Earnings call: Schrödinger reports record revenue, aims for growth

  • Investing.com
  • Stock Market News
Earnings call: Schrödinger reports record revenue, aims for growth

Schrödinger, Inc. (SDGR) has announced a record revenue of $74 million for the fourth quarter of 2023, marking a significant 20% increase in total revenue for the year, which reached $217 million.

This growth has been attributed to a 17% year-over-year increase in software revenue and the continued advancement of the company's proprietary pipeline, including the initiation of a phase one study for its second proprietary program, SGR-2921. Schrödinger ended the year with 27 customers with an Annual Contract Value (ACV) of at least $1 million, reflecting a substantial increase from the previous year.

Key Takeaways

  • Schrödinger's Q4 revenue hit a record $74 million, with a 20% increase in annual revenue to $217 million.
  • Software revenue grew by 17% year over year, with significant contributions from large biopharma companies.
  • Schrödinger launched a phase one study for SGR-2921 and plans to submit an IND for SGR-3515 in the first half of 2024.
  • The company has 27 customers with an ACV of $1 million or more, up from 18 the previous year.
  • Gross margin on software revenue was high at 87% in Q4, with overall gross margin at 65% for the year.
  • R&D expenses were $52 million in Q4, reflecting an increase due to higher FTE numbers and CRO expenses.
  • Schrödinger expects software revenue growth in 2024 to be between 6% to 13% and aims to reduce operating cash burn in 2025 and beyond.

Company Outlook

  • Schrödinger aims to expand the adoption of its platform among global biopharma companies and emerging biotech.
  • The company is positioned to capitalize on the growing interest in computationally driven drug discovery.
  • Operating expense growth is expected to be around 8% in 2024.
  • Early clinical data from proprietary programs is anticipated in the next one to two years.

Bearish Highlights

  • Guidance has been affected by uncertainties in partner programs and new business development transactions.
  • The company has removed milestones triggered by partners' advancing programs from their guidance due to the inability to determine their probability or timing.
  • Forecasts for drug discovery are challenging due to the uncertain nature of program advancement.

Bullish Highlights

  • Schrödinger has realized significant value from collaborations and co-founded company investments.
  • The company is shifting capital allocation towards its proprietary portfolio, which is expected to create more value.
  • Positive results have been reported for proprietary programs, including SGR1505 in a Phase 1 study.


  • The impact of smaller customers affected by financing and industry consolidation on the 2023 results.
  • The company is not providing guidance on the timing or value of significant revenue opportunities from proprietary programs.

Q&A Highlights

  • Decisions on programs and contracts will consider cost, value, and industry requirements on a case-by-case basis.
  • The shift from on-prem to hosted software is a minor trend compared to the influence of contract duration and size.
  • Collaborations with NVIDIA (NASDAQ: NVDA ) and Google (NASDAQ: GOOGL ) Cloud are ongoing, and the company is exploring scaling up software usage with large and emerging companies.
  • The impact of the former Bristol-Myers and ZAI Labs program on clinical programs and future customer renewals was discussed.
  • Despite challenges in forecasting the drug discovery segment, there is confidence in revenue growth potential and the value of proprietary programs in partnering transactions.

Schrödinger's financial performance in the fourth quarter demonstrates robust growth and a strategic focus on expanding its software platform and advancing its proprietary drug discovery programs. The company's commitment to capitalizing on the increasing interest in computational drug discovery and its continued investment in R&D positions it well for future growth. However, the company also acknowledges the challenges in forecasting certain aspects of its business and has adjusted its guidance to reflect a more conservative outlook due to uncertainties in partner programs and new business development transactions.

InvestingPro Insights

Schrödinger, Inc. (SDGR) has recently delivered a strong financial performance, with record revenues and a significant uptick in its customer base. As investors evaluate the company's potential, here are some key metrics and insights from InvestingPro that may help in understanding Schrödinger's current market position and future prospects:

InvestingPro Data:

  • Market Cap (Adjusted): $1.93 billion USD
  • Revenue Growth (Quarterly) for Q4 2023: 30.4%
  • Price % of 52 Week High: 45.26%

InvestingPro Tips:

1. Schrödinger is currently trading at a low P/E ratio relative to near-term earnings growth, suggesting that it may be undervalued in terms of its future earnings potential. This could be a point of interest for investors looking for growth opportunities.

