Schrödinger Q4 2024 Earnings Call Transcript

Quartr
Provided by Quartr
February 26, 2025

There are 18 speakers on the call.

Operator

you for standing by. Welcome to Schrodinger's Conference Call to Review Fourth Quarter and Full Year twenty twenty four Financial Results. My name is Kelvin, and I'll 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

Please be advised that today's call is being recorded at the company's request. Now I would like to introduce your host for today's conference, Ms. Jared Madden, Senior Vice President of Investor Relations and Corporate Affairs. Please go ahead.

Speaker 1

Thank you, and good afternoon, everyone. Welcome to today's call during which we will provide an update on the company and review our fourth quarter and full year twenty twenty four 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 Rami Farid, chief executive officer, Jeff Porges, chief financial officer, and Karen Nakansanya, president of R and D Therapeutics. Following our prepared remarks, we'll open the call for Q and A.

Speaker 1

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 2025, 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 considerations described in the risk factors section and elsewhere in the filings we make with the SEC, including our form 10 k for the year ended 12/31/2024. 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.

Speaker 1

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 2

Thanks, Jaren, and thank you everyone for joining us today. Twenty twenty four was an exciting year for Schrodinger. We exceeded our software revenue expectations, established a new drug discovery collaboration and expanded software agreement with Novartis, and we continue to advance our collaborative and proprietary pipeline. We advanced the science underlying our platform, including initiating a project to predict toxicity associated with off target binding and launching a new enterprise informatics platform for biologics. Twenty twenty four was also marked by important milestones at companies we cofounded.

Speaker 2

Ajax and Structure progressed their clinical programs, and Morphic was acquired by Lilly for $3,200,000,000 resulting in approximately $48,000,000 for Schrodinger. As we look to 2025, I'm optimistic this broad momentum will continue. Total revenue for the year was $2.00 $8,000,000 Software revenue was $180,000,000 representing just over 13% growth, and fourth quarter software revenue grew 16% to $80,000,000 The strength of our business is also reflected in our 2024 KPIs. The number of software customers with an annual contract value of greater than 5,000,000 increased from four to eight, and the number of customers with ACV of greater than 1,000,000 increased from 27 to 31. Total ACV increased by 24% to 191,000,000.

Speaker 2

Our software customer retention was 100% for customers with ACV of at least 500,000. We believe this strong performance of our KPIs is a direct consequence of the impact our technology is having on our customers' programs. Our priority for 2025 is driving continued increases in adoption of our computational technology and enterprise informatics platform. It is clear that the computational landscape in the industry is changing rapidly and that our unique integration of physics and AIML methods is producing powerful solutions for drug discovery and materials design. This year, we plan to release several new products and solutions that reflect our continued investment in the platform, including our predictive toxicology technology, where we have already enabled more than 50 off targets.

Speaker 2

We are also planning to release enhancements to our biologics discovery technologies and additional applications of AIML methods that are accelerating and broadening the impact of our physics based methods. Our platform is having a big impact on our ability to rapidly progress a broad pipeline of collaborative and proprietary discovery programs. This year, we look forward to sharing initial phase one clinical data from our three lead programs. Karen will provide a detailed update later in the call. We are well positioned for a transformational 2025, and we look forward to providing updates over the course of the year.

Speaker 2

I will now turn the call over to Jeff.

Speaker 3

Thank you, Rami, and good afternoon, everyone. We're very pleased with Schrodinger's financial performance in 2024. Our software growth exceeded our expectations and showed resilience of our business through changing industry cycles and the headwinds of large contract renewals in prior years. The revenue contribution from hosted contracts continues to increase and we expect this will gradually reduce the Q4 concentration of our revenue. The strong software results for the year is reflected in the excellent progress we have made in our KPIs and in the financial guidance we are providing for 2025.

Speaker 3

Our drug discovery collaborations and portfolio expanding driven by the landmark new agreement with Novartis and new programs added to the existing Otsuka and Lilly collaborations. Finally, our proprietary clinical programs are reaching key data milestones with significant clinical disclosure from three programs coming this year. I'll now summarize our financial results beginning with Q4. Total revenue in Q4 was $88,300,000 an increase of 19% compared to Q4 twenty twenty three. The increase was driven by higher software and drug discovery revenue.

Speaker 3

Software revenue was $79,700,000 an increase by 16% compared to Q4 twenty twenty three. The increase was mainly due to higher hosted revenue from large customers who have transitioned from on prem to hosted licenses over the last two years. On prem software revenue increased by 3% to $55,400,000 as new multi year deals that closed in Q4 twenty twenty four, including Novartis, matched the contribution of multi year deals closed in Q4 twenty twenty three. Hosted revenue increased by 86% to $11,000,000 Maintenance revenue was $5,900,000 and increased by 3.5%. Maintenance revenue was driven by support for on prem contracts from prior periods and offset reductions in maintenance from customers switching to hosted licenses.

