Schrödinger, Inc. (NASDAQ:SDGR) Q1 2024 Earnings Call Transcript

Schrödinger, Inc. (NASDAQ:SDGR) Q1 2024 Earnings Call Transcript May 1, 2024

Schrödinger, Inc. reports earnings inline with expectations. Reported EPS is $-0.76 EPS, expectations were $-0.76. SDGR isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Welcome to Schrödinger’s Conference Call to review First Quarter and 2024 Financial Results. My name is Claudette [ph], 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, Miss. Jaren Madden, Director 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 and 2024 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 schrodinger.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. During today’s call, management will make statements that are forward-looking and 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 second quarter and full year 2024, our plans to accelerate the growth of our software business and advance our collaborative and proprietary drug discovery programs, the timing of, initiation of, and readouts from our clinical trials, the clinical potential and properties of our compounds.

The use of our cash resources, and our future 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 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, 2024. These forward-looking statements represent our views only as of today and we caution you that, except as required by law, 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 pleased with the start of the year, delivering revenue growth in line with our expectations, and continuing to advance our proprietary pipeline. As you will hear from Karen, our first two clinical programs are progressing in Phase 1 clinical studies, and today we announced IND clearance for SGR-3515, our Wee1/Myt1 inhibitor. Total revenue for the first quarter was $36.6 million with software revenue totaling $33.4 million, and we are reiterating our full year guidance. We are in active discussions with multiple global and emerging biopharma companies about increasing adoption of our platform. While it is too early to predict the magnitude of scale up from customers with renewals in the remainder of the year, we continue to see high interest in computationally driven drug discovery, and believe we are well positioned to capitalize on the growing wave of research teams incorporating computation at scale into molecular discovery programs.

Today we reported that rights to the SOS1 inhibitor discovered and developed as part of the collaboration with BMS have reverted to us based on portfolio prioritization decisions. Collaborations are an important part of our business, and we are routinely assessing opportunities with existing and new collaborators and partners. Our venture activity has also been a very successful part of our overall strategy, validating our platform and strengthening our balance sheet with both cast distribution and equity from companies we have co-founded. We have been pioneering computational molecular discovery for over 30 years, and continue to push new frontiers integrating physics and machine learning to extend our scientific and commercial leadership position in the industry.

We have a bold vision of structurally enabling every protein in the human genome with an initial focus on the most important off targets known to cause serious side effects that derail clinical programs. There is an emerging requirement for such models to predict drug toxicity risks before animal or human studies. We are very actively developing computational solutions to meet these requirements. Our recent advances characterizing the structure of key proteins such as HERG and cytochrome P450 enzymes are examples of these efforts. We have also expanded our informatics platform, and in March we launched a new version of live design that supports biologics. Live design is an enterprise cloud-based solution that allows drug discovery teams to centralize access to computational modeling tools and data in a single interface.

Live design previously only supported small molecules, and we are pleased to expand our informatics capabilities to support biologics. We are well positioned to advance all aspects of our business this year. We see clear opportunities to drive software adoption, to extend our scientific leadership in the industry, and to advance our clinical programs towards multiple data readouts. I will now hand the call over to Geoff.

Geoff Porges: Thank you, Ramy, and good afternoon, everyone. Schrödinger have a solid Q1 with software revenue meeting our expectations. A handful of software renewals were bumped into Q2 from Q1 and reduced some of the upside opportunities for the quarter. But we should see the benefit of these in Q2 and the balance of the year, underpinning our confidence in our full-year revenue growth guidance. Our business in China has been below our expectations this year, based on the challenging commercial environment there, but we have many opportunities to offset that impact with larger renewals in the U.S. and Europe. We continue to enhance the capabilities of our software and see multiple paths to secure multimillion-dollar increases in contract size, a global and emerging biopharmaceutical companies in 2024 and beyond.

We are also very excited to have advanced our proprietary portfolio to now have a third program entering the clinic. And we are within sight of our first clinical data for our proprietary programs in patients later this year or in 2025. Finally, the return of our SOS1 program from BMS gives us another opportunity to evaluate for our proprietary portfolio and to consider for external partnership and combination development opportunities. In Q1, software revenue was $33.4 million and increased to 4% compared to Q1 last year. Q1 last year benefited from a significant revenue contribution from multi-year renewals that did not recur in Q1 this year. Hosted software revenue was 22% of total revenue and grew more than 60% compared to Q1 2023. The faster growth in hosted software was in line with our expectations and consistent with our prior comments about an anticipated gradual transition to hosted software licenses across our customer base over a number of years.