2. Despite recent volatility, with the stock taking a hit over the last week, analysts predict the company will be profitable this year. This forecast aligns with the company’s strategic focus on expanding its software platform and advancing its proprietary drug discovery programs.

For investors seeking more comprehensive analysis and additional insights, there are 9 total InvestingPro Tips available for Schrödinger at https://www.investing.com/pro/SDGR. To access these insights and enhance your investment strategy, use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription.

These metrics and insights can provide a deeper understanding of Schrödinger's financial health and market potential, offering valuable context to the company's recent announcements and future outlook.

Full transcript - Schrodinger Inc (NASDAQ: SDGR ) Q4 2023:

Operator: Welcome to Schrödinger's Conference Call to review Fourth Quarter and Full Year 2023 Financial Results. My name is Mandie, and I will be your operator for today's call. [Operator Instructions]. Please be advised that this call is being recorded at the company's request. Now I would like to welcome your host for today's conference, Mr. Matthew Luchini, Director of Investor Relations and Corporate Affairs. Please go ahead.

Matthew Luchini: 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 2023 financial results. Earlier today, we issued a press release summarizing our financial results and progress across the company, which is available on our website at schrodinger.com. Here with me on our call today are Ramy Farid, Chief Executive Officer; Geoff Porges, Chief Financial Officer and Karen Akinsanya, President of R&D, Therapeutics. Following our prepared remarks, we'll open the call for Q&A. During today's call, management will make statements that are forward-looking and made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, including without limitation statements related to our outlook for the full year 2024, our plans to accelerate the growth of our software business and advance our collaborative and proprietary drug discovery programs, the timing of, initiation of, and readouts from our clinical trials, the clinical potential and properties of our compounds. The use of our cash resources, as well as our future expenses. These forward-looking statements reflect our current views about our plans, intentions, expectations, strategies, and prospects, which are based on the information currently available to us and on assumptions we have made. Actual results may differ materially due to a number of important factors, including the considerations described in the risk factors section and elsewhere in the filings we make with the SEC, including our Form 10-K for the year ended December 31, 2023. These forward-looking statements represent our views only as of today and we caution you that, except as required by law, we may not update them in the future, whether as a result of new information, future events, or otherwise. Also included in today's call are certain non-GAAP financial measures. These non-GAAP financial measures are not prepared in accordance with generally accepted accounting principles and should be considered only in addition to and not a substitute for or superior to GAAP measures. Please refer to the tables at the end of our press release, which is available on our website, for reconciliations of these non-GAAP measures to the most directly comparable GAAP measures. With that, I'd like to turn the call over to Ramy.