Speaker 3

Services declined by 23% as existing services projects were completed or expired. Contribution revenue was $4,900,000 reflecting the new predictive tox project funded by the Bill and Melinda Gates Foundation. Overall, hosted revenue contributed 14% of total software revenue in the quarter compared to 9% in Q4 twenty twenty three. We are very encouraged by the software results with strong growth in the top 30 global pharma accounts offsetting continued churn in our small and mid cap customer segments. Small biotech companies continue to embrace our software, but equally each year we are seeing a number of our biotech software customers being acquired.

Speaker 3

These outcomes are positive for the industry and add to the validation of our platform, but also contribute to the churn in our mid cap biotech segment. Drug discovery revenue was $8,700,000 in Q4 compared to $5,500,000 in Q4 twenty twenty three. The increase was due to milestones received in the quarter and amortization of upfront payments from existing collaborations. Very little revenue was recognized for the new Novartis collaboration in the quarter. Turning to margins, the software cost of revenue was $13,300,000 in the quarter compared to $8,700,000 in the same period in 2023.

Speaker 3

The increase was mainly due to the costs associated with the predictive tox project along with higher royalties. The software gross margin was 83 percent in Q4 compared to 87.4% in Q4 twenty twenty three. The decrease in gross margin was due to the lower profitability of the predictive tox project. Drug discovery cost of goods was $10,900,000 compared to $7,900,000 in Q4 twenty twenty three. The increase was due to higher royalties as well as some increases in FTE and technology expenses.

Speaker 3

Overall, our cost of revenue increased by 46% compared to Q4 twenty twenty three and the overall gross margin declined from 77.6% in Q4 twenty twenty three to 72.6% in Q4 twenty twenty four. The decline was due to higher drug discovery expenses and the higher cost of software. Looking ahead, we expect this trend to continue for the balance of this year as more of our R and D expenses associated with internal projects moves into cost of goods for drug discovery and as the predictive tox project continues in 2025. Our largest operating expense remains R and D. R and D declined from $51,500,000 in Q4 twenty twenty three to $49,400,000 in Q4 twenty twenty four.

Speaker 3

The decline was due to lower CRO spending and lower FTE allocation for projects that were discontinued during the year. Sales and marketing expenses in Q4 decreased by 2.5% to $9,700,000 based on relatively stable headcount and associated expenses. And G and A was essentially flat at $25,800,000 mainly associated with higher professional services being offset by decreases in royalties. Total operating expenses were $84,800,000 compared to $87,200,000 in Q4 last year. And the loss from operations was $21,000,000 compared to $29,600,000 in Q4 last year.

Speaker 3

The change in fair value was a loss of $22,000,000 based on the mark to market of our equity in Structured Therapeutics and the small changes in private company valuations. This compares to a loss in value of $8,000,000 in Q4 of twenty twenty three. Other income was $3,500,000 in Q4 compared to $6,600,000 in Q4 twenty twenty three. The lower income was due to a lower cash balance and the unfavorable effect of currency fluctuations in foreign currency balances. Total other expense was

Speaker 4

a loss of $18,500,000

Speaker 3

compared to a loss of $1,900,000 in Q4 last year, resulting in net loss before taxes for the quarter of $39,300,000 net loss after taxes of $40,200,000 or $0.55 per diluted share. This compares to a net loss of $31,000,000 or $0.43 per diluted share in Q4 last year. The fully diluted share count for Q4 was $72,900,000 and for the year was $72,700,000 dollars The share count increased by 1% compared to the same periods in the prior year. I'll now summarize the full year 2024 financial results. Full year revenue was $2.00 $8,000,000 compared to $217,000,000 in 2023.

Speaker 3

Software revenue grew by 13.3% from $159,000,000 to $180,000,000 with two thirds of the growth coming from hosted software and one third from contribution revenue. Hosted revenue grew from $20,000,000 to $35,000,000 due to an increasing number of large accounts transitioning to hosted licenses. Hosted contracts contributed 20% of software revenue for 2024 compared to 13% in 2023. On prem contract revenue was flat at $104,000,000 as new large multiyear on prem contracts signed this year more or less offset those signed last year. Contribution revenue increased due to the impact of the predictive tox project funded by the Gates Foundation.

Speaker 3

Drug Discovery revenue was $27,000,000 for the year compared to $58,000,000 in 2023. The reduction was due to the impact of non recurring milestones received from partners in 2023. Software gross margin for the year was 79.5% compared to 81.5% in 2023. The change in gross margin was due to the higher costs associated with the contribution revenue in 2024 compared to 2023. Overall gross margin was relatively stable at 64% compared to 65% in 2023.

Speaker 3

Operating expenses increased by 7.3% compared to 2023 with R and D increasing by 11% to $2.00 $2,000,000 sales and marketing increasing by 7% to forty million dollars and G and A increasing by 1% to $100,000,000 Our operating loss for the year was $2.00 $9,000,000 compared to $177,000,000 in 2023. Other income was $23,600,000 this year compared to $220,000,000 in 2023. And our net loss in 2024 was $187,000,000 or $2.57 per diluted share compared to net income of $41,000,000 or $0.54 per diluted share in 2023. The profit in 2023 was driven by the gains associated with the distribution from Nimbus and the gains in the value of our stakes in Morphic and Structured during 2023. Our net cash used in operating activities was $31,000,000 in Q4 compared to $37,000,000 in Q4 twenty twenty three.

