Schrodinger Q2 2025 Earnings Report

Schrodinger EPS Results

• Actual EPS: -$0.59
• Consensus EPS: -$0.83
• Beat/Miss: Beat by +$0.24
• One Year Ago EPS: -$0.66

Schrodinger Revenue Results

• Actual Revenue: $54.76 million
• Expected Revenue: $52.03 million
• Beat/Miss: Beat by +$2.73 million
• YoY Revenue Growth: +15.70%

Schrodinger Announcement Details

• Quarter: Q2 2025
• Date: 8/6/2025
• Time: After Market Closes
• Conference Call Date: Wednesday, August 6, 2025
• Conference Call Time: 4:30PM ET

Schrödinger, Inc., together with its subsidiaries, develops physics-based computational platform that enables discovery of novel molecules for drug development and materials applications. The company operates in two segments, Software and Drug Discovery. The Software segment is focused on licensing its software to transform molecular discovery for life sciences and materials science industries. The Drug Discovery segment focuses on building a portfolio of preclinical and clinical programs, internally and through collaborations. The company serves biopharmaceutical and industrial companies, academic institutions, and government laboratories worldwide. Schrödinger, Inc. was incorporated in 1990 and is based in New York, New York.

Schrodinger Q2 2025 Earnings Call Transcript

Key Takeaways

• Positive Sentiment: Schrodinger reported Q2 total revenue of $54.8 M, up 16% year-over-year, with software revenue at $40.5 M (+15%) and drug discovery at $14.2 M (+19%), and reaffirmed full-year guidance.
• Negative Sentiment: Software gross margin fell to 68% from 80%, reflecting a shift in revenue mix and investments in the predictive toxicology initiative.
• Positive Sentiment: R&D expenses decreased over 15% to $43.1 M and operating expenses declined 6%, driven by expense-reduction initiatives and enabling a lower full-year operating expense outlook.
• Positive Sentiment: Proprietary MALT1 inhibitor SGR1505 showed encouraging Phase I activity in refractory CLL and Waldenström’s macroglobulinemia, and Schrodinger is exploring partnerships to accelerate mid- and late-stage development.
• Neutral Sentiment: The beta release of the predictive toxicology platform—featuring a virtual kinase panel and off-target predictions for HERG, PXR, and common CYPs—aligns with FDA efforts to reduce reliance on animal models.

Presentation

[Operator]

Thank you for standing by. Welcome to Schrodinger's Conference Call to Review Second Quarter twenty twenty five Financial Results. My name is Rob, 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 this call is being recorded at the company's request. Now I would like to introduce your host for today's conference, Ms. Jeron Madden, Chief Corporate Affairs Officer and Head of Investor Relations. Please go ahead.

[Jaren Madden, Chief Corporate Affairs Officer & Head - IR at Schrödinger]

Thank you, and good afternoon, everyone. Welcome to today's call during which we will provide an update on the company and review our second quarter twenty twenty five 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, Richie Jain, chief financial officer, and Karen Nakinsanya, President, Head of Therapeutics, R and D and Chief Strategy Officer, Partnerships. Following our prepared remarks, we'll open the call for Q and A.

[Jaren Madden, Chief Corporate Affairs Officer & Head - IR at Schrödinger]

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 financial outlook for the full year 2025 and third quarter twenty twenty five, 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 represent our current views and reflect our plans, intentions, expectations, strategies and prospects, which are based on the information currently available to us and on assumptions we have made. Actual results may differ materially due to a number of important factors, including the considerations described in the Risk Factors section and elsewhere in the filings we make with the SEC, including our Form 10 Q for the quarter ended 06/30/2025. 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.

[Jaren Madden, Chief Corporate Affairs Officer & Head - IR at Schrödinger]

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. And with that, I'd like to turn the call over to Rami.

[Ramy Farid, CEO, President & Director at Schrödinger]

Thanks, Jaren, and thank you, everyone, for joining us today. We made very solid progress in the 2025. Total revenue was $54,800,000 in the second quarter, a 16% increase from the 2024. Software revenue was $40,500,000 representing 15% year over year growth. Drug Discovery revenue was $14,200,000 highlighting the progress and growth of our collaborative portfolio.

