Schrödinger, Inc. (NASDAQ:SDGR) Q3 2023 Earnings Call Transcript

Schrödinger, Inc. (NASDAQ:SDGR) Q3 2023 Earnings Call Transcript November 1, 2023

Schrödinger, Inc. misses on earnings expectations. Reported EPS is $-0.86 EPS, expectations were $-0.69.

Operator: Welcome to Schrödinger’s Conference Call to review Third Quarter 2023 Financial Results. My name is Eric and I will be your operator for today’s call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions]. 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 third quarter 2023 financial results. Earlier today, we issued a press release summarizing our results and progress across the company, which is available on our IR website at shordinger.com. Here with me on our call today are Ramy Farid, CEO; 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 full-year 2023, our quarter ending September 30, 2023, 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 as well as 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 September 30, 2023. 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 had a successful and exciting third quarter, marked by several important milestones for the company. We reported total revenue of $42.6 million, representing 15% growth compared to the third quarter of 2022. And we are on track to deliver on our full year revenue guidance. We began patient dosing for our Phase 1 study of SGR-2921 and we received CTA approval to open clinical trial sites for SGR-1505 patient study in Europe. Additionally, SGR-3515 is advancing. And we also have a number of exciting discovery programs just behind our lead programs, which we’ll discuss at more length at our pipeline day in December. Today, we reported that rights to two related oncology discovery programs within the BMS collaboration reverted to us after BMS elected not to proceed with further development for strategic reasons.

These programs were making excellent technical progress, and our team is assessing the next steps for these programs in the context of our overall portfolio strategy. BMS continues to be an important partner. We have three active research programs in the collaboration, as well as SOS1 which reached development candidate status and transitioned to BMS earlier this year. We are also discussing the potential for additional discovery programs with BMS. Collaborations are an important part of our business, and we continue to evaluate new partnerships where the science, overall scope and value are consistent with our strategy. Turning to our Software business, we remain confident about the opportunity for significant revenue growth among our largest software customers this year.

The interest in computationally driven drug discovery is quite high, and we are seeing more customers increasing their utilization of our platform. We’re continuing to invest in the development of new capabilities to enhance the value of our platform, and we expect these capabilities to support continued growth in our software business for many years to come. Our latest quarterly software release incorporates a number of key technologies, including the ability to more accurately predict certain ADMET properties, such as binding to cytochrome P450s and HerD and technology that allows for prediction of antibody affinity as a function of pH. We are pleased with the progress we have made this year and we’re very excited about the opportunities that lie ahead.

I greatly appreciate the hard work and commitment of all of our employees who are instrumental in our mission. I will now turn the call over to Geoff.

Geoff Porges: Thank you, Ramy. And good afternoon, everyone. It’s been a strong quarter for Schrödinger and this is reflected in our quarterly results and financial guidance. Our Software business is growing despite a challenging biopharma industry environment and our proprietary portfolio is progressing nicely. Today, I’ll share details of our financial results and then close with some comments about our financial guidance. Our revenue results for the quarter were above our expectations and reflect the impact of the changes in our collaboration portfolio that Ramy explained earlier. We remain very positive about our outlook for the year and continue to expect significant growth in software revenue in Q4 in both Drug Discovery and Software revenue for the year overall.

Software revenue for Q3 was $28.9 million, up 17% compared to Q3 2022. The revenue growth was driven by existing customers increasing their investment in our technology, with a number of additional customers reaching the $1 million per year threshold during Q3. Hosted software grew strongly as some large customers elected to initially increase their access to technology on a hosted basis. Services revenue declined due to the shift away from our structural biology services and towards our proprietary programs. And our contribution revenue increased to $1.8 million, driven by the expanded renewal of our battery chemistry research project with Gates ventures. Drug Discovery revenue increased by 11% to $13.7 million compared to $12.3 million in Q3 last year.

There was a $10 million contribution in the quarter from the acceleration had previously deferred revenue associated with the two BMS programs that reverted to us. There are four main programs in the BMS collaboration, including the SOS1 program that transitioned to their portfolio in Q1 2023. Total revenue for the quarter was $42.6 million compared to $37 million in Q3 2022 and $35.2 million in Q2 2023. For the first three quarters of the year, our Software revenue was $90.5 million compared to $88 million for the same period last year, and our Drug Discovery revenue was $52 million compared to $36 million for the same period a year ago. Our gross margin performance is positive this quarter, with higher revenue producing improved product profitability.

Software gross margin was 76% compared to 72% in the same period last year and 77% in Q2 2023. Drug Discovery gross margin was 13% compared to a 5% loss ratio for the same period a year ago. Combined reported gross margin was 56% compared to 47% in the same period in 2022. Our Software gross margin should continue to improve slowly, and our Drug Discovery margin will be volatile depending on the timing and amount of milestone payments associated with collaborations. In general, we expect our cost for collaboration programs to trend down, thus increasing the potential growth, profitability and successful achievement of milestones in collaborations. R&D expenses were $46.8 million in Q3 compared to $33 million in the same period a year ago. A significant portion of this increase is due to redeployment of our existing employees from collaborations to proprietary programs, and from customer facing structural biology services to internal programs.