Speaker 3

And our net cash used in operating activities for the year was $157,000,000 in 2024 compared to $137,000,000 in 2023. Our cash and marketable securities balance was $367,000,000 at the end of Q4 twenty twenty four compared to $469,000,000 at the end of Q4 twenty twenty three. Our cash position at the end of Q4 twenty twenty four did not reflect the effect of the receivable from Novartis, which added $150,000,000 to our cash balance in January. I'll now provide our initial financial guidance for 2025. We expect our software revenue growth to be in the range of 10% to 15 and currently expect drug discovery revenue to be in the range of $45,000,000 to $50,000,000 We expect a further increase in the proportion of our revenue from hosted contracts, which should slightly reduce our fourth quarter weighting of software revenue and bolsters our revenue in earlier periods.

Speaker 3

Our current expectation is that software revenue will be in the range of $44,000,000 to $48,000,000 in Q1 and the drug discovery revenue will be weighted towards the later quarters of the year. Our software gross margin is likely to be in the range of 74% to 75% compared to 79.5% in 2024. The reduction is driven by the increase in the contribution revenue from the predictive talks initiative. Our operating expenses are likely to grow by less than 5% in 2024, a certain expenses shift from R and D to cost of goods in associated with the predictive talks initiative and newly announced collaborations. We now expect net cash used in operating activities in 2025 to be lower than 2024.

Speaker 3

In 2025, we expect the growth of our software business to continue to be driven by increasing adoption of our technology by large customers. Many of these companies have not scaled up their investment in our technology and are increasingly interested in improving the productivity of their drug discovery efforts. We are already having encouraging discussions with many of the companies who have not yet adopted our technology at scale and anticipate that the enhancements to our platform, including capabilities for biologics and expanded integration of AI and machine learning with our physics based methods should contribute meaningfully to our growth this year. While we are fielding inquiries from new and emerging biotech companies, we don't expect small companies to contribute meaningfully to our growth this year. Our exposure to China is less than 5% of revenue and we don't expect significant growth from that market this year either.

Speaker 3

To conclude, Schrodinger had an excellent year in 2024 with strong results that leave us well positioned operationally, financially and strategically entering 2025. We have many opportunities to drive continued growth in our software business and our collaborations are poised to contribute significant value in 2025 and beyond. Our balance sheet is strong and our operating metrics including KPIs and operating expenses are trending in the right direction. I'll now turn the call over to Karen to comment on our therapeutics R and D.

Speaker 4

Thank you, Jeff, and good afternoon, everyone. Twenty twenty four was a productive year as we advanced our collaborative and proprietary pipeline. In November, we signed a significant new drug discovery agreement with Novartis, and we recently expanded our collaborations with Otsuka and Lilly. Dose escalation studies for SGR 15 o five and SGR twenty nine twenty one progressed, and we initiated our Phase one study for SGR 3,515. These achievements laid the groundwork for important milestones this year with the expected presentation of initial Phase one data from all three clinical stage programs.

Speaker 4

Beginning with our collaboration portfolio, we are pleased with the addition of another target to our discovery collaboration with Lilly. Today's announcement of an exciting new program in a high value therapeutic area builds on the agreement initially signed in 2022 and the advances made by the team on a challenging initial target. Last month, we announced the expansion of our collaboration with Otsuka, adding another program to the existing agreement. The expansion of these two partnerships as well as our collaboration with Novartis reflect the excellent track record we have established for delivering differentiated molecules and robust preclinical packages for high value targets. Turning to our clinical programs, our most advanced phase one program is our MORT1 inhibitor SGR fifteen o five.

Speaker 4

MALT1 is a clinically validated target for leukemias and lymphomas. It is downstream of the BTK pathway and regulates NF kappa b signaling, which is elevated in B cell malignancies and in patients with BTK inhibitor resistance. Our ongoing phase one dose escalation study is evaluating SGR fifteen o five in patients with relaxed refractory B cell malignancies. We expect to report safety, pharmacokinetic, and pharmacodynamic data as well as preliminary pre k PD relationships and efficacy data at a medical meeting in the second quarter. Our goal is to provide an initial understanding of the profile of SGR fifteen o five to inform further development.

Speaker 4

Enrollment is also ongoing in our phase one study of SGR twenty nine twenty one, our CDC seven inhibitor, in patients with acute myeloid leukemia or myelodysplastic syndrome. As a reminder, the objectives of this phase one study are to evaluate the safety and tolerability of SGR twenty nine twenty one and to determine the recommended phase two dose and schedule. The study is progressing well with multiple dose escalations completed, and we continue to anticipate reporting initial clinical data in the second half of this year. Third, our phase one study of SGR thirty five fifteen, our V1 mit1 co inhibitor, is also advancing. Our ongoing dose escalation study will evaluate the safety PKPD preliminary antitumor activity and dosing schedule in patients with advanced solid tumors predicted to be sensitive to V1, MIT1 inhibition.