[Ramy Farid, CEO, President & Director at Schrödinger]

While the macroeconomic environment has been highly uncertain, we continue to see demand of our software platform driven by the industry's need for validated computational approaches that are critical for innovation and efficient R and D. We believe we are uniquely positioned at the forefront of the ongoing transformation of integrating predictive methods into all stages of molecular discovery. We are maintaining our full year software revenue growth guidance, reflecting the productive conversations we're having with our software customers around renewals and scale ups in the second half of the year. As you will hear from Karen, we continue to make progress across our pipeline and recently presented encouraging Phase I data from SGR1505, our proprietary MALT1 inhibitor. The emerging profile of SGR1505 shows best in class potential, and we are exploring strategic opportunities to accelerate clinical development and maximize the potential of this program.

[Ramy Farid, CEO, President & Director at Schrödinger]

We expect to report initial Phase I data from our other two clinical programs, SGR2921 and SGR3515 in the fourth quarter. We are continuing to make significant improvements to the performance and usability of our software platform and continue to add streamlined workflows to enhance the user experience and make our software more accessible to scientists without a computational chemistry background. We are also advancing our predictive toxicology initiative in support of the FDA's efforts to modernize drug discovery through its new alternative methods program to reduce reliance on animal models, including through the development and deployment of predictive computational models. To this end, we recently released the beta version of a virtual kinase panel to prospectively identify potential liabilities for an initial set of approximately 50 representative kinases. Our platform now also supports prediction of binding to the known off targets HERG, PXR, and three common CYPs.

[Ramy Farid, CEO, President & Director at Schrödinger]

We expect to expand the number of supported off targets as we continue to advance the technology. Overall, we have made considerable progress during the quarter, and we are excited about the opportunities ahead. I want to thank our employees who are critical to achieving our goals for their hard work and dedication. I will now turn the call over to Richie Jane, who was appointed Chief Financial Officer in May. Richie has made significant contributions during his tenure at Schrodinger, including working across the company to pursue strategic initiatives and secure and expand strategic collaborations.

[Ramy Farid, CEO, President & Director at Schrödinger]

And I'm very pleased to have him on the call today. Richie?

[Richie Jain, CFO at Schrödinger]

Thank you, Rami, and good afternoon, everyone. I'm happy to join my first earnings call as Schrodinger's CFO. Broadly, the industry is navigating a complex macroeconomic landscape, including regulatory and tariff uncertainties, challenging capital markets, and drug pricing pressures, such as most favored nation provisions. Notwithstanding this backdrop, we are very pleased to deliver strong results for the 2025. Total revenue for the quarter was 54,800,000.0, an increase of 16% compared to q two two thousand twenty four.

[Richie Jain, CFO at Schrödinger]

The increase was driven by both higher software and drug discovery revenue. Software revenue was 40,500,000.0, an increase of 15% compared to q two two thousand twenty four and in line with our expectations for the quarter. The increase was primarily driven by higher revenue from hosted contracts and contribution revenue from the Gates Foundation grant related to our predictive toxicology initiative. Revenue from on prem contracts was slightly lower year over year, primarily due to the timing and size of renewals. Consistent with prior periods, our growth primarily reflects increasing utilization and adoption at existing accounts with minimal contribution from new customers given the persistent biotech environment challenges.

[Richie Jain, CFO at Schrödinger]

Drug discovery revenue was 14,200,000.0, an increase of 19% compared to q two two thousand twenty four. The increase reflects continued recognition of the 150,000,000 upfront payment from the Novartis collaboration that began in late two thousand twenty four and execution across the collaboration portfolio that we continue to expand. Software gross margin was 68 percent compared to 80% in 2024. This lower margin reflects the change in revenue mix and investment associated with the predictive toxicology initiative, which began in the 2024. R and D expenses were 43,100,000.0 in q two two thousand twenty five, a greater than 15% decrease from the 50,800,000.0 in 2024.

[Richie Jain, CFO at Schrödinger]

The decrease was primarily due to the continued shift in expenses from the predictive toxicology initiative into software cost of goods sold, from proprietary r and d programs into collaborations, and lower CRO and FTE spend following the 30,000,000 expense reduction initiatives announced in May. Sales and marketing expense was 10,700,000.0, an increase of approximately 11%, primarily due to higher FTE expenses. G and A increased by 7% to $25,200,000 driven by higher professional services. Total operating expenses were $79,000,000 in the quarter, a decrease of 6% compared to q two twenty twenty four, largely due to lower r and d expenses. Total other income was a gain of 10,000,000 compared to a loss of 1,200,000.0 in q two last year due to mark to market changes in our equity investments.