Maintenance and professional services were relatively constant, as new service and maintenance agreements largely offset the native effects of projects that were completed or transitioned to hosted licenses. Drug discovery revenue was $3.2 million in the quarter compared to $32.6 million in the same quarter last year. The first quarter of 2023 included a large collaboration milestone payment associated with the progression of a collaboration project at BMS. We continue to expect that drug discovery revenue to be variable from quarter-to-quarter due to the timing of milestones and challenging to forecast given uncertainty about partner decisions and about the timing and value of new business development activity. Total revenue was $36.6 million in Q1 compared to $64.8 million in Q1 of 2023.

The difference was due to drug discovery revenue. Our cost of software revenue was $8 million compared to $7.1 million in Q1 2023. The increase was mainly due to high technology costs. Our software gross margin was 76% for the quarter compared to 78% in Q1 2023, also mainly due to high technology expense. Our cost of drug discovery revenue was $9.7 million compared to $12 million in Q1 2023. The decrease in the cost of drug discovery was due to the shift in allocation of staff from collaboration to proprietary programs and also lower CRO expenses for collaboration programs. Our drug discovery margin was negative compared to a profit in Q1 2023 when the quarter benefited from a single relatively large milestone payment from BMS. Overall, our gross margin was 52% compared to 71% in Q1 2023.

The decline was driven by lower drug discovery revenue. Turning to operating expenses, R&D expenses $51 million compared to $41 million in the same period of 2023. Most of the increase was for our therapeutics R&D was partly driven by changing allocation between our collaboration investments and our proprietary programs, as well as by higher headcount and higher CRO expenses. Overall platform of therapeutics R&D continued to be approximately balanced in their contributions to our total R&D. Health and marketing expenses $10.2 million for the quarter and increased by 11% compared to the prior year. The increase was mainly due to high headcount and associated costs. G&A expense was $25.5 million in Q1 2024 and decreased slightly compared to the same period a year ago.

The decrease was due to royalty payments associated with an Nimbus distribution in Q1 2023, which flows through G&A by county convention. None of this effect underlying G&A expenses increased by approximately 5% mainly due to higher FTE expenses. Total operating expenses were $86 million in Q1 2024 compared to $76 million in the same period in 2023. The increase is mainly due to higher R&D. For the quarter our operating loss is $67 million compared to $31 million in the same period a year ago. Changing for value of equity method investments was $8.1 million compared to $35.7 million in Q1 2023. The change in Q1 2024, which is the changes in the value of our equity ownership and structure therapeutics and Morphic during the quarter. In the same period in 2023, the change in fair value was driven by the change evaluation of our ownership position and structure associated with a successful IPO.

Other income consisted of $5 million in Q1 2024, mainly consisting of interest on cash balance. In Q1 23, other income was $2.9 million. Gain on equity method investments was zero in Q1 2024 compared to $147 million reported in Q1 2023 driven by the Nimbus distribution. Total other expense or income was $13.2 million in Q1 2024 compared to $186 million in Q1 2023. Our loss before taxes was $54.3 million compared to a pre-tax profit of $155 million in Q1 2023. Our tax expense in Q1 2024 was $0.5 million compared to $26 million of tax expense in Q1 last year. Our net loss diluted share was $0.76 in Q1 2024 compared to a profit of $170.75 in Q1 2023. On a non-GAAP basis, excluding gains and changes in fair value for equity method investments, our loss per share was $0.86 in Q1 2024 compared to a loss of $0.39 per share in Q1 2023.

Our cash used in operating activities was $39 million in Q1 2024 compared to $31 million in Q1 2023. And our total cash and marketable securities balance declined by $33 million in Q1 as our operating cash was offset by $7.6 million in cash realized from the sale of equity during the quarter from our ATM. At the end of Q1, we had $436 million in cash and marketable securities compared to $469 million at the end of Q4 2023. Our previously provided financial guidance for the year is unchanged. We are confident about the outlook for our software business and see multiple opportunities for significant step ups in contract size at many of our customers. We are encouraged by the interest and opportunities in front of our drug discovery business and by the potential of our proprietary medicines.

And we believe the trajectory of our expenses and cash use this year are consistent with our original expectations. For Q2 2024, we expect our software revenue to be in the range of $31 million to $33 million. I now turn the call over to Karen to comment on a therapeutic R&D.