Speaker 4

This includes ovarian, uterine, and breast cancer in addition to other solid tumors with elevated replication stress. SGR thirty five fifteen inhibits both V1 and MIT1, and concurrent loss of these two proteins confers amplified vulnerability in cancer cells termed synthetic lethality. Our intermittent dosing schedule is intended to maintain efficacy while allowing recovery from any potential mechanism based hematological toxicity. We are pleased with our progress in this study and anticipate reporting initial data in the second half of this year. Beyond our clinical programs, we are also progressing early discovery programs for targets involved in inflammation and neurodegenerative diseases.

Speaker 4

Recently, we selected a development candidate for our EGFR c seven nine seven s program for osimertinib resistant non small cell lung cancer, including brain metastases. Over the past three years, we have advanced several programs into the clinic and partnered some of our early stage programs. We continue to see additional opportunities for value creation emerging from our portfolio through out licensing, new ventures, or collaborations. We are very much looking forward to sharing clinical results from all three clinical programs throughout the year. I'll now turn the call back to Rami.

Speaker 2

Thank you, Karen. As you heard, we had a very successful 2024, and I would like to take this opportunity to thank our dedicated employees for their hard work and accomplishments. I'm very excited about our outlook for 2025, and we look forward to providing further updates across the business throughout the year. At this time, we'd be happy to take your questions.

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Your first question comes from the line of Michael Yee of Jefferies. Please go ahead.

Speaker 5

Hey guys, this is Kyle Yang for Michael Yee. Thanks for taking our questions. Congrats on the quarter. First question a few quick ones for us. The first question is, what is your assumption behind your 2025 drug discovery revenue guidance?

Speaker 5

And could

Speaker 6

you please share what proportion of

Speaker 5

the guidance comes from revenue from the Novartis partnership? And second is, could you please tell us a little bit about your updated thoughts on your MULT one program? We understand that you previously sort of used J and J's first generation molecule data as a bar. So how should we think about the bar now knowing that J and J has initiated a second generation molecule and also Apti has a MULT one as well? Thank you so much.

Speaker 7

So you

Speaker 8

wanna cover that first? Yeah.

Speaker 9

Let me start off with your question about the 2025 revenue guidance for drug discovery. The increase in the drug discovery revenue that we're forecasting is pretty broad based. It comes from quite a few different collaborations. As you would imagine, part of it is the amortization of the upfront payment from the Novartis collaboration, which we indicated is going to be sort of over multiple years. I wouldn't want you to think that it's most of that revenue, because, you know, we're just scaling up all of act those activities on those projects.

Speaker 9

I imagine we're gonna be sort of at peak peak recognition of that upfront payment probably in eighteen to twenty four months, but it is a significant portion. But there are a number of other programs. As we announced today, we have a new collaboration with Lilly agreement. We announced a new collaboration a new program, sorry, in the Lilly agreement, a new program in the Yotsukro agreement at the beginning of the year. Both of those contribute.

Speaker 9

And the progress that we're making in in some of our other collaborations such as BMS also contribute. So it's really pretty broad based, and that's similar for the the guidance that we provided on software, frankly, as well.

Speaker 10

Perfect.

Operator

Can you

Speaker 8

address the second question?

Speaker 7

Yes. So as you point out, there is a lot of excitement, I think, about MOR208 as a mechanism. That's reflected, I think, in the number of companies that are pursuing this, this target. We are very pleased with the progress we're making in our phase one trial. Just to remind you, this is a dose escalation study where we are studying the PKPD safety, which we think is super important for this mechanism for combinations, as well as initial signs of clinical activity.

Speaker 7

Now in terms of the bar, I would say that we're really focused on understanding the performance of our molecule in this trial. As you point out, there are other companies entering this space, but our focus this year laser focused on describing the profile of our molecule. And as you heard, we will be sharing some of that data in the second half of the year at a at a medical conference with, an update on on the profile so far from this dose escalation study.

Speaker 11

Second quarter.

Speaker 7

Second quarter. Sorry. Yeah.

Speaker 11

Yeah. K.

Operator

Your next question comes from the line of Manny Forohar of Leerink Partners. Please go ahead.

Speaker 12

Hi. This is CJ on for Manny. Congrats on progress and thanks for taking our question. Our question is, you previously noted that seasonality becomes more 4Q weighted over time. Is this something that's happening at a pace that we would start to show this year, or this is something we would see a more longer term over the next half decade?

Speaker 3

Alright.

Speaker 9

So you you suggested that our seasonality becomes more weighted, but perhaps you mean that it becomes less weighted over time. We, we we actually do think that it will gradually become less our revenue distribution will become less q four weighted. It's It's hard because we keep coming up with great opportunities in the fourth quarter as we've seen in the last couple of years. But we think that this year we will see more distribution. That's why we emphasize the hosted revenue because, of course, the hosted revenue is a foundation that that continues through all four quarters of the year.