[Richie Jain, CFO at Schrödinger]

Taxes were minimal, resulting in a net loss of 43,000,000 or 59¢ per share versus a net loss of 54,000,000 or 74¢ per diluted share in q two two thousand twenty four. The fully diluted share count for q two was 73,400,000.0 compared to 72,700,000.0 in q two two thousand twenty four. We remain well capitalized with 462,000,000 in cash and equivalents as of June 30. We are maintaining our software and drug discovery revenue guidance for the year of software revenue growth of 10% to 15% and drug discovery revenue of 45,000,000 to 50,000,000. We continue to have encouraging discussions with customers about scale ups at renewal, most of which take place in the fourth quarter.

[Richie Jain, CFO at Schrödinger]

Shifting to operating expenses, we now expect them to be lower in 2025 than in 02/2024, driven primarily by our $30,000,000 expense reduction initiative that we announced in May. Cash used in operating activities in 2025 is still expected to be significantly lower than in 2024. For the third quarter, we expect software revenue to be in the range of 36,000,000 to $40,000,000 We continue to expect the balance of drug discovery revenue to be approximately evenly distributed through the third and fourth quarters. With that, I'll turn the call over to Karen to discuss our therapeutics R and D and pipeline updates.

[Karen Akinsanya, President, Head - Therapeutics R&D and Chief Strategy Officer, Partnerships at Schrödinger]

Thank you, Richie, and good afternoon, everyone. We achieved strong pipeline progress during the quarter, reporting our first clinical data and advancing our portfolio of collaborative and proprietary programs. Our platform empowers our scientists to discover differentiated molecules with remarkable efficiency. To date, 15 development candidates from our collaborative and proprietary portfolio have entered Phase I clinical development. Six of these have advanced to Phase two and one is currently in Phase three.

[Karen Akinsanya, President, Head - Therapeutics R&D and Chief Strategy Officer, Partnerships at Schrödinger]

These programs represent distinct value creation opportunities for Schrodinger, offering the potential for additional future milestones, royalties and cash distributions from equity. Turning now to our proprietary pipeline. I'll begin with SGR1505, our MORT1 inhibitor. The presentation of initial Phase I clinical data was an important milestone for the program, and our conversations at EHA and ICML reaffirmed our belief that MORT1 inhibition represents a promising novel therapeutic strategy in the hematology armamentarium beyond BTK, BCL2 and standard of care agents. The initial Phase one dose escalation data were highly encouraging, showing a well tolerated profile with clear monotherapy signals in heavily pretreated chronic lymphocytic leukemia where three of seventeen patients responded and in Waldenstrom's macroglobulinemia where all five patients responded.

[Karen Akinsanya, President, Head - Therapeutics R&D and Chief Strategy Officer, Partnerships at Schrödinger]

Importantly, two of the three CLL responders were double exposed to BTK and BCL2 inhibitors and all five Waldenstrom patients were last treated with a BTK inhibitor, providing early evidence supporting an opportunity for SGR1505 in patients with refractory disease. The FDA Fast Track designation for SGR1505 for the treatment of adult patients with relapsedrefractory WM that have failed at least two lines of therapy including a BTK inhibitor also reflects the medical need. The emerging best in class profile of SGR1505 and preliminary activity in indolent and aggressive lymphoma solidifies our conviction in the potential of MORT1 inhibition as a well tolerated oral approach to treat patients with limited options. The strength of the early development package, including current PKPD, safety and efficacy data, supports our plans to align with the FDA on the recommended Phase two dose. To ensure SGR1505 receives the dedicated focus and resources required to pursue mid- and late stage development, we are exploring a range of strategic opportunities for this program rather than initiating these studies independently.