CRO expenses and headcount also contributed materially to the increase as we supported the progress of our most advanced programs into clinical development. Compared to Q2 2023. R&D expenses increased by 10%, again, driven by shifting allocation of our staff to proprietary programs and by higher CRO expenses. For the first three quarters, our R&D expenses were $130 million compared to $92 million in the same period in 2022. Sales and marketing expenses were $9.1 million in Q3 compared to $7.2 million in Q3 2022, with most of the increase coming from increased headcount and associated costs to support our software business. Sales and marketing expense was flat compared to Q2 of this year. G&A expense was $24 million in Q3 compared to $23 million in Q3 2022 and $23 million in Q2 2023.

Increases in headcount were offset by savings in professional services compared to prior periods. Total operating expenses were $80 million compared to $63 million in Q3 2022 and to $75 million in Q2 2023. Operating expenses increased due to higher R&D and somewhat higher sales and marketing expenses. Our reported loss from operations was $56 million in Q3 compared to $46 million in the same period in 2022. Our other income was once again affected by significant changes in the value of our equity positions in publicly traded biopharma companies. Changes in these valuations resulted in a $14.5 million loss in Q3. Other income also included $5.8 million in interest income and our tax provision was a benefit of $3 million, which was the anticipated reversal of the tax system that we reported in Q1 2023 associated with the Nimbus distribution.

Our net loss was $62 million or $0.86 per basic and diluted share for the quarter compared to a net loss of $39.9 billion or $0.56 per share in Q3 2022. Our non-GAAP net loss for the quarter was $50.4 million compared to a net loss of $44.9 million in Q3 2022. Our weighted average basic and diluted share count increased by 1% compared to the prior year. Our total cash used in operating activities for the quarter was $49.9 million and our cash and marketable securities decreased from $554 million on June 30 to $503 million on September 30. I’ll now turn to our financial guidance for the year. Our guidance for Software and Drug Discovery revenue for 2023 is unchanged. We continue to expect full year Software revenue growth to be 15% to 18% and expect drug discovery revenue to be in the $50 million to $70 million range.

We continue to expect total operating expense growth in 2023 to be below operating expense growth in 2022. We now expect cash used for operating activities to be somewhat higher in 2023 than 2022 based on the mix of revenue, the timing and size of milestones and our expectations for new business development activity this year. Our net cash position at the end of the year is likely to be similar to our net cash position at the end of 2022, with the cash distributions in the first half of the year from our investment in Nimbus offsetting our expected full year cash use for operating activities. The major uncertainties for our financial outlook, our ability to predict changes in the strategic priorities of our partners and customers, the timing and value of new business development activity, and the timing and probability of development milestones.

These uncertainties are reflected now updated guidance. Overall, we reported strong financial results for the quarter and are maintaining our revenue guidance for the year. Our proprietary portfolio is maturing, our capital allocation is shifting towards supporting the progress of our proprietary programs and to capturing the value generated by our technology in emerging companies such as Structure and Morphic. I’ll now turn the call over to Karen to comment on the progress in our drug discovery and development portfolio. Karen?

Karen Akinsanya : Thank you, Geoff. And good afternoon, everyone. During the quarter, we continued to make strong progress across our pipeline. We are close to completing our SGR-1505 healthy volunteer study. We initiated dosing in our SGR-2921 oncology trial and the IND submission for SGR-3515 is on track. We are also preparing to present four posters at the ASH Annual Meeting next month. These presentations will include data on 1505 and 2921, as well as two clinical trial in progress posters. In addition to our proprietary programs, several collaborative programs are advancing, and nine molecules have transitioned to the clinic through our collaborations. As Ramy and Geoff reported earlier, two collaborative programs which target the same protein reverted to Schrödinger from BMS, and our team is assessing next steps in the context of our overall proprietary portfolio.

I’ll now review recent progress on several of our proprietary programs in more detail. First, beginning with our MALT1 inhibitor, SGR-1505. We are continuing to advance our development program to further characterize the clinical profile of our molecule. Earlier this year, we initiated a study of SGR-1505 in healthy volunteers to assess initial safety and pharmacokinetic and pharmacodynamic relationships. This study is nearing completion and we expect to share data from the study at upcoming medical, scientific and investor events. In our patient study, we recently opened additional sites in Europe and the US to support recruitment. In addition to the CTA approval in Europe, in the third quarter, the FDA granted orphan drug designation to SGR-1505 for the potential treatment of mantle cell lymphoma.

