Schrödinger Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 28, 2024

There are 15 speakers on the call.

Operator

Thank you, and good afternoon, everyone. Welcome to today's call, sir, in which we will provide an update on the company and review our Q4 and full year 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 schrodinger.com. Here with me on our call today are Ramy Farid, Chief Executive Officer Jeff Porges, Chief Financial Officer and Karen Ankinsanya, President of R&D Therapeutics. Following our prepared remarks, we'll open the call for Q and A.

Operator

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 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 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 also in the filings we make with the SEC, including our Form 10 ks for the year ended December 31, 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.

Operator

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 Rami.

Speaker 1

Thanks, Matt, and thank you everyone for joining us today. We made incredible progress in 2023 and we expect to continue to make important advances across the business in 2024. In 2023, we continue to make significant advances to the science that underlies our computational platform. And as expected, we continue to see increased adoption of our software at scales that are allowing our customers to meaningfully impact their programs. We also advanced our proprietary pipeline, including initiating a Phase 1 study for our 2nd proprietary program, SGR-two thousand nine hundred and twenty one.

Speaker 1

2023 was also marked by progress at several companies we co founded and in which we have equity stakes, including Nimbus, Morphic and Structure. Their advancing programs also further validate our platform. And in the case of Nimbus, their TIK2 inhibitor, which we co discovered, led to the sale of the molecule to Takeda and a substantial cash distribution to Schrodinger last year. Total revenue for the year was $217,000,000 a 20% increase over the prior year. Software revenue grew by 17% year over year marked by multiyear renewals with large biopharma companies including an expanded 3 year software agreement with Lilly.

Speaker 1

We had a very successful 4th quarter in our software business reporting revenue of $69,000,000 the largest quarter for software revenue in our history. We ended the year with 27 customers with an annual contract value or ACV of at least $1,000,000 up from $18,000,000 the prior year reflecting customer demand and their increased confidence in the value that our platform can deliver. This year, we will continue to focus on increasing adoption of our platform at global biopharma companies as well as establish and emerging biotechs. The interest in computationally driven drug discovery has never been higher and we are witnessing a sea change within the industry and how computation is regarded and applied to drug discovery. We believe that the decades long debate about the utility of computation is finally over.

Speaker 1

While the shift may have been fueled by the recent excitement about AI, there is also a growing understanding about some of the obvious limitations of AI. We believe we are well positioned to capitalize on this heightened interest in computation. Our platform is grounded in 1st principles methods and leverages the accuracy of physics to generate training sets for machine learning and AI. This increased interest in computation has created a worldwide shortage of computational chemists and modelers, which in the near term may attenuate the full potential of computation, but we have made significant investments in training the next generation of modelers who will expect and demand validated computational technologies to advance their projects. Our platform is built on more than 30 years of science and has become the gold standard for computational molecular discovery.

Speaker 1

We are continuing to make investments to push the boundaries of molecular design and we expect the computational breakthroughs in small molecule and biologics discovery formulations and informatics will support future growth for many years to come. We have recently published multiple papers demonstrating how our computational methods can improve the utility of ML predicted protein structures, enabling research teams to work on even more targets through structure based discovery. We are also expanding our enterprise informatics solutions to increase efficiency and drive collaboration across teams. Even with the increased scale up of our platform by our largest customers, we are still leveraging our platform to scale is at least an order of magnitude greater than our largest customers. This is having a big impact on our ability to rapidly progress a broad pipeline of proprietary programs.

Speaker 1

We now have 2 programs in the clinic, SGR1505, our MALT1 inhibitor and SGR2921, our CDC7 inhibitor. In December, we reported positive data from our Phase 1 study of SGR-fifteen oh five in healthy subjects and are encouraged by the progress in our ongoing patient study in advanced B cell malignancies. We expect to report data from the patient studies of both SGR1505 and SGR2921 in late 2024 or 2025. We are also on track to submit an investigational new drug application for SGR-three thousand five hundred and fifteen, our Wee-one MIT1 inhibitor in the first half of this year and are advancing an existing portfolio of discovery programs to position us for our 4th IND in 2025. Years ago, we set forth a bold vision to transform the way therapeutics and materials are discovered, and I'm incredibly proud of the progress we have made toward achieving this goal.

Speaker 1

There has been turbulence in the global economy and in many tech industries in particular, but we have never been more steadfast in our confidence in our technology and its potential. We deeply appreciate the commitment and hard work of all our employees and I look forward to another year of progress toward realizing our vision. I will now turn the call over to Jeff.

Speaker 2

Thank you, Rami, and good afternoon, everyone. Schrodinger had an excellent Q4, which kept a strong 2023. In Q4, we reported record revenue of $74,000,000 principally driven by software. For the full year, total revenue grew 20% with bookends of a large contribution to drug discovery revenue from a single milestone payment in Q1 and then several large multiyear software renewals driving revenue growth in Q4. The year was marked by the considerable progress we have made with our proprietary portfolio and the continued development of our technology platform, which is enabling new capabilities for molecular discovery even as our largest customers increase the scale of their deployment of our current platform.

Speaker 2

2023 was also a year of great validation from our co founded companies, with $147,000,000 distribution from Nimbus boosting our cash flow and GAAP earnings and Structure and Morphix significantly advancing their programs during the year. We see multiple avenues to grow our Turning to a review of our Q4 results. Software revenue for the quarter was $69,000,000 an increase of 44%. The strong Q4 software result reflects the contribution from a number of multi year multimillion dollar on prem software renewals in Q4, as well as some renewals by hosted customers with ratably recognized software purchases. The contribution of these multiyear on prem renewals in Q4 was significantly greater than the contribution of multiyear renewals in Q4 2022.