[Karen Akinsanya, President, Head - Therapeutics R&D and Chief Strategy Officer, Partnerships at Schrödinger]

In the meantime, we expect to provide an update on the complete dose escalation study, translational data and feedback from the regulatory interactions later this year. We are also advancing Phase I dose escalation studies for SGR2921, our CDC7 inhibitor, and SGR3515, our V1MIT1 co inhibitor. We expect to share initial Phase I data from both programs in the 2025. SGR2921 is being evaluated in patients with acute myeloid leukemia and myelodysplastic syndrome, while SGR3515 is being evaluated in patients with advanced solid tumors predicted to be sensitive to We1MIT1 inhibition, including ovarian, uterine and breast cancer, in addition to other solid tumors. The primary goal of both studies is to evaluate the safety tolerability and preliminary clinical activity.

[Karen Akinsanya, President, Head - Therapeutics R&D and Chief Strategy Officer, Partnerships at Schrödinger]

Both studies are progressing, with multiple dose escalation steps completed. Turning to our advancing portfolio of discovery stage assets. In the 2024, we licensed an undisclosed early stage program to Novartis, which continues to advance along with other joint discovery programs. Earlier this year, we expanded our collaborations with Lilly and Otsuka, and we recently announced the expansion of our relationship with Ajax Therapeutics, a company we co founded. The expansion builds on our joint success with AJ1-eleven thousand and ninety five, which is in Phase I for myelofibrosis and adds another JAK family target for autoimmune and inflammatory disease to the collaboration.

[Karen Akinsanya, President, Head - Therapeutics R&D and Chief Strategy Officer, Partnerships at Schrödinger]

We also recently established a collaboration with the Novo Nordisk Foundation Centre for Basic Metabolic Research at the University of Copenhagen. We have a strong track record for delivering differentiated, clinic ready molecules, which underpins the growing number of new collaboration programmes across a range of therapeutic areas and target classes working on high potential targets. In summary, we are pleased with the progress we have made this quarter and expect continued advancements in our proprietary and collaboration pipelines over the remainder of 2025. We look forward to updating you on our progress. I'll now turn the call back to Rami.

[Ramy Farid, CEO, President & Director at Schrödinger]

Thank you, Karen. We are pleased with the advancements we have made across all aspects of our business. We have reported very promising data for SGR1505 and are exploring strategic opportunities to expand and accelerate clinical development for this potentially best in class molecule. We expect to report data from our other two clinical programs, SGR2921 and SGR3515 in the fourth quarter. We continue to invest in our platform to strengthen our leading position in computational molecular discovery.

[Ramy Farid, CEO, President & Director at Schrödinger]

And we are encouraged by the tenor of conversations we are having with customers, collaborators and partners. We look forward to updating you on our progress in the coming months. At this time, we are happy to take your questions.

[Operator]

Thank you. We will now begin the question and answer session. Your first question comes from the line of Evan Seigerman from BMO Capital Markets. Your line is open.

[Evan Seigerman, MD & Senior Research Analyst at BMO Capital Markets]

Hi, guys. Thank you so much for taking my question. Two from me. One, as you think about kind of your conversations with your customers, how has the tone and tenor changed with regard to investments kind of in your platform? Kind of a follow-up to a question that I had on prior quarter, just seeing how that's changed. And secondarily, as you think about kind of out licensing, why do you decide to out license the product kind of at this stage of development versus stage in early Phase II trial? Thank you so much.

[Ramy Farid, CEO, President & Director at Schrödinger]

Okay. I think we picked up on that. It's a little hard here, but I think we got it. Yeah. As far as the tenor of the discussions with customers, it's a good question because, you know, of course, there's concern about sort of macroeconomic conditions.

[Ramy Farid, CEO, President & Director at Schrödinger]

And what we can tell you right now is that the discussions are quite positive. There is a clear demand for, advanced technology predictive technologies. And so far, we're really pleased with the discussions.

[Karen Akinsanya, President, Head - Therapeutics R&D and Chief Strategy Officer, Partnerships at Schrödinger]

And if I heard you correctly, Evan, the question I think was about, the potential to out license a phase one program at this stage.

[Evan Seigerman, MD & Senior Research Analyst at BMO Capital Markets]

Yeah.

[Karen Akinsanya, President, Head - Therapeutics R&D and Chief Strategy Officer, Partnerships at Schrödinger]

Right. Thank you. Yeah. We so we have been discussing this program with partners for a very long time. Obviously, it's really important that we align with companies around the strategy for the further development of these, assets.