Karen Akinsanya: Thank you, Geoff, and good afternoon, everyone. Our Therapeutics team continues to advance our pipeline of collaborative and proprietary programs. With the IND clearance of SGR-3515, our Wee1/Myt1 Inhibitor, we now have three clinical stage proprietary programs. In addition to our proprietary pipeline, several collaborative programs are advancing in clinical trials at companies we have co-founded or partnered with, providing continued validation of our platform. As Ramy reported, we have received full rights to the SOS1 development candidate that we discovered as part of our collaboration with BMS. As you know, BMS acquired a clinical stage SOS1 inhibitor when it completed its acquisition of a clinical stage oncology company earlier this year.

We received a milestone upon completing the SOS1 development candidate package, and BMS had been conducting IND enabling studies. The transfer of information from BMS to Schrödinger is ongoing. We will determine the next steps and plans for further investment in this program based on our assessment of the updated data package from BMS, as well as the opportunity within the context of our overall proprietary portfolio and the evolving therapeutic landscape. As we look ahead, we expect collaborations to continue to be an important component of our portfolio, and we continue to evaluate new partnerships where the science, project scope and value are consistent with our strategy. Turning to SGR-1505, our Malt1 inhibitor, our Phase 1 study in patients with relapsed refractory B-cell lymphomas is progressing well.

We’ve expanded the study to 15 sites globally, and dose escalation is ongoing. As a reminder, the primary objectives of the study are to evaluate the safety tolerability PKPD and determine the recommended dose. Measures of clinical activity are secondary end points. We are on track to have clinical data in late 2024 or in 2025. Our CDC7 inhibitor, SGR-2921 is also advancing in a Phase 1 dose escalation study in patients with acute myeloid leukemia or myelodysplastic syndrome. The study is progressing well with multiple dose escalation steps completed, and we also expect to report initial data from this trial in late 2024 or 2025. Today, we announced that we received FDA clearance of our IND for SGR-3515, our Wee1/Myt1 inhibitor. Our preclinical data package demonstrated that SGR-3515 exhibited sustained tumor growth inhibition while maintaining a favorable safety profile using an intermittent dosing schedule.

Activities are underway to open clinical study sites, and we expect to begin patient enrollment in the third quarter. The Phase 1 study is designed to evaluate the safety PKPD and establish a recommended dose for SGR-3515 in patients with solid tumors. The study population will include patients with advanced solid tumors predicted to be sensitive to Wee1 or Wee1/Myt1 inhibition, including breast cancer, ovarian cancer, uterine cancer, and solid tumors with elevated replication stress. In addition, we are advancing several discovery programs in areas of high interest, including inhibitors of EGFR, C797S, PRMT5-MTA and NLRP3. We have identified potent selective inhibitors that may overcome product profile design challenges observed across other programs.

We are on track to select development candidates to support an additional IND submission in 2025. In our collaborative portfolio, we are excited about the progress we have made in identifying all small molecule inhibitors for targets previously addressed by antibodies or that required intravenous administration, and we anticipate advancing early stage proprietary modality switch programs across multiple disease areas. In summary, we are pleased with the progress we are making across our collaborative and proprietary pipeline. With Phase 1 studies of SDR-1505 and 2921 advancing and 3515 poised to enter the clinic this year, we are excited to be advancing towards clinical readouts and inflection points from three programs. Behind our clinical stage programs, we have a next generation of molecules with opportunities to generate value through partnerships, new ventures, or by advancing them independently.

We are excited about our first-in-class and first-in-class opportunities within our portfolio and look forward to updating you on our progress in the coming months. I’ll now turn the call back to Ramy.

Ramy Farid: Thank you, Karen. As you heard, we are off to an excellent start this year and are continuing to make progress against our goals for the year. We appreciate the hard work and commitment of our employees who are instrumental to our mission. We look forward to providing further updates throughout the year. At this time, we’ll open the lines for questions.

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Q&A Session

Operator: [Operator Instructions] And we’ll take our first question from Michael Yee with Jefferies. Your line is open.

Michael Yee: Hey, guys. Thank you for the question and thank you for the update. Question on software and question on the pipeline. On the core business, I think Geoff just made a comment about how some business was maybe pushed from Q1 to Q2. Can you talk a little bit about that and how that relates to ongoing trends, appreciating that fourth quarter still is really your biggest quarter? So just comment on some of that dynamic. And then on the pipeline, maybe for Karen, can you talk about the MALT1 study going on and what you would deem to be positive and very promising efficacy for a new small molecule for B cell lymphomas? Thank you.

Geoff Porges: Hi, Mike. Just on the contracts that I mentioned, there were a couple of relatively small contracts, but really the difference between the core meeting our expectations and then being a little bit lighter, I don’t think it reflects any underlying trends in the business. These were contracts that we knew were renewals, and for logistics reasons, they didn’t renew at the very end of Q1 and they tipped into Q2. We don’t think that there’s any – there’s no increase in the number of non-renewals or anything like that. We continue to have very high conviction about the outlook for the full year and just don’t see anything in the external environment that affects that outlook. I did highlight the effects in China. Our business, underlying business in China is relatively small.