Speaker 2

Compared to Q3, software revenue more than doubled, in line with our expectations and consistent with the typical seasonality of large customer renewals. Drug discovery revenue for the quarter was $5,000,000 compared to $9,000,000 in the same quarter of 2022 $13,700,000 in Q3. Revenue decreased in the quarter compared to the prior year based on non recurring milestones reported in Q4 2022 as well as reduced contributions from the smaller number of active collaboration programs during the quarter. Total revenue was $74,000,000 in the quarter, an increase of 30% compared to Q4 2022 and a 74% increase compared to Q3 2023. The increase was driven by software revenue growth in Q4.

Speaker 2

For the full year, software revenue was $159,000,000 an increase of 17.4% compared to the prior year. The growth was driven by significant increases in our existing customers, including multiyear renewals by large customers in Q4. For the full year, drug discovery revenue was $57,500,000 compared to $45,000,000 in 2022. The increase was driven by progress in our existing collaborations, recognition of some revenue from new collaborations announced in 2022 and accelerated revenue recognition for previously disclosed programs returned to us by our collaboration partners. Total revenue for the year was $217,000,000 compared to $181,000,000 in 2022.

Speaker 2

The increase in total revenue was driven by both software and drug discovery revenue growth. I have a little more color on trends in our software business. Throughout 2023, we disclosed that we are engaged in discussions with a number of large customers about stepping up their level of investment into our technology. And we are encouraged that several of them elected to renew at significantly increased scale and value during Q4. Those agreements contributed substantial portion of the year on year reported growth in on prem software.

Speaker 2

We view these companies as bellwethers in the industry and are engaged in discussions with other large companies about substantial renewals. At this stage of the year, we do see opportunities for growth from renewals this year. But since the number of our largest customers entered into multiyear contracts in 2023, the contributions from such additional renewals in 2024 is likely to be less than in 2023. We reported that we continue to have 4 customers with annual contract value of at least 5,000,000 dollars and the average contract value for customers over $5,000,000 grew significantly to $6,700,000 The number of customers with ACV of at least 1,000,000 has increased from 18 to 27 as more and more emerging companies recognize the value of increasing their scale of adoption. We have disclosed a new key performance indicator of customer retention among customers of at least 500,000 in ACV.

Speaker 2

Among such customers, the retention was 98% in 2023 and was 100% in 2022. Our net customer retention for customers of at least 100,000 per year was 92% in 2023 compared to 96% in 2022. The decrease was associated with increased consolidation and discontinuation of R and D efforts by some biotech customers in the 100,000 to 500,000 ACV range. This discontinuation rate has been elevated since 2021 and appears likely to remain elevated in 2024. Moving now to expenses.

Speaker 2

During Q4, the gross margin on our software revenue was 87%. The gross margin performance in Q4 was particularly high based on the strong revenue results in the quarter. The full year gross margin performance was increased by favorable operating leverage and the shift in allocation of our structural biology team from customer facing projects to internal and collaboration projects. We believe gross margin in future years is likely to be similar to 2023 with some potential variance depending on revenue performance and mix. Cost of delivering our drug discovery revenue in Q4 was $7,900,000 and declined compared to $10,000,000 in Q4 2022.

Speaker 2

For the full year, our cost of drug discovery revenue was $46,500,000 compared to $50,400,000 in 2022. The change reflects the reallocation of internal resources from collaboration projects to proprietary programs. The positive profit contribution from our drug discovery revenue for the year reflects the benefits of the one time milestone reported in Q1. Overall gross margin was in Q4 was 78% compared to 68% in Q4 'twenty two based on improved profitability for software and the shift in mix. For the full year, software gross margin was 81% compared to 78% for 2022.

Speaker 2

Our software gross margin for the year improved due to lower royalty obligations and of operating leverage on our fixed costs. Our drug discovery gross margin was 19% for 2023 compared to a loss ratio of 11% for 2022. And reflects the favorable effects of successful progression of our collaboration programs. Our overall gross margin for 2023 was 65% compared to 56% in 2022. The increase was due to the improvement in software and drug discovery gross margin.

Speaker 2

As a result of the strong revenue and gross margin performance in Q4, our gross profit increased by 49% compared to Q4 2022. For the full year, our gross profit was $141,000,000 compared to $101,000,000 in 2022. R and D expenses were $52,000,000 in Q4 2023 compared to $35,000,000 in Q4 2022. The main drivers of the increase were increased FTE numbers, CRO expenses and technology expense. Compared to Q3, R and D expenses were 10% higher based on increased allocation of staff and resources to proprietary programs.

Speaker 2

Higher FTE numbers and increased CRO expenses contributed. For the full year, R and D expense was $182,000,000 which was an increase of 44% compared to the $126,000,000 reported in 2022. The increase for the year was driven by the shift in allocation from collaborations to proprietary programs, higher FTE numbers and increases in CRO expenses. As in the recent past, our R and D expenses are approximately balanced between our technology platform and our therapeutics. A significant portion of the increase in R and D investment from 2022 to 2023 has been associated with the progression of our clinical portfolio.