[Karen Akinsanya, President, Head - Therapeutics R&D and Chief Strategy Officer, Partnerships at Schrödinger]

And and with respect to fifteen oh five, we believe that this program is best developed in mid and late stage development a bio partner who has expertise in development and commercialization in hematology, and that includes the opportunity to expand into different indications. And so we think that partnership, as we've said in the past, is probably the best approach to accelerate the program and realize the full potential.

[Evan Seigerman, MD & Senior Research Analyst at BMO Capital Markets]

Great. Thank you so much.

[Operator]

Your next question comes from the line of Scott Schoenhaus from KeyBanc Capital Markets. Your line is open.

[Scott Schoenhaus, Managing Director at KeyBanc Capital Markets]

Hey, team. Thanks for taking my question. It seems like your model is resilient on the software side despite the macro uncertainties and what's going on regulatory wise. But my question, I guess, is on the back half setup and the demand that you're currently seeing now by cohort. Is it pretty consistent with what you saw ninety days ago across from large pharma all the way down to biotech?

[Scott Schoenhaus, Managing Director at KeyBanc Capital Markets]

Has things changed? And then you mentioned in your prepared remarks about encouraging discussions on renewal season in fourth quarter. Just wanted more color there and maybe on the cohort of clients for renewal.

[Ramy Farid, CEO, President & Director at Schrödinger]

Yes, Richie, and Jean.

[Richie Jain, CFO at Schrödinger]

Scott, thanks for your call. I think, demand for our technology remains strong, and it's, you know, delivering delivers proven value, lowers cost for our customers, and drives efficiency. If you break that down by cohort, we continue to have really good conversations with our customers about the renewals and potential for scale ups. Most of those, as you noted, take place in the fourth quarter. The biotech segment of the market has been more challenging for us.

[Richie Jain, CFO at Schrödinger]

That's not anything new. We've seen that the last couple of quarters. I think some of the the macroeconomic landscape has, impacted that cohort more than the others. But within pharma, you know, there's obviously a lot of uncertainty between policy and tariffs and drug pricing. We're obviously monitoring all of that very carefully, but the conversations continue to be constructive heading into year end around some of the big renewals that we're expecting.

[Scott Schoenhaus, Managing Director at KeyBanc Capital Markets]

Great. Thanks. And as my follow-up, it's more of a housekeeping question. But you mentioned that the quarter, I think so on in on prem was down year over year. That implies that your cloud is now is probably a bigger percentage.

[Scott Schoenhaus, Managing Director at KeyBanc Capital Markets]

Just kind of a housekeeping item on where we stand on the cloud versus on prem as a percentage of the software revenue book. Thanks.

[Richie Jain, CFO at Schrödinger]

Yeah. I think on prem being lower, year over year, this was really due to some of the deals we signed last year in q two that were just multiple year deals. So the comparison year over year looks lower there. But in this quarter, we had strong growth in hosted revenue and are con continuing to grow those relationships with our existing customers. So these are things that you'll see quarter over quarter bounce around.

[Richie Jain, CFO at Schrödinger]

But overall, we're happy with the trend of increased growth when you look across both hosted and on prem revenue.

[Scott Schoenhaus, Managing Director at KeyBanc Capital Markets]

Great. Thanks.

[Operator]

Your next question comes from the line of Mani Faroohar from Leerink Partners. Your line is open.

[Lili Nsongo, VP - Equity Research, Biotechnology at Leerink Partners]

Hi, good afternoon. This is Lillian Fangal on for Mani. Thank you for taking our question. Same on the software side of things. Can you so two questions there.

[Lili Nsongo, VP - Equity Research, Biotechnology at Leerink Partners]

Can you give us a little bit on how the predictive talk feature, how much adoption you've seen there and how much growth you expect from it in the mid to short term? And then secondly, you mentioned that most of the growth on the software side comes from existing customer. I was wondering how much, if you could quantify that, how much more room is there for increased usage among the average customer?

[Ramy Farid, CEO, President & Director at Schrödinger]

Yeah. So with regard to predictive tox, as we said, we're very pleased that we had the beta release, which was pretty pretty recent. We have users now, and, it's very clear that there's a lot of excitement around, this technology, a lot of demand for it. We're, of course, very pleased to see the FDA sort of insisting that the industry develop predictive technologies to, you know, to to lower or reduce the use of animal models. So that's progressing.