It’s the smallest of our geographies, and given what’s going on there, perhaps not a surprise that the renewals there have dropped off somewhat, but it’s not going to have a big impact. The big driver for us, as I highlighted, those large renewals, they will tend to be concentrated in the fourth quarter.

Karen Akinsanya: And, Mike, on the MORT1 mechanism, as you’re aware, we’re obviously in our Phase I dose escalation trial. I think your question was broader than that with respect to the mechanism. We see this as a clinically validated mechanism, given data that’s been published over the last few years, showing monotherapy responses in the range of 28% LRR and combination activity in combination with BTK, giving you around 70% LRR. We also know that there were complete responses in prior trials. So, in terms of what we think would be exciting, obviously, monotherapy activity, but also combination activity, either with BTK inhibitors or with BCR2 inhibitors, and we showed a lot of that preclinically, but preclinically you can get to regression. And so we hope to see similar data emerging from the MORT1 mechanism over the coming years.

Michael Yee: Very good. Thank you.

Operator: And we’ll take our next question from David Leibowitz with Citi. Your line is open.

David Lebowitz: Thank you very much for taking my question. Could you comment on, I mean, Michael, to some extent, got on this, but on the trends that we should expect. I know there was an effort to try to shift the nature of contracts to move revenues, I guess, to be a little bit more smoothed out, or would result in them smoothing out somewhat more. How are those efforts progressing, and how should we see that take hold?

Ramy Farid: Yes, thanks very much for the question, David. Indeed, we are seeing some transition over to hosted for on-prem. You can see it in the breakout in the queue. The hosted in this most recent quarter grew by 60% year-over-year, and was now 21% of total software revenue, whereas in the first quarter of last year, it was only 14% of software revenue. It was much more percentage in the fourth quarter. So when we do have these large quarters with multi-year contract renewals, then the hosted proportion is going to go down. However, the long-term trend is that we think that the proportion of business that’s hosted will gradually increase. We did have a number of significant customers switch over from on-prem to hosted last year.

Now as we’ve said, our business has been around selling software for nearly 30 years. That’s longer than that way before my history with the company. But we have complex contracts and every contract is different. They have to be honest like snowflakes. And so we can’t go in and sort of immediately change all of those contracts over. But we do think that over a number of years that proportion from hosted will continue to increase. It won’t be rapid, sudden, or single-year transition. But we do think that it will increase over time.

David Lebowitz: Thank you for taking my question.

Operator: And we’ll move next to Scott Schoenhaus with KeyBanc. Your line is open.

Scott Schoenhaus: Hi, team. Could you give us an update on what you’re seeing on the biotech end markets? We’ve had some peers in the space that have noted potentially some recovery or it’s mixed commentary. So we wanted to hear from what you guys are seeing and then remind us what’s baked into your guidance in terms of the biotech end markets. Thanks.

Ramy Farid: Sure. Scott, last year we did highlight that there was an increase in the number of small companies that were non-renewing. You could see that in the KPI data that we provided in the companies in the tier between 100,000 and 500,000 of ACV, there was an increase in the non-renewals in that tier. We don’t provide quarterly ACV numbers or quarterly booking numbers, but we’ve seen a stabilization of that trend. We’re not seeing any sort of continued increase in the number of non-renewals. That being said, we aren’t seeing an offsetting increase in the new inquiries, but I will say we’re seeing companies coming forward that are venture backed who are asking are there any creative ways they can get access to our software.

And when engaging in those discussions, we do think over time they will result in software contracts. It may take longer than we normally would have expected, perhaps back in 2020 or 2021 to see that realized into our results, but we’re hearing about those opportunities coming forward. So I would still characterize it as green shoots rather than anything that we can harvest, but we’re definitely seeing some of those opportunities.

Scott Schoenhaus: Thank you.

Operator: And we’ll move next to Vikram Purohit with Morgan Stanley. Your line is open.

Vikram Purohit: Hi, good afternoon. Thanks for taking our questions. So we had two, one on the pipeline and then one on the full-year software guidance. So on the pipeline, at what point do you think there might be some more visibility available on specifically when the late-24 or 25 data could come through from MALTl and CDC7? And how are you currently thinking about what the initial size and scope of that data set could be? And then on the software guidance for the year, with 1Q behind us now, how are you now thinking about which scenarios define the bookends of your guidance of 6% to 13% year-over-year growth? Thanks.