And this is really giving us increased confidence that these deals will close when they come up for renewal later in the year.

Operator: Thank you. The next question comes from David Lebowitz from Citi.

David Lebowitz: Specifically on cadence as we go through the year on the software side. I know that the second quarter and third quarter historically have been down quarters, relatively speaking, you’ve given guidance for 2Q guidance for the full year is maintained. Does the balance of that, I guess, guided that shift from 1Q to 2Q. Is that something we think of as moving towards all towards the year-end? Or does some of that growth find its way into 3Q?

Geoff Porges: Thanks for the question, David. Look, we’re not giving guidance for Q3 at this stage. But I think from my answer to the earlier question, you can tell that we have line of sight to really substantial renewals in Q4. We do think there are opportunities in Q3 that can contribute to the quarter and to get some of that growth. But at this stage, we’re not updating — providing guidance for Q3. It’s relatively early days, but we’re very confident about the back half of the year and about our full year numbers.

David Lebowitz: Would it be fair to say, I mean, every year, pretty much since 2019, the fourth quarter as a percentage of annual has ticked up. Would it be fair to say that trend is probably going to continue in ’23 as well?

Geoff Porges: That’s definitely our sense. I don’t want to give you a sort of firm sense of that percentage only because the conversations that I mentioned and that Ramy alluded to, we’re not sort of locking in a timing for those conversations coming to fruition. But I think as a general observation, I think you’re correct.

David Lebowitz: Agreed. Thank you for taking my questions.

Geoff Porges: Thanks.