Speaker 9

So, I do think that the q four waiting will come down, but I think similarly, I do wanna point out that q two and q three are still going to be sort of kind of cyclically lower quarters than the other quarters of the year this year. I'll add to that. The q one guidance that we provided also reflects the impact of some deals that we signed in q four and and revenue being recognized for quite a number of things that we closed in Q4, particularly as you imagine hosted deals. So, you know, that some of that is a tail coming out of Q4 into Q1.

Operator

Great. Thank you. Your next question comes from the line of Scott Jonas of KeyBanc Capital Markets. Please go ahead.

Speaker 13

Hey guys, this is Steve on for Scott. Thanks for taking our questions.

Speaker 14

What do customers take into consideration when potentially moving from on prem to hosted? And how do you see the percentage of your book transitioning to hosted progressing over the next couple of years? And then as a follow-up, what is the level of demand been like for combination drug discovery and software arrangements from existing and new customers? Thanks.

Speaker 9

So maybe I'll give you a sense of the cadence of the transition from, on prem to hosted, and then, Brian, maybe you can talk a little bit about the the basis for making that decision, and then, Carrie, you talk about the the or discovery question.

Speaker 11

So

Speaker 9

in terms of the cadence, I pointed out in my prepared remarks, I think that the, there was about a five to seven percentage point difference in, the amount of our software revenue that came from, hosted contracts in 2024 compared to 2023 and also about the same in q four compared to q four. I would, I think that that's a reasonable goal in terms of a continuation of the trend. We've previously indicated that we don't we we don't envisage the kind of sudden or even rapidly accelerated switch, but that sort of cadence of transition, we think is is reasonable as a as a kind of base assumption going forward.

Speaker 8

Yeah. And let me just remind you, what we mean by hosted in the large majority of cases. What this means is that we're hosting the license server, not the underlying software. When we do host the license server, it does allow us to, deliver the licenses a little bit more seamlessly for the customer. But as far as the customer's concerned, and actually as far as we're concerned, and as far as the sort of burden on us or the, the impact it has on us, it's it's extremely small.

Speaker 8

Remember, it's just hosting license server, not the software itself.

Speaker 9

Why would that why do they need to transition?

Speaker 8

I mean, I just you know, I I I think that's what I was just saying. It's just it is a little bit more seamless to deliver the software, deliver the license. Right? Yeah. Cool.

Speaker 8

Yeah.

Speaker 7

Yeah. And I think the last question was about, combination deals.

Speaker 8

Yeah. The demand for what what do we see as the dominant demand for

Speaker 7

the combination? Yeah. No. I mean, I think, as you're well aware, both the drug discovery team and the software team spend a lot of time with, potential partners and and, software customers, really showcasing, programs and how we execute drug discovery. And I think as you are aware, that's led to a number of these combined deals over the last few years.

Speaker 7

We expect that to continue. I think it's hard to give you a sense of, the extent to which that will be true, but I think we're excited about these opportunities. It gives us a chance as we talked about with the Nevatis deal, not just to see them scale up the platform, but actually to have those front row seat and watch us use the platform so that they get the most out of it. So

Operator

Your next question comes from the line of Brendan Smith of TD Cowen. Please go ahead.

Speaker 12

Great. Thanks for taking the questions. Excuse me. I wanted to actually maybe just piggyback off of that prior question just a little bit and ask a bit more about kind of customer retention feedback and how you're thinking about new product offerings. Can you maybe just give us a sense of what are some of the stickiest aspects that your software users are responding to that they're kind of telling you about as really driving some of this retention and driving up ACV over time?

Speaker 12

And then really just curious how some of that feedback is impacting your capital allocation strategy on where to focus new product offerings and R and

Operator

D investment moving forward? Thanks.

Speaker 8

Yes. The customer retention is coming from something that we said in our remarks and it's pretty exciting, which is the technology is having an impact on progress. We're getting constant reports from our customers that they're making fewer molecules to get to a development candidate, Quality of molecules are improving. The belief of success isn't is improving. They're getting to development candidates more rapidly.

Speaker 8

It's very simple. It's impact. And what that means is they become very, very dependent on it. And the the the option to not continue to use it, of course, is there when you have that kind of impact. The other aspect of it is, of course, whether there are all there are alternatives.

Speaker 8

And obviously, this kind of retention rate certainly suggests that there are not viable alternatives, to the technology that we're we're developing. We are, as as you as we indicated in our marks and you're asking your question, continue to advance the platform in a number of very important areas. And then, of course, also helps with retention. When customers see that we continue to improve the platform, and they continue you know, then then it becomes a more of a partnership. Right?

Speaker 8

They're investing, and also they know that by continuing to work with us, giving us feedback, they're gonna see continued improvements to the software and new technologies. And we talked about, for example, enhancements to our biologics offering in particular in in the enterprise informatics space. That's been really well received. The predictive toxicology, you know, this off target panel that we're developing is, there's a lot of excitement around that. It's a it's a real, there's a real need to improve that aspect of drug discovery.