Our CDC7 inhibitor SGR-2921 has also entered the clinic with patient dosing underway in the US. The primary objectives of this study are to evaluate the safety, pharmacokinetics and pharmacodynamics and establish the recommended Phase 2 dose for SGR-2921 in patients with acute myeloid leukemia and myelodysplastic syndrome. Preclinically, SGR-2921 exhibits monotherapy and combination activity in AML patient-derived models, independent of genetic drivers and resensitizes AML models to standard of care agents, such as FLT3 inhibitors. Turning to SGR-3515. Today, we provided new details on our development candidate. SGR-3515 was selected based on its inhibition of both Wee1 and Myt1. Concurrent loss of function of these two proteins confer selective vulnerability in cancer cells.

In addition to this mechanistic advantage, termed synthetic lethality, SGR-3515 has a favorable pharmacologic profile. We are on track to submit the IND for SGR-3515 in the first half of 2024 to support initiation of a Phase 1 study by the end of next year. Beyond the disclosed programs, we are working on a number of other programs in oncology and immunology at various stages of discovery. Today, we disclosed that one of these programs is PRMT5-MTA. PRMT5 has been shown to be a synthetic lethal target for MTAP-deleted cancers with potential roles in the treatment of both hematologic and solid tumors. In summary, our proprietary portfolio is advancing and we are very excited to be sharing our first clinical data from healthy subjects for SGR-1505 later this quarter.

We look forward to sharing more information about our proprietary programs at our Pipeline Day on December 14. I’ll now turn the call back to Ramy.

Ramy Farid : Thank you, Karen. As you heard, we’ve made excellent progress across the business this quarter, and we look forward to providing further updates on our discovery and clinical programs later this year. At this time, we’d be happy to take your questions.

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Q&A Session

Operator: [Operator Instructions]. Your first question comes from Michael Yee with Jefferies.

Michael Yee: Two questions for the team, one on Software and one on Drug Discovery. On Software, there’s been prior commentary around how your customers are accelerating use. I think you mentioned that word utilization. Can you just talk about how much visibility and how you’re seeing those things come through both in the third quarter? And presumably what we would see in the fourth quarter? Are there metrics or things that would show that? And I ask that in the context of – Wall Street likes to see beating numbers and beating by $1 million or $2 million, and so I just wanted to understand that because you came in the middle of your guidance for the quarter. On Drug Discovery, can you clarify if there was a payment from Bristol in this quarter for the hand back of the two compounds? And what would explain the large $20 million range for drug discovery then in the fourth quarter? That’s a pretty large range.

Ramy Farid: This is Rami. I’ll take the first one and then hand it over to Geoff for the second one. So first of all, let me be very clear that the visibility we have into the fourth quarter is very high. We’ve had very productive discussions that have been going on, as we’ve been saying, all year with our largest customers, and there’s very clearly significant interest in scaling up their usage. I just want to emphasize that we have a lot of visibility into that.

Geoff Porges: Mike, just to answer your question on Drug Discovery, I highlighted that of the reported Drug Discovery revenue in Q3, $10 million of that was from BMS associated with the return of the two programs that we disclosed. Now, there was also a program decision by them in the prior year in the third quarter that contributed then. So that was a smaller payment, but that was a payment in Q3 of last year. To the range of the guidance, I think it should be fairly clear by now that our revenue on the Drug Discovery side is chunky. And we’ve tested the guidance range wide to encompass what we think is a reasonable range of probable outcomes. To just state the obvious, we don’t think there’s going to be a reversion of revenue for the low end of the guidance range. But equally, there’s still a number of things that can occur in the fourth quarter that can push us to different points in that range. So that’s why we’ve left the range intact.

Michael Yee: I’ll someone else ask if we could go from 52 to 50, Geoff. But assuming that’s not happening, it’s still a wide range. So I will take a look and figure that out. But look forward to the results for the fourth quarter.

Operator: Your next question comes from the line of Vikram Purohit with Morgan Stanley.

Unidentified Participant: This is [indiscernible] for Vikram. So I want to ask questions regarding MALT1 inhibitor. The first, what is the current sense of timing towards Phase 1 data? Because I know you are going to release some data in ASH. But what are the Phase 1 data on the patients, the timing, roughly, your sense? And second, what’s the bar or hurdle on efficacy for the data for the initial data set?

Karen Akinsanya: The healthy volunteer study is nearing completion and we do expect to share data from that study at upcoming medical conferences and investor events. As far as the study in advanced hematologic malignancies is concerned, that study is ongoing. And we are continuing to add new sites to support enrollment. But we expect initial data from the patient study to be available in late 2024 or 2025 depending really on enrollment. And so, with respect to your question on the hurdle, we will not be discussing that today. I think we do have Pipeline Day coming up later on this year. And I think we’ll be giving a lot more color on our strategy and thoughts about the program at that time.