[Ramy Farid, CEO, President & Director at Schrödinger]

We'll get the feedback. That's how beta releases work, and and and, you know, look forward to to reacting it to that to that feedback. The second question,

[Richie Jain, CFO at Schrödinger]

I think, was yeah. Yeah. I I think about just the growth within the existing customers. I think there's a lot of excitement about computational discovery. We are central to that theme, and, you know, there's a lot of excitement about the solutions that we're developing.

[Richie Jain, CFO at Schrödinger]

You know, this has been a focus of ours is growing within existing customers. We continue to see kind of different levels of adoption within our within our largest customers, and our focus is to, you know, grow customers from our smaller and medium tiers into the larger tiers.

[Lili Nsongo, VP - Equity Research, Biotechnology at Leerink Partners]

Thank you.

[Operator]

Your next question comes from the line of David Lebowitz from Citi. Your line is open.

[Ike Lee, Biotech Equity Research Analyst at Citigroup]

Hi, guys. Thank you for taking our question. This is Ike Lee on for David Lebowitz. We have one regarding your predictive toxicology solution. There's a few parts to this.

[Ike Lee, Biotech Equity Research Analyst at Citigroup]

So wondering how many clients overall have access to the beta version. How do you think about pricing this product in relation to your currently existing software? Is it bundled? Is there discounts? What is the setup like?

[Ike Lee, Biotech Equity Research Analyst at Citigroup]

And then you mentioned getting feedback from the beta version as how it goes. What's the timeline for doing that and potentially rolling out the full version as well? Thank you.

[Ramy Farid, CEO, President & Director at Schrödinger]

Yeah. Thanks for the questions. With regard to how many clients, that that's really not something that we, disclose. What we can tell you, though, and we said this before, is there all of our collaborators, have access, to the technology through the collaboration. So we've been using it internally.

[Ramy Farid, CEO, President & Director at Schrödinger]

And, as we've said before, we can share with you that it's having an impact. It works. There's still a lot of work to be done, to expand the number of targets that are supported. But, yeah. So so sorry.

[Ramy Farid, CEO, President & Director at Schrödinger]

We can't we can't tell you about the the number of clients. Now with regard to pricing, what we can tell you, without obviously hitting into the details, is that it will be separately priced. This is not this is an add on module. It would not be it it won't just be that customers will automatically get access to it. I think there was a third question about the beta

[Richie Jain, CFO at Schrödinger]

Feed feedback on the beta testing. Feedback on

[Ramy Farid, CEO, President & Director at Schrödinger]

the bay if there is feedback, is that what the yeah. No. Not not yet, other than what I just mentioned earlier about the feedback sort of from collaborators. But it's a little early for that. You know, it was really released very recent in the beta form.

[Ike Lee, Biotech Equity Research Analyst at Citigroup]

Got it. Just the the last part was mostly about the timeline. Just what's the timeline for getting the feedback and rolling out the full version. I think especially as it pertains to the gross margins, you're saying your gross margins are being impacted by the spend. Right? So just wondering, you know, how long should we look for those gross margins to remain depressed because of that

[Ramy Farid, CEO, President & Director at Schrödinger]

Just separate concepts here. Yeah. So with regard to beta feedback, really, you know, we don't know. That's that'll happen on the pace that that it happens. Now with regard to the margins, that's tied really to the grant and the time period of the grant. So maybe, Richie, you can comment

[Richie Jain, CFO at Schrödinger]

on that. So as we've said before,

[Ramy Farid, CEO, President & Director at Schrödinger]

I think the The grant from the Gates.

[Richie Jain, CFO at Schrödinger]

Yeah. The our our efforts around predictive toxicology that are related to the Gates and Gates grant, those those expenses have are are realized within cost of goods sold. The timing of that grant started in q three of last year, and it was roughly about two years. So you can you can model that out on the gross margin impact, right, from that grant.

[Ike Lee, Biotech Equity Research Analyst at Citigroup]

Got it. Thank you.

[Operator]

Your next question comes from the line of Michael Ryskin from Bank of America. Your line is open.

[Michael Ryskin, Managing Director at Bank of America Merrill Lynch]

Great. Thanks for taking the question, guys. Want to go back a little bit to your announcement from May, late to mid May, the restructuring, the headcount reductions, just kind of thinking of that in context of the quarter you just reported. You're having steady results. You reiterated the all the key components of the full year guide.