Speaker 2

We expect R and D expense growth to moderate in 2024. Sales and marketing expense for Q4 was $10,000,000 compared to $9,400,000 in Q4 2022. The increase was mainly due to increased staff and associated expenses. Compared to Q3, sales and marketing expense increased by 9% based on headcount and year end incentive compensation. For the full year, sales and marketing expense was $37,000,000 compared to $31,000,000 in 2022.

Speaker 2

The increase of 21% was driven by higher headcount associated expenses as well as increased travel. G and A expense for Q4 was $26,000,000 compared to $23,000,000 in Q4 2022. The increase is mainly due to high headcount and onetime royalty obligations, partially offset by lower professional services. For the full year, G and A was $99,000,000 and increased by 9% compared to 2022. The increase was mainly due to high headcount and FTE expenses as well as royalty obligations partially offset by lower professional services.

Speaker 2

For Q4, total operating expense was $87,000,000 compared to $67,000,000 in Q4 2022. The increase was mainly due to increases in R and D. For the year, total operating expense increased to $318,000,000 compared to $248,000,000 in 2022. The increase was mainly driven by R and D. During Q4, our operating cash use was $37,000,000 dollars and our cash and short term investments declined by $34,000,000 during the quarter.

Speaker 2

For the year, operating cash use was $137,000,000 compared to $120,000,000 in 2022. Our cash and marketable securities balance was $469,000,000 at year end compared to $456,000,000 at year end 2022. During the year, our operating cash use was offset by the cash distributions from our investment in Nimbus and by favorable trends in working capital. Our operating loss for Q4 was $29,600,000 compared to $28,500,000 in Q4 2022. Other items and expenses were $1,900,000 in Q4 2023 compared to an income of $1,200,000 in Q4 20 22.

Speaker 2

Our reported net loss was $30,700,000 in Q4 2023 compared to a loss of $27,000,000 in Q4 2022 and a loss of $62,000,000 in Q3 2023. For the full year, other income and expense items were $220,000,000 driven by the $147,000,000 distribution from our investment in Nimbus, a gain of $53,000,000 in the fair value of our investments and $19,700,000 in other income, mainly interest. Our pretax income for the year was $43,000,000 and our tax expense was $2,200,000 Our net income was $40,700,000 or $0.54 per diluted share. As we explained previously, we do not expect our profitability in 2023 associated with the Nimbus distribution to persist in 2024. For GAAP reporting purposes, our fully diluted share count at year end was 75,000,000 compared to 71,200,000 at the end of 2022.

Speaker 2

Our basic share count increased by 0.8% over the prior year. Looking ahead to 2024, I already highlighted specific outsized top line contributions in 2023 that we have to grow past this year. We currently expect that software revenue growth for 2024 will be in the range of 6% to 13%. We firmly believe software is a growth business for us, but that growth remains lumpy with outsized contributions from large customers when they renew extended contracts. We have opportunities to significantly increase the adoption of our technology in our large accounts this year, but it's too early to forecast whether they can match or exceed the contribution from such renewals last year.

Speaker 2

We expect our growth outlook to benefit from the introduction of enhancements and new capabilities to our platform. For our accounts of at least $500,000 at least $1,000,000 at least $5,000,000 trended positively in 2023, and we expect our revenue to grow in association with further changes in these metrics. While our largest customers are now purchasing significantly more than $5,000,000 per year in software, this level of adoption is only occurring among a relatively small proportion of the population of global biopharmaceutical companies. Emerging biopharma companies are also among our largest accounts and their relatively high level of adoption of our technology also suggests further opportunity for our commercial efforts in 2024. We expect software revenue in Q1 to be in the range of $33,000,000 to $35,000,000 and expect the distribution of revenue by quarters to be similar this year to that reported in recent years.

Speaker 2

We expect drug discovery revenue to be in the range of $30,000,000 to $35,000,000 for 2024. Our guidance incorporates uncertainty about the occurrence and timing of development decisions by our collaboration partners and uncertainty about the outlook for progress of programs in our ongoing collaborations. We have taken a cautious approach to including value for new business development activity this year, although we continue to be actively engaged in discussions about such opportunities with a variety of emerging and global companies. We expect our software gross margin to be similar to our gross margin in 2023 and to vary slightly depending on customer mix and contract type. Operating expense growth in 2024 is likely to be in the 8% to 12% range, significantly below the 28% growth in 2023.

Speaker 2

In 2024, the growth is likely to be mainly for increased investment in R and D, particularly to support our growing portfolio of proprietary programs. We anticipate that our operating cash burn in 2024 will be higher than our cash burn in 2023. Our goal is to reduce our cash burn in 2025 later years, and that reduction will depend on continued growth in our software revenue, realization of value from our proprietary portfolio and continued operating expense and headcount growth discipline. To conclude, we had an excellent Q4 and a very strong year at Schrodinger in 2023 with progress in our software business, collaborations and proprietary programs. We realized considerable value from our collaborations and co founded company investments, and we see opportunities to create even more value from these activities in 2024 and beyond.

Speaker 2

Our capital allocation is shifting towards our proprietary portfolio, and we are excited that the early clinical data from those programs will emerge in the next 1 to 2 years. With the industry's leading computational chemistry platform and a growing portfolio of proprietary medicines and investments in co founded companies and collaborations coming to fruition, the future is very bright for Schrodinger. Now I'll turn the call over to Karen to provide you with an update about our therapeutics R and D activities.