Speaker 8

And that taps into new budgets, which is also a part of of stickiness, right, as you start to, as as the technology starts to have a broader impact across the whole enterprise, not just in one specific area. The other area that that's in that category is, formulations, in particular crystal structure prediction. That's an exciting new technology that we released last year. Receiving a lot of great feedback. Customers are seeing that we're advancing the science.

Speaker 8

We're making, you know, we're doing good science and it's having an impact on their projects.

Speaker 10

Great.

Speaker 5

Thanks very much.

Operator

Your next question comes from the line of Michael Ryskin of Bank of America. Please go ahead.

Speaker 11

Great. Thanks. Thanks for taking the question guys. I want to ask about some of your the KPIs you released in terms of 2024 performance. Just taking a look at number of customers with ACV over 5,000,000, ACV of top 10 customers, seems like really jumped in those top five, top 10 accounts from the software perspective.

Speaker 11

Maybe this is a follow on to the prior question, but just sort of what are you seeing there? Why is that feels like a little bit of a step function? Just sort of how sustainable is that? And, is that is this a little bit of a one time jump? Or are you seeing something that's making you reassess that?

Speaker 8

Yeah. I know we can address that. It's a great question. We've talked a lot about this that to see impact from this technology has to be used at scale. You have to explore huge numbers of molecules to solve this incredibly complicated drug discovery and materials design problem that we all face, this multi parameter optimization problem.

Speaker 8

It requires exploring huge amounts of chemical space. And that can only be done by using the technology at scale. And it's become very clear that in in some sense there's an inflection in the value that gets created when you reach that 5,000,000 plus spend. That gives you access to enough technology to support enough programs to really see an impact. But as we said over and over again, that's not we don't think that's the TAM.

Speaker 8

We don't think that's the the the limit. We know internally in our 25 to 30 programs or so that we're working on internally, we're using the technology at a much larger scale even then. So, yes, these companies can see impact at the 5 to 10,000,000 range or so, But it turns out there's still room for, to experience significantly more impact by actually spending quite a bit more than that. And again, we have evidence of that through our own partnerships and our partners experience that. They get access to that level of technology, Companies like Lilly and now Novartis and so on.

Speaker 8

And I think they're gonna start to see, what's required, to to, achieve the kind of, outcomes that we've achieved and that Karen mentioned is, that reflects that's reflected in our track record.

Speaker 11

Got it. Thanks so much. Appreciate it.

Speaker 14

Cool.

Operator

Your next question comes from the line of Vikram Parohit of Morgan Stanley. Please go ahead.

Speaker 10

Hi, good afternoon. Thanks for taking our questions. So we had two. First on the revenue guidance, was wondering if you could just talk us through what drives the bookings there. Just wanted to understand some of the sensitivities that flow into each end of the range.

Speaker 10

And then secondly, on MALT one, so you mentioned that the data update here is going to be a medical meeting in 2Q. I was just wondering, do you think you'll be in a position to evaluate partnerships for that program post that data cut? Or do you think you'd want to see more follow-up or more data points before evaluating potential PD for MEL1? Thanks.

Speaker 8

Jeff will cover the first. Yeah.

Speaker 9

So on the revenue guidance, we provide revenue guidance to q for q one and then for the full year. And as you can imagine, Vikram, the the confidence or certainty that we have about the outlook for Q1 is much higher than for the full year because we're two thirds of the way through the first quarter as well. As I mentioned on the earlier question, we have some deals that closed in late in Q4 that are delivering revenue in Q1. So there's a pretty broad foundation behind that that q one number. For the full year, you know, we're still going to have a pretty big chunk of revenue that we'll we'll have to deliver in the fourth quarter.

Speaker 9

And and and the confidence we have in that is based on several things. First, you heard Rami talk talk about the under penetration, in much of the industry. Yes, we have eight customers over $5,000,000 but that still leaves an awful lot of the industry, that is well below that. In fact, substantially below that, where we think we have an opportunity to advance discussions. The second is that, of course, we are deploying all the new capabilities into the technology, which results in both new customers coming in and saying, hey, that would be really useful.

Speaker 9

We'll step up. And then existing customers that already stepped up, taking their utilization to a higher level. The third thing I'll say is that we because of the hosted contracts that we've put in place, a hosted contract in a strange way puts future revenue in the bank rather than an on prem contract where you take all the revenue upfront. So compared to prior years, the situation we're in in terms of the base of revenue that we have a high degree of certainty about for 2025 is actually higher than it's been in prior years because of that hosted revenue contract. So all of those elements give us a very high degree of confidence about the revenue guide for the year.

Speaker 9

Now top and bottom end, it just depends on what the magnitude of the step up in those large customers is particularly towards the end of the year. And as those discussions mature, know, we'll think about, you know, where we actually think the year is going to end up. But, we've got a very high degree of confidence at this stage.