[Michael Ryskin, Managing Director at Bank of America Merrill Lynch]

It sounds like you're more resilient on the pharma customer front than a lot of your peers and a lot of what we expect. Just put the headcount reduction in that context of you've got a strong balance sheet. You don't really need to implement cost savings to save cash. So just what's the the, know, walk us through the rationale and the thought process there.

[Ramy Farid, CEO, President & Director at Schrödinger]

Yeah. I'll try and take a crack at that, and then I'll hand it over to Richie if there's something more to add. As we said when we announced this, this the the it didn't the the reduction force didn't have it it wasn't focused on a particular project. It was sort of across the board, and it didn't have an impact on our sort of strategic initiatives and strategic direction. And we said this at the time too.

[Ramy Farid, CEO, President & Director at Schrödinger]

We felt that we had, after the rift, the right team to deliver on the software growth to advance, the, software and the platform and and to advance the, collaborative and proprietary programs. So I I think I might be answering your question, but if it is if not, let us know.

[Richie Jain, CFO at Schrödinger]

Richie, do

[Ike Lee, Biotech Equity Research Analyst at Citigroup]

you wanna answer?

[Richie Jain, CFO at Schrödinger]

I'll just add. I think we've been really disciplined on cost management. You're starting to see the impact of those expense reductions in your financials that we just reported and some of the reductions in operating expenses and r and d. It's also one of the main drivers behind the change in guidance for 2025 in reducing our expectation and operating expenses to now be lower than 02/2024.

[Michael Ryskin, Managing Director at Bank of America Merrill Lynch]

Okay. And and for my follow-up, real quick. Apologies if I missed this in the prepared remarks. But for SGR twenty nine-twenty one and 03/2015, the CDC seven and we won mid-one. I think previously you're talking about second half twenty five for initial data, now it's 4Q.

[Michael Ryskin, Managing Director at Bank of America Merrill Lynch]

I know it's not per se a delay, but it feels a little bit of a delay. So just wondering, anything specific going on there? I know there's been a lot of concerns on, FDA ability to sort of process data or if there's anything going on from the regulator front. Just talk about the refinement of the timeline there.

[Karen Akinsanya, President, Head - Therapeutics R&D and Chief Strategy Officer, Partnerships at Schrödinger]

Yeah. Thanks, Mike. These are ongoing phase one dose escalation studies, whereas you may recall we're collecting safety, PKPD efficacy data. That continues to progress. We just provide a little bit more clarity that we expect now based on where we are with collection of data, for that to be shared with, shared in the fourth quarter.

[Karen Akinsanya, President, Head - Therapeutics R&D and Chief Strategy Officer, Partnerships at Schrödinger]

Really because of where we are in the development of these phase one trials, while we are obviously, guiding to discussions with the FDA on SGR fifteen oh five, which is a completed, dose escalation study, we're not in that position yet for these other two programs. So nothing about the FDA, I think, is impacting, two ninety one or thirty five fifteen at this time.

[Evan Seigerman, MD & Senior Research Analyst at BMO Capital Markets]

Okay. Thanks. I'll I'll leave it there.

[Operator]

Your next question comes from the line of Sean Lehman from Morgan Stanley. Your line is open.

[Sean Laaman, Executive Director at Morgan Stanley]

Good afternoon. Hope everyone is well. Thanks for taking my question. On the proprietary pipeline, so is there a bit more granularity what kind of data you are going to present in 4Q? And can we expect at some point that these molecules might go the same way as the program for 1505 and you're going to look for strategic partners or strategic opportunities on those two programs?

[Karen Akinsanya, President, Head - Therapeutics R&D and Chief Strategy Officer, Partnerships at Schrödinger]

Yeah. So, just in a way, let's let's, sort of think about where we were in May once we finished the dose escalation study for fifteen o five, we provided a pretty comprehensive update on the results that we had from that trial. Those two programs, two ninety one and thirty five fifteen, are behind fifteen o five. And so we're still assessing the extent to which we'll be able to share complete data, but we do plan on providing an update on the, data that we've collected so far by the end of the year. And as we just said on the previous question, that's likely to be with the safety KPD, and really very preliminary data around, clinical activity.