Speaker 3

Thank you, Jeff, and good afternoon, everyone. Our therapeutics team continues to advance the maturing pipeline of collaborative and proprietary programs. As Ravi and Jeff reported, companies we have co founded are successfully advancing programs into clinical trials, including Phase II and III, providing repeated and extensive validation of the impact of our platform when deployed at scale. A growing number of our proprietary programs is successfully transitioning into IND enabling studies and clinical development. I'll now review recent progress on several of our proprietary programs in more detail.

Speaker 3

Starting with our MORT1 inhibitor, SGR1505. During our recent pipeline day, we reported that SGR1505 was well tolerated in a completed Phase 1 study of 73 healthy volunteers. No drug related serious adverse events or dose limiting toxicities were observed. Steady state SGR1505 exposures achieved greater than 90% inhibition of IL-two secondretion in activated T cells, confirming target engagement and meeting the pharmacodynamic goals for the study. The healthy subject data provide important insights into the safety and clinical pharmacology of SGR1505 and this obviates the need to explore food effect and drug drug interaction potential in our patient study.

Speaker 3

At ASH, we presented data demonstrating that SGR1505 achieves maximal inhibition of IL-two in ex vivo human blood at greater than 50 fold lower concentrations than the benchmark molecule, which has shown clinical responses in indolent or aggressive lymphoma and CLL. This builds our confidence in the profile of our compound. We are encouraged by the progress in our ongoing Phase I study of SGR1505 in patients with relapsedrefractory B cell lymphomas. We are continuing to expand the number of clinical trial sites globally, allowing us to increase enrollment and make good progress through dose escalation despite the early enrollment challenges we previously discussed. We are encouraged that in patients, safety and tolerability is consistent with the profile observed in the 10 day healthy volunteer study.

Speaker 3

As of mid February, all enrolled patients have remained on drug. We are on track to have initial clinical data late in 2024 or in 2025. We are also looking forward to presenting details about the discovery of SGR1505 in an oral presentation at the spring ACS meeting next month. We are also continuing to advance our CDC-seven inhibitor SGR-two thousand nine hundred and twenty one. In December, we reported data from a range of translational models representing treatment naive patients, relapsedrefractory patients and models incorporating p53 and FLT3 mutations that confirm broad sensitivity to SGR-two thousand nine hundred and twenty one.

Speaker 3

These preclinical data and key opinion leader feedback confirm high interest in mechanisms that have mutation agnostic anti proliferative potential, providing compelling rationale for our ongoing Phase 1 study in patients with acute myeloid leukemia or myelodysplastic syndrome. The primary objectives of this study are to evaluate the safety pharmacokinetics and pharmacodynamics and establish the recommended Phase 2 dose. The study is progressing well with multiple dose escalation steps completed, and we expect to report initial data in late 2024 or 2025. Turning to SGR 3515, we continue to be excited about the differentiated pharmacological profile of our molecule. SGR-three thousand five hundred and fifteen inhibits both V1 and Mit1 and concurrent loss of function of these two proteins confer selected vulnerability in cancer cells, termed synthetic lethality.

Speaker 3

In A-four twenty seven non small cell lung cancer preclinical model, SGR 3515 has shown sustained tumor growth inhibition while maintaining a favorable safety profile using an intermittent dosing schedule. We are on track to submit the IND for SGR-three thousand five hundred and fifteen in the first half of twenty twenty four to enable the initiation of a Phase 1 dose escalation study by the end of this year. In addition, we are progressing several discovery programs including inhibitors of EGFR C797S, PRMT5 MTA and NLRP-three highlighted at Pipeline Day. We have identified potent selective inhibitors that may overcome product profile design challenges observed across other programs and are on track to select candidates that will support an additional IND submission in 2025. In our collaborative portfolio, we are excited about the progress we have made in identifying oral small molecule inhibitors for targets previously addressed by antibodies or that require intravenous administration.

Speaker 3

And we anticipate advancing early stage proprietary modality switch programs such as these across multiple disease areas. In 2023, we completed our SGR 50 day five healthy volunteer study and opened additional sites globally in the patient study. We initiated dosing in our 2,921 oncology trial and advanced IND enabling studies for SGR-three thousand five hundred and fifteen. We also progressed several discovery programs to enable a steady flow of programs for internal or partner development. I'll now turn the call back to Rami.

Speaker 3

Thank you, Karen.

Speaker 1

As you heard, we had a very successful 2023 and are off to an excellent start this year. We look forward to providing further updates across our business throughout the year. At this time, we'd be happy to take your questions.

Speaker 4

The floor is now open for your questions. Our first question comes from the line of Michael Yee with Jefferies. Your line is open.

Speaker 5

Hi, this is Jarjei Wen on the line for Michael Yee. Thank you for taking my question. I guess, my first question is how should we think about the software guidance of 6% to 13% year over year growth, which seems actually lower than the typical 15% growth guided in the past years, especially given the recent industry wide AI momentum? And secondly, maybe comment on how the recent AI evolution changes your view on the competitive landscape and what are your efforts that will keep you ahead of competition? Thank you.

Speaker 6

Jeff, do you want to take the first and

Speaker 7

then I'll Sure. Thanks.

Speaker 8

Yes. Regarding the guidance for the software business, we have a fairly high degree of confidence in the long term growth potential of the software business. We have multiple opportunities to increase the adoption of software in our largest customers, but also to move up what we sort of refer to as the next tier of customers that we highlighted today that are greater than $1,000,000 but still not at that $5,000,000 per year. So there's a lot of opportunity. That being said, as I heard in my prepared remarks, there were significant renewals of multiyear contracts in the 4th quarter that delivered that very strong 4th quarter revenue number.