Speaker 7

So on on MORT one, I I think, important to just restate that this is an ongoing dose escalation trial. As you know, we spend

Speaker 8

a lot of

Speaker 7

time with potential partners, aligning on what kind of profile people are looking for, what would be impactful in in the HemOnc space for AMORT one. But I will emphasize again that, what we will be sharing in 2Q is the data per the cutoff when we submit the abstract. So, it will be ongoing. And I think as we approach, a more complete study, we'll have second rounds, obviously, in discussions, further rounds of discussions with companies, as the year progresses. So, yeah, really an interim update, I think, at the medical meeting.

Speaker 10

Got it. Thank you.

Operator

Your next question comes from the line of Evan Seagram of BMO Capital Markets. Please go ahead.

Speaker 15

Hi. This is Makam Hoffman on for Evan. Thank you for taking our question. I wanted to ask, if you guys could think of any impacts that you could foresee from recent proposed U. S.

Speaker 15

Tariffs, you know, the exposure to China is only roughly 5% of revenue. Could any of this be meaningfully impacted by those ongoing disputes? Just trying to get your context there. Appreciate it. Thanks.

Speaker 9

Yeah. I appreciate the question. I think it's a sensible one given the context. I think total revenue for China is actually substantially less than 5%. It's in the low single digits.

Speaker 9

We aren't expecting that to sort of recover in in the immediate future, but we'd equally, we don't see ourselves as having a lot of risk associated with that. I would sort of dovetail your question with with another answer, which is our exposure to, NIH is less than 1%. Our total exposure to US academic institutions across all different parts of our business is about high single digits, mid mid really mid single digits. And, total US government exposure, including NIH, is still considerably less than 1%. So, there's a lot of turmoil out there and it's going to be looks like being a tough environment for academic medical research, but we don't expect that to have a lot of impact on our business.

Speaker 11

Appreciate it. Thanks, guys.

Operator

Your next question comes from the line of Matt Hewitt of Craig Hallum Capital Group. Please go ahead.

Speaker 16

Good afternoon and thanks for the update. I actually have three different lines of questions, so I'm going to ask them and then I'll let you answer and then I'll come back with the follow ups. But first, as far as the drug discovery revenues are concerned, should we be thinking how should we be thinking about the cadence for those? Obviously, you don't know when milestones are necessarily going to hit, but with the Lilly contract signing in January, is there anything attached to that? I'm just trying to think how we should be dispersing those revenues over the course of the year.

Speaker 9

Okay. I indicated in my prepared remarks that they're likely to, again, be somewhat back end weighted. As you could imagine, I mentioned that the Novartis revenue Novartis contract is gonna contribute, and and that will, of course, scale up, during the year as we spin up all of those project teams. And similarly, frankly, with with even, for example, the new program with Lilly and Natsuka collaborations, you know, while we're ready to go, it takes, you know, a period of time to scale up those project teams as well, and then you recognize that revenue as those teams scale up. So, you know, I think that I would I don't think it's we're not getting sort of sense.

Speaker 9

Very heavily back end weighted, but it will gradually increase throughout the year.

Speaker 16

Got it. And then secondly, the predictive toxicology, can you provide any feedback that you're getting from some of the initial beta customers? And when do you think that could be ready for prime time?

Speaker 8

Yes. As I indicated, the feedback, has been, really excellent. It's clear there's a wide recognition that this solves a a real challenge that essentially every single project faces at some point. As far as the quality of the science and the accuracy of the methods, it's impressive. And that's also being recognized widely as far as, when it will be released.

Speaker 8

We're, not in the habit of announcing ahead of time, you know, dates for actual releases, but we are committed to releasing it this year, and look forward to sharing with you, you know, announcements around that release and and more information as we have more and more customers using it. I will say this is kind of important. Maybe you can hand over to Karen. We are using it already and quite so our collaborators have access to it, and it's had a big impact on a number of our projects.

Speaker 7

Yeah. That's correct. As you know, the internal drug discovery team gets early access to the technology, and, it is actually something we've been using in ongoing programs both our own and with collaborators as Rami said and being able to dial in and dial out the profiles we want and those we don't want is really a very powerful tool.

Speaker 16

That's great. And then maybe the last one and maybe this is a little bit bigger picture here, but you noted that small pharma is still lagging from an adoption standpoint. It didn't sound like that you were expecting much change this year. What do you think is going to be the trigger to get small pharma, small biotech to really get on board with using software in the drug discovery standpoint? Is it simply a money thing?

Speaker 16

Is it they need to feel more comfortable with their balance sheets? Is there some other hurdle that you think that needs to be kind of overcome? Or what's it going to take there? Thank you.

Speaker 8

I'll hand it over to Jeff to give some thoughts. But let me just first make clear, and this is something we've talked about before, that we have a number of small companies, that are using the software potentially, if you think about the number of programs they have, at a higher scale than the large majority of our pharma customers. So the good news there is that, there are plenty of relatively small companies that are recognizing the value using it. That's a good sign. But the broader question, maybe, Jeff, you can

Speaker 9

Yeah. Yeah. So I I may have conveyed the wrong impression.

Speaker 10

Mhmm.