[Karen Akinsanya, President, Head - Therapeutics R&D and Chief Strategy Officer, Partnerships at Schrödinger]

The second part of your question was about the strategic opportunities that we're pursuing for fifteen o five and whether that is something that we will be pursuing also for 02/09/2021 and thirty five fifteen. First, let me take the opportunity just to say that we are looking at a range of transactions and collaboration arrangements with the fifteen o five, and so that could span a number of different approaches. But I will just reiterate that we've been consistent, I think, since the initiation of these programs that because of the combination opportunity with venetoclax and with other standard of care agents, All three of these programs we believe are best accelerated in further mid to late stage development by working with partners. And so I think we still have that view. Obviously, we need to look at all the data, but I think that consistent view that we aim to work with other companies, around, you know, further development of these assets.

[Sean Laaman, Executive Director at Morgan Stanley]

Great. Thank you. And a quick follow-up, if I may. Just, the expanded collaboration with with Ajax. How might that impact future milestones and and revenue, if you can say?

[Richie Jain, CFO at Schrödinger]

Yeah. It's Sean, thanks for the question. I think, you know, we're gonna just the way these collaborations work is as we execute against the project that is recognized as revenue. So there will be some impact of that into our discovery revenue. The impact of that in 2,025 is very modest.

[Richie Jain, CFO at Schrödinger]

Over time, there will be milestones. And then in this program that we've added, there's also the opportunity for later stage commercial milestones and royalties, but those are all, you know, further out of time.

[Operator]

Your next question comes from the line of Matt Hewitt from Craig Hallum. Your line is open.

[Analyst]

Hello. Thanks for taking the question. This is Taltz on for Matt. So are you guys still seeing what you called it last quarter as level pegging with customers where some customers will increase spending and others will decrease kind of just netting it all out? Thank you.

[Ramy Farid, CEO, President & Director at Schrödinger]

Yeah. We it's very unusual for a customer to decrease spend. To be clear, we generally see increases of different amounts, but very, very, very rare for there to be a decrease.

[Richie Jain, CFO at Schrödinger]

And we have a 100% retention rate with customers greater than half a million dollars.

[Analyst]

All right. Thank you. Your

[Operator]

next question comes from the line of Brendan Smith from TD Cowen. Your line is open.

[Brendan Smith, Director & Senior Analyst at TD Cowen]

Great. Thanks for taking the questions and congrats on the quarter. I actually wanted to ask just a follow-up on the predictive tox conversation from earlier and really in the context of FDA's push on animal testing. Sorry if I missed it, but have you all been in touch with the agency at all about their proposed pilot study that they're looking to initiate and just kind of comparing some of the computational modeling approaches with actual animal testing data? I'm just wondering if that's something you all could or would be involved with and maybe what's kind of the potential timing for any of that might look like. Thanks.

[Ramy Farid, CEO, President & Director at Schrödinger]

Yeah. The the intention, of course, is to engage with the FDA at the appropriate time when the technology is in the state where we feel where we feel that's appropriate. And we have had, I would say, sort of informal discussions is probably the way to say it. Right? And they're aware of the work that we're doing.

[Ramy Farid, CEO, President & Director at Schrödinger]

But it's premature, of course, to talk about the FDA adopting the technology, obviously, until maybe after we get feedback from, for example, from beta testers.

[Brendan Smith, Director & Senior Analyst at TD Cowen]

Yes. Okay. Fair enough. Thanks, guys.

[Operator]

I'm showing no further questions in queue. That concludes today's call. You may now disconnect.

Participants

Executives

• Karen Akinsanya, President, Head - Therapeutics R&D and Chief Strategy Officer, Partnerships

Analysts

• Jaren Madden, Chief Corporate Affairs Officer & Head - IR at Schrödinger
• Ramy Farid, CEO, President & Director at Schrödinger
• Richie Jain, CFO at Schrödinger
• Evan Seigerman, MD & Senior Research Analyst at BMO Capital Markets
• Scott Schoenhaus, Managing Director at KeyBanc Capital Markets
• Lili Nsongo, VP - Equity Research, Biotechnology at Leerink Partners
• Ike Lee, Biotech Equity Research Analyst at Citigroup
• Michael Ryskin, Managing Director at Bank of America Merrill Lynch
• Sean Laaman, Executive Director at Morgan Stanley
• Analyst
• Brendan Smith, Director & Senior Analyst at TD Cowen