Speaker 8

And those renewals effectively pose a headwind for us to overcome in 2024. So we do believe that we can grow the business. We believe that we can continue with that growth trajectory that you mentioned from the previous years, but we have to overcome the effect of those deals in the Q4, but the underlying dynamics of the business are still growing significantly. I will also highlight that in 2023, we did see some of the effects of the biotech capital markets in our smaller customers. And you can see that in some of the information about the KPIs where the renewal rate in the across the broad customer group went down slightly from, I think, 96% to 92%, but it remained very high in the larger customers.

Speaker 8

And so those smaller customers that we are seeing some of the turmoil associated with companies running out of capital, shutting down R and D, getting merged, etcetera. We think that that's being a drag on our growth in 2023. We think we're planning on that consisting in 2024, but if there's some relief in that and some of those companies do go ahead and get funded, but now also provide us with opportunity. Wamsi, do you want to talk about AR?

Speaker 6

Yes, absolutely. So let me just also emphasize what Jeff just said. I mean, there's no question that we view this, our software business as a growth business. There's still, as Jeff said, many opportunities. Now one of those, as you mentioned, is actually, some nice progress in AI on structural biology and biology front.

Speaker 6

And the structural biology front, this is something we've actually published on recently. This is resulting in a bigger supply of protein structures, which is the input of course to our physics based methods. As we've shown, these structures still need refinement with physics based methods, which of course we've developed, but this is providing a larger pool of targets. Similarly, a lot of the work in AI on sort of elucidation of biology is also resulting in a larger number of targets that are of interest and of course that helps fuel growth in our business. Now with regard to your comment about staying competitive, I think we've talked a lot about this.

Speaker 6

We have a very large effort in the area of developing state of the art using state of the art machine learning methods. But as we've shown over and over again and discussed many, many times, these methods have no value without a training set. And of course, that's the definition of machine learning. And we've shown that our physics based platform is in a unique position to be able to develop the sorts of training sets that are required to actually make machine learning to fully realize the utility of machine learning. And to date, we see no efforts in the space that are competitive with our physics based approaches.

Speaker 6

So we're feeling very good about where about our sort of leadership position in this area.

Speaker 8

Great. Thank you. Thanks.

Speaker 4

Our next question comes from the line of David Lebowitz with Citigroup. Your line is open.

Speaker 9

Thank you very much for taking my question. When you look at the drug discovery guidance for next year, You had spoken earlier in this quarter in January about a shift in the methodology and guidance. And I was wondering if you could clarify the extent that the guidance for next year reflects a shift from your expectations that you would have given under your prior methodology with guidance. Just to understand the extent that the shift is an organic shift in expectations versus a systematic change relative to your approach.

Speaker 8

Yes. Thanks for your question, David. I totally understand it. Yes, we found it challenging to provide guidance that incorporates the uncertainty associated with partners advancing programs that would trigger milestones to our benefit. And we just are in a position to have information about, for example, where a phase 2 trial might stop or Phase 3 trial might read out.

Speaker 8

And so we have elected to take those milestones out of our guidance because we just can't determine what the probability of those programs advancing is or when they will advance. So that is a change that we have made. The second change we've made is that we aren't including any allowances or estimates for new business development transactions, I. E. New collaborations with new partners or partnering proprietary programs.

Speaker 8

Now of course, we're in active discussions with many participants in the industry, both large companies and emerging companies about lots of different opportunities. But again, we just didn't think that we could reasonably estimate the probability, timing, value, etcetera, of what might emerge from those discussions. So we've also kept that out of the guidance for drug discovery. And we're guiding to what we believe today to be the most likely range of outcomes at the beginning of the year. But you can imagine that we're going to be very busy throughout the year looking for all these opportunities that I mentioned, but that's the most likely range of outcomes at this stage of the year.

Speaker 9

Thank you for taking my question.

Speaker 4

Your next question comes from the line of Vikram Parohit with Morgan Stanley. Your line is open.

Speaker 10

Hi, thanks for taking our questions. We had 2, 1 on the software guidance and then 1 on the pipeline. So for the revenue growth guidance of 6% to 13%, could you provide a bit more color on which situations would drive each of those bookends? And then for the MALT-one data set expected later this year or next year, how are you framing what a strong outcome here could be? And any details available at this point on how much data, how much follow-up may be available through that initial patient data set?

Speaker 10

Thank you.

Speaker 9

Anne, do you want to do the second question first?

Speaker 7

Yes. So as you know, we're in a patient trial right now, where we're recruiting into B cell malignancies. In terms of the data, obviously, we're still gathering PK, PD and safety. It's a Phase 1 dose escalation trial, but we obviously will also be looking at activity in that trial. And in terms of what good looks like, I think that's still to be determined.

Speaker 7

We know that Janssen, for example, saw ORR and CRs and PRs in their trial. But that's something that obviously we're still looking at. What we believe a great outcome will be for this mechanism as monotherapy and then ultimately a the combination whereas you know, again, there was very interesting data presented previously by Janssen. And what was the second part of your question?

Speaker 8

The first question was about the software.

Speaker 6

Yes. So we'll answer that. But there were 2 parts, I think. Did we answer your question, Vikram, about MOL-one?

Speaker 10

Yes. The second part of the MOL-one question was just any color you might have at this point on how much data we could see, how much follow-up we could see tumor types, etcetera?