Speaker 9

It's it's it's not that small pharma or biotech companies are reluctant to use the software or or actually even lagging. If that segment as a whole has churned it, frankly, because some of them are so successful, they just keep being acquired. And, you know, that that that is a lot of validation for our platform, and then the acquirer finds out how they discover their molecules. So that's causing some churn. But the other thing is, you know, we're all seeing the headlines about companies that are restructuring and focusing on advancing just a clinical program or concentrating down just to one core therapeutic area or something.

Speaker 9

And naturally, that has an effect on their appetite for investing in discovery. So what what I would do my direct answer to your question would be, for that segment to, again, be a growth driver for us, what we wanna see is kind of a renewed commitment to providing capital for drug discovery in emerging biotech companies, which is sort of, I would say, still pretty tepid, the environment for that.

Speaker 16

That's super helpful. Thank you.

Operator

Your next question comes from the line of Chris Shibutani of Goldman Sachs. Please go ahead.

Speaker 6

Great. Thank you very much. Two questions, if I may. With the predictive toxicology business, you made several announcements in 2024 about the partnership and the contribution that's being made by the Gates Foundation. With that, you mentioned that the majority of revenues will be recognized in 2025.

Speaker 6

Jeff, can you just clarify for us from a modeling perspective how we should think about that revenue recognition, where it appears in the model and anything to do with sequencing? And then a second question for Karen perhaps, but still tied to Jess as well. You have three clinical assets. You've talked about a little over a year ago at your R and D day about having multiple potential candidates that you could advance into the clinic. What is currently the gating factor for you to decide to choose another one to enter into the clinic?

Speaker 6

And currently, is there a favorite child? Thank you.

Speaker 9

Great. Thanks, Chris. In terms of the predictive talks revenue, you are 100% correct. We indicated that most of the revenue would be recognized in 2025. We recognized $6,000,000,000 in revenue for that initiative in 2024 between Q3 and Q4.

Speaker 9

And then the total grant, I believe, we've disposed is around $19,000,000 to $19,500,000 So the most of the balance of that will be recognized in 2025. There is a bit of a tail that will continue into 2026, but that's kind of the cadence of that recognition.

Speaker 7

Yes. I'd say on the programs, I think the focus in 2025 is really on the three programs that we have in the clinic. As we've said, we're excited about progress and we intend to share data on those programs this year. With respect to the pipeline behind those programs, we have, as you know, last year partnered some of our early programs with Novartis, and we want to stay flexible in terms of the decision when to partner, when to advance programs to the clinic. Got our hands pretty full right now in the clinical space with our three advanced assets.

Speaker 7

But we do have other opportunities that will emerge from the pipeline over the coming years. And I think the merits of of each of those assets, not just within, the sort of target product profile that we've been focused on, but also within within the landscape. There are, a lot of companies pursuing, similar exciting targets and we'll have to decide when the time is right, whether that's one that we will take into the clinic ourselves or whether we will partner.

Speaker 6

Thank you.

Operator

Your next question comes from the line of David Lebowitz of Citi. Please go ahead.

Speaker 17

Hi. This is Aikley on for David Lebowitz. Thanks for taking our question. We have one on the V1 mit1 inhibitor, the 03/2015. For the Phase one study results coming out later this year, are there any safety signals that you are going to be very focused on given particularly given past discontinuations in this class?

Speaker 17

And to what degree do you think you have an advantage there based on the work that you've done with the dual mechanism approach? And then two, I guess on a related note as well, when you say you're canvassing different solid tumors, is there one of particular interest that stands out to you before we see the data? Thanks.

Speaker 7

Yeah. So, I mean, I think first of all, with respect to safety, what we have shared with you in the past is what we have observed pre clinically, that the ability to dose intermittently with a dual inhibitor that essentially allows you to take the break off V1. That's the MIP1 contribution. That in our preclinical studies we observed that this allowed for, more efficacy while you were in a dosing holiday. As you know, we're currently exploring that in our phase one trial.

Speaker 7

We are not going to be providing an update, necessarily on this call about the profile. That's something that we're reserving for later on this year. But you're right to say that it's very clear. V1 has efficacy. The focuses are how do we maintain efficacy while ensuring that people can tolerate the drug.

Speaker 7

And so that's gonna be a focus during the course of this trial is to fully understand the safety profile as well as the efficacy profile, or at least initial clinical activity coming out of the dose escalation trial. I also want to just, answer this question on tumors, tumor types. I think what we've seen time and time again and with is that there's activity there and some pretty important tumor types. Platinum resistant ovarian cancer, uterine serous carcinoma. We're seeing repeatedly with different molecules that there's activity there.

Speaker 7

And that's something that we will be looking to replicate with our proof of mechanism in respect to our trial. But as you know from previous comments, we're also excited about other tumor types, that have the potential to respond to we won. I think we also know CCNE, infers some additional sensitivity. We are interested, of course, in exploring that in other tumor types, but we haven't been sharing a lot about, the beyond, ovarian and uterine strategy at this time that will emerge later on.

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