Speaker 7

Yes. I mean, it's a little bit too early say. I think as I said, we're monitoring the PKPD and clinical activity. So I just think it's too early to say what we'll be able to share this year versus next year. But yes, the study is going well, enrollment is going well and we look forward to giving you an update in Q4.

Speaker 6

Vikram, I'll take a first stab at your first question and hand it over to Jeff if there's anything else to add. Here's how we see it. There are there's a remarkable heightened interest in computation among pharma companies and emerging companies. I mean, it's a really exciting time. It seems, as we said, this sort of decade long debate of whether to use computation and how to use it and does it really work is I mean, this is such an exciting thing to be saying given how long we've been in this field is over.

Speaker 6

So there's really significant demand. What's going to dictate sort of where we end up in the range is, whether companies can get to the point of scaling up their software to the level that we see our largest customers at. And that's going to depend on things like and we talk about this, there's sort of worldwide shortage of mothers. How long is it going to take to train mothers and to bring them on board? And how long is it going to take to get the IT system set up to be able to access the kinds of compute resources that are required to run our calculations.

Speaker 6

So the interest is there. It really is there. It's just a matter of sort of how quickly and how large the scale up. And the scale up has started to happen in the industry. I mean that's the exciting thing.

Speaker 6

It's just has it happened across the board evenly with all top companies and the hundreds of emerging companies? No, not yet. The other thing that's important to keep in mind and Jeff has talked about this and again Jeff can add more color is. Remember, we have very different revenue recognition rules associated with on prem versus hosted and the sort of mix of hosted and on prem has a big impact on this range. It doesn't impact the underlying growth is there, but how it gets recognized and what year and so on, it's obviously variable.

Speaker 6

So Jeff, do you want to add anything to add?

Speaker 8

Yes. So basically, I would just say the timing and type of the renewals that we see during the year has a large impact on how those renewals translate to revenue. So first, if we renew with multi years versus single years, that has an impact. And secondly, if we renew on a hosted basis versus all of that. And I did highlight a little bit in my prepared remarks that there is a slow trend towards more hosted that, of course, slows down our reported revenue growth as we make that transition.

Speaker 8

But ultimately, we think that is beneficial because it produces a more steady and predictable revenue outlook. So we're not going to advance that transition on a sudden basis rapidly, but it is underway. So the type of contract, the timing of the contract during the year and of course, the degree of scale up, whether a customer is going from a $1,000,000 a year contract to $2,000,000 or $3,000,000 a year contract, that's the fundamental driver. And we see lots of opportunity, as Brandy alluded to, for that scale up. But of course, it does get down to every single contract and how it gets recognized.

Speaker 10

Got it. Thank you.

Speaker 8

Thanks, Vikram.

Speaker 4

Our next question comes from the line of Evan Seigerman with BMO Capital Markets. Your line is open.

Speaker 11

Hi, guys. Thank you so much for taking the questions. Take a step back, as you think about kind of your dual business model where you have your software licensing, model where you have your software licensing and then your own internal development. I guess, a question for Rami. Just how say, 2, 3 years from now, how do you expect your internal pipeline to kind of drive your business?

Speaker 11

Are you going to be bringing these to Phase 2, 3 and then out licensing them? Are you going to bring them all the way to Phase 3 and out licensing them? I'm just trying to understand how this evolves, understanding that your business is a bit influx with some of the nuances between hosted software and out licensing software. Love commentary on that. Thank you so much.

Speaker 6

Yes. Thanks, Evan. I think we talked a little bit about this before. You can see we have a rather a larger pipeline than we had a few years ago. We have these 3 more advanced programs, 2 in the clinic, one more that's going to be in the clinic.

Speaker 6

We just said we're going to be expecting to file an IND for one of the now next cohort of programs next year. There are quite a number of those. And so we have a lot of options. That's a number of programs. We expect, as we said, some of those programs, it will make sense to partner them.

Speaker 6

And after Phase 1, in some cases, it may make sense to take them further. And we're making sure that we allow ourselves to have the opportunity to have that sort of flexibility. So I think you'll see a mix of all the things that you said over the next several years.

Speaker 11

Sorry. What are you saying?

Speaker 8

No, I was going to say my colleagues, sir.

Speaker 11

What's the hurdle that you need to get over to bring something really forward into mid phase trial and use your capital to advance that versus out license it at Phase 1? I'm just trying to think about how this becomes part of your business in a way that's efficient when it's in the hands of Schrodinger versus in the hands of someone else?

Speaker 7

Yes. I mean, I think to some extent, I'll start and maybe Jeff can add. I mean, I think to some extent, it depends on the target. We believe that there are targets where when they're first in the industry, first in the world and there's a lot of interest and demand in the target, we don't necessarily even need to take it to the clinic. However, we'll assess that on a case by case basis.

Speaker 7

But from a clinical development standpoint, we are very comfortable doing Phase 1 dose escalation. We've got 2 of those ongoing and a third about to start. But I think for some programs when it's in multiple tumor types, you've got lots of different potential indications. You've got combinations to pursue. We do see that having a partner for that development could be very, very helpful.

Speaker 7

So I think it really depends on the target, whether we feel comfortable taking it into the clinic in the 1st place, but then expanding the program later on. So I don't know, Jeff, if you want to add to that.

Speaker 8

Yes. Alan, I think from an economic standpoint, clearly, we're going to consider cost. We're also going to consider value. Is there what's required to really generate a lot of value from the program? And then lastly, we're also going to consider what the industry requires.

Speaker 8

Now in some cases, what the industry requires is 10 subjects with showing that you have a differentiated PK profile or a safety profile. In other cases, what the industry might require is a very large randomized Phase 2b study, which we might not be inclined to do. So I think on a case by case basis, we're going to consider all of those components to make a decision. I don't think that we're inclined to make a blanket decision one way or another.

Speaker 11

Great. Thank you, guys. Appreciate it.

Speaker 6

Thanks, Evan.

Speaker 4

Our next question comes from the line of Scott Schoonau with KeyBanc. Your line is open.

Speaker 11

Hi, team. Thanks for taking my So I just wanted to follow-up on Vikram's question on the software. So it seems like the wide guidance range has to do with whether or not you can or how much of the book you can shift from on prem to hosted. Is that correct? And would you be able to is it easier to shift these sort of contracts from on prem to hosted with larger clients, midsized clients or smaller clients?

Speaker 11

Just trying to get a sense of the scale here on this shift from on prem to hosted.

Speaker 8

I just want to clarify something, Eddie. The hosted on prem shift is a small component of the trends in our business. I mean, it's worth I called without deliberately, but the biggest factor is whether we our business materializes in the form of multiyear contracts or single year contracts. Because if we do an on prem annual renewal, then all of the revenue is recognized or almost all of the revenue in the year in which that and most of it in that quarter. But if we do a multiyear on prem, it's even more of the revenue is recognized in that quarter.

Speaker 8

So the biggest variable is the mix of duration of contracts. The second biggest most important variable is the size of contracts, right? We're scaling up big contracts or smaller contracts. And then probably the least influential variable is the hosted versus on prem shift. But to the extent that there is a shift to hosted in the year in which that occurred, it reduces the reported revenue growth rather than increases it.

Speaker 8

So that does have some effect, but I don't want to convey that that's most of the effect.

Speaker 6

And then just to answer the other, that's absolutely right. And just to touch on the last part of your question, there's really no barrier to companies shifting for us to shift companies from on prem to hosted because it's not actually the software itself or the compute engine that's being hosted. It's just the license server, which is a trivial piece of code that just controls the licensing. So this is it doesn't matter large, small and it's completely under control and there doesn't seem to be much resistance. In fact, a lot of companies like it when that's being managed because we can serve them better.

Speaker 6

But just to be clear, 99.999 percent of the computation that's being run is still on prem. It's just that tiny little bit of code. And when that little bit of code is hosted, then the whole entire contract is considered hosted. That's not our rule. That's

Speaker 8

the rule. Okay.

Speaker 6

I hope that helps.

Speaker 8

That's good. Yes, that's

Speaker 11

all very helpful. Can I just sneak in one follow-up? Jeff, you mentioned about the opportunities in the smaller biopharma biotech potentially developing. Is any of that baked into that growth range on the software side for this year?

Speaker 8

We have taken a cautious approach to the outlook in the emerging companies. We haven't accounted for any recovery in capital availability or new companies showing up. Let me give you a little bit more color. What we saw in 2020 2021 was a lot of new customers who were newly kept relatively recently capitalized company showing up and saying we need to discover molecules against our proprietary targets quickly and sort of setting up software contracts with us. That slowed down in 2022 and the natural flux amongst that population of smaller companies, more companies dropped out than came in.

Speaker 8

So we are assuming that that reverses itself and we go back to 2020 or 2021.

Speaker 11

Great. Thank you so much.

Speaker 4

Our next question comes from the line of Chad Wietrovsky with TD Cowen. Your line is open.

Speaker 12

Hey, everyone. This is Chad Wietrovsky on for Stephen Ma. I guess on the software revenues, how does a validating expansion of an agreement like with Lilly, for example, in the Q4, how does that translate when you're looking into that Tier 2 customer expansions? And what does that specifically validate about the platform itself?

Speaker 6

Yes. That's a great question. We really see that as highly validating and the beginning of an important trend of adoption of our computational platform at scale by the pharma industry overall. It's extremely unlikely that and it's not just Lilly, there are a number of customers that are you saw you see what our KPI is for example customer spending over $5,000,000 There is we believe a critical number of pharma companies that have scaled up their usage of the software and using it at a scale that's approaching what we're doing internally as, again, as a beginning of a trend and it's extremely unlikely that it will just be those handful of customers that will do that. And the reason we're saying that is sort of the obvious thing, but also the level of engagement from the other companies that are working their way up to that is really quite positive and we're sure that it's going to happen.

Speaker 6

It's a matter of as Jeff is saying, we're saying just sort of there, when exactly is it going to happen? Is it going to be in multiple stages where they go from 1 tier then to the next over a couple of years? That's where the uncertainty comes from. But it seems pretty clear that that trend that we're seeing and we're obviously very encouraged by those handful of customers spending at that level that that trend will continue. I should mention one other thing that's actually sorry, go ahead, please.

Speaker 12

No, I was just going to kind of pivot. You can continue on that question. Yes.

Speaker 8

I was just going to

Speaker 6

say one other really important thing, but I'll be very brief and let you ask the other question. It's important for to point out that we continue to advance the platform. We have a very significant effort. We continue to make breakthroughs in the science and we expect that to continue as well. So that's another thing that over the next several years and really beyond, we will continue to see more and more breakthroughs in the science that we think will continue to increase the value and the impact that the software will have.

Speaker 6

And I think that's something else that the industry will continue to react to.

Speaker 12

And so you have partnerships with NVIDIA and Google Cloud. And like for example, NVIDIA's BioNeMo platform is an emerging marketplace for fine tuned AI tools for drug discovery. Is there any type of incentive structure for you to launch software on these marketplaces? Is that a way that you could further monetize this growing capabilities?

Speaker 6

Yes, we're not prepared to discuss that now, but I'm glad you brought up those collaborations. They're extremely important and longstanding by the way. These aren't recent. They've been in place for a long time. And I'm sure we will continue to be able to leverage those collaborations to benefit not just us, but really benefit the whole industry.

Speaker 12

Thanks for the questions.

Speaker 4

Our next question comes from the line of Matt Hewitt with Craig Hallum Capital Group. Your line is open.

Speaker 13

Hi guys, this is Jack on for Matt. Thanks for taking my questions. Firstly, with the former Bristol Myers and Zai Lab's program now being solely Schrodinger assets, will that alter the timing of trials and how should we think about those assets? And then, my second question, when you previously mentioned that Eli Lilly renewed and expand their software agreement, are there any other large customer renewals this year we should be monitoring? Thanks.

Speaker 7

So with respect to the first question about the BMS enzyme program, obviously, we've described in the past that some of these are for commercially targeting commercially validated targets, whereas others were more novel targets. And we have been looking at how we will incorporate these into our portfolio. Right now, there is no impact of those programs on our pursuit of clinical programs. The 3 programs or the 2 that are in the clinic and the one that's about to enter were all wholly owned, are all wholly owned proprietary programs that came from our own assets. We continue to look at some of the programs that have been returned as potential opportunities in the future, but we have not made

Speaker 6

engaged in a number of discussions with large companies and as Jeff said, emerging companies. That's very important to keep in mind. It's not just the top 10, 20 pharma companies that have the potential to scale up their usage of the software. So the conversations are encouraging. We're certainly having them.

Speaker 6

But at this point in the year, we're certainly not prepared to name the next company that's going to be, if you want to call it the next Lilly. But yes, we're certainly having those conversations.

Speaker 11

Understood. Thank you.

Speaker 8

Yes.

Speaker 4

Again, the floor is now open for your questions. Our next question comes from the line of Michael Ryskin with Bank of America Securities. Your line is open.

Speaker 14

Hi, thanks. This is both on for Mike. I appreciate taking questions. So the multi year renewal dynamic that you have going on in software is pretty well understood. But also software only came in modestly above your guide in 3Q even with these big renewal benefits and your 4Q outlook is fairly well below.

Speaker 14

So kind of backing out these timing and comp related dynamics, have you seen some change in the underlying markets? Or what's it going to take for software to get back to that 20% -plus multiyear SAC growth profile? Then I have a

Speaker 8

follow-up. Yes. Okay. No, I understand the question. So look, there we highlighted some of the flux in the smaller customers that were have been affected by financing, consolidation in the industry, etcetera.

Speaker 8

And there is no doubt that, that was a significant, if one plays it right way, a drag on what we reported in 2023. We think that there is a path to more than offsetting that And the growth opportunities in what I referred to as the sort of mid cap companies, let's just say, greater than 500,000, the 50 are there, more than offset the effect of that drag, if you like, in the smallest accounts. So and we're not counting on those small accounts coming back, although theoretically, that's a possibility. Now we deliberately called out the multiyear contribution in Q4 and specifically highlighted the Lilly deal because of the size of that and the impact that it had, that was something that we were working towards throughout the year and there are a number of other multi year agreements that we worked towards through the year, some of which became closed contracts and generate revenue, but others that we're still working on. So there is plenty of wood to chop and plenty of opportunity to drive things this year, but we're being pretty careful not to suggest that there's another Lilly out there right now, because clearly that was a major opportunity for us that we pulled out in the Q4.

Speaker 8

Rami, do you want to add?

Speaker 11

No, I think that's perfect. Yes.

Speaker 14

Okay. Got it. Thank you. And then on the other side of the business in Drug Discovery, I think the change in guidance methodology is pretty clear there. I'm not going to ask you to guide to 25 over the out years, but given that there was kind of this inflection expected for drug discovery previously, should we now be thinking of more of a kind of steady ramp there barring any clear indications and milestones?

Speaker 14

Or just how should we think about the trajectory for that segment?

Speaker 8

I hope that we conveyed that the challenges we find in forecasting this segment in my answers to questions in the prepared remarks. It is difficult because of the nature of this business and of our business there and the programs to estimate when programs will go ahead, particularly as they become more advanced. And of course, as they become more advanced, the milestones become larger and so the outsized effect becomes even greater. We continue to be very confident that if we keep initiating those programs and advancing them and they continue to progress that there are opportunities for that revenue to grow. But the other way we are thinking about this, of course, is that we are shifting our capital allocation towards our proprietary programs.

Speaker 8

And as we advance our proprietary programs into the clinic or even to advance preclinical development, we believe consistent with industry standards that they're going to be worth more in partnering transactions. So we are planning that a number of our programs will be partnered in the next in the foreseeable future because obviously, we couldn't take everything in our very rich portfolio already forward and our therapeutic group is continuing to come up with promising new development opportunities. So there's we do think that there's a very significant revenue opportunity there. But given the methodology and the approach we're taking, we think it's prudent to be not guiding to the timing or value of those transactions.

Speaker 14

Got it. Thanks for your time.

Speaker 4

I'm showing no further questions at this time. That concludes today's call. You may now disconnect.

Powered by Quartr
Earnings Conference Call
Schrödinger Q4 2023
00:00 / 00:00