Ramy Farid: Thanks, Matt, and thank you, everyone, for joining us today. We made incredible progress in 2023, and we expect to continue to make important advances across the business in 2024. In 2023, we continue to make significant advances to the science that underlies our computational platform, and it's expected we continue to see increased adoption of our software at scales that are allowing our customers to meaningfully impact their programs. We also advanced our proprietary pipeline, including initiating a phase one study for our second proprietary program, SGR-2921. 2023 was also marked by progress at several companies we co-founded and in which we have equity stakes, including Nimbus, Morphic, and Structure. Their advancing programs also further validate our platform, and in the case of Nimbus, their TYK2 inhibitor, which we co-discovered, led to the sale of the molecule to Takeda and a substantial cash distribution to Schrödinger last year. Total revenue for the year was $217 million, a 20% increase over the prior year. Software revenue grew by 17% year over year, marked by multi-year renewals with large biopharma companies, including an expanded three-year software agreement with Lilly. We had a very successful fourth quarter in our software business, reporting revenue of $69 million, the largest quarter for software revenue in our history. We ended the year with 27 customers with an Annual Contract Value, or ACV, of at least $1 million up from $18 million the prior year, reflecting customer demand and their increased confidence in the value that our platform can deliver. This year we will continue to focus on increasing adoption of our platform at global biopharma companies, as well as establish an emerging biotech. The interest in computationally driven drug discovery has never been higher, and we are witnessing a sea change within the industry in how computation is regarded and applied to drug discovery. We believe that the decades-long debate about the utility of computation is finally over. While this shift may have been fueled by the recent excitement about AI, there is also a growing understanding about some of the obvious limitations of AI. We believe we are well positioned to capitalize on this heightened interest in computation. Our platform is grounded in first principles methods and leverages the accuracy of physics to generate training sets for machine learning and AI. This increased interest in computation has created a worldwide shortage of computational chemists and modelers, which, in the near term may attenuate the full potential of computation, but we have made significant investments and training the next generation of modelers, who will expect and demand validated computational technologies to advance their projects. Our platform is built on more than 30 years of science and has become the gold standard for computational molecular discovery. We are continuing to make investments to push the boundaries of molecular design, and we expect that computational breakthroughs in small molecule and biologics discovery formulations and informatics will support future growth for many years to come. We have recently published multiple papers demonstrating how our computational methods can improve the utility of ML predicted protein structures, enabling research teams to work on even more targets through structure based discovery. We are also expanding our enterprise informatics solutions to increase efficiency and drive collaboration across teams. Even with the increased scale up of our platform by our largest customers, we are still leveraging our platform to scale is at least an order of magnitude greater than our largest customers. This is having a big impact on our ability to rapidly progress a broad pipeline of proprietary programs. We now have two programs in the clinic, SGR-1505, our Malt1 inhibitor, and SGR-2921, our CDC7 inhibitor. In December, we reported positive data from our Phase 1 study of SGR-1505 in healthy subjects and are encouraged by the progress and our ongoing patient study in advanced B-cell malignancies. We expect to report data from the patient studies of both SGR-1505 and SGR-2921 in late 2024 or 2025. We are also on track to submit an investigational new drug application for SGR-3515, our Wee1 Myt1 inhibitor, in the first half of this year and are advancing an existing portfolio of discovery programs to position us for our fourth IND in 2025. Years ago, we set forth a bold vision to transform the way therapeutics and materials are discovered, and I'm incredibly proud of the progress we have made toward achieving this goal. There has been turbulence in the global economy and in many tech industries in particular, but we have never been more steadfast in our confidence in our technology and it’s potential. We deeply appreciate the commitment and hard work of all our employees, and I look forward to another year of progress toward realizing our vision. I will now turn the call over to Geoff.

Geoff Porges: Thank you, Ramy, and good afternoon, everyone. Schrödinger had an excellent Q4, which kept a strong 2023. In Q4, we reported record revenue of $74 million, principally driven by software. For the full year, total revenue grew 20%, with bookends of a large contribution to drug discovery revenue from a single milestone payment in Q1, and then several large multi-year software renewals driving revenue growth in Q4. The year was marked by the considerable progress we have made with our proprietary portfolio and the continued development of our technology platform, which is enabling new capabilities for molecular discovery, even as our largest customers increase the scale of their deployment of our current platform. 2023 was also a year of great validation from our co-founded companies, with $147 million distribution from Nimbus boosting our cash flow and gap earnings, and Structure and Morphic significantly advancing their programs during the year. We see multiple avenues to grow our software revenue in 2024 and beyond, and continue to be active in collaboration and partnership discussions with existing and potential new drug discovery partners. Turning to a review of our fourth quarter results, software revenue for the quarter was $69 million, an increase of 44%. The strong Q4 software result reflected the contribution from a number of multi-year, multi-million dollar on-prem software renewals in Q4, as well as some renewals by hosted customers with ratably recognized software purchases. The contribution of these multi-year on-prem renewals in Q4 was significantly greater than the contribution of multi-year renewals in Q4 2022 compared to Q3, software revenue more than doubled, in line with our expectations and consistent with the typical seasonality of large customer renewals. Drug discovery revenue for the quarter was $5.5 million, compared to $9 million in the same quarter of 2022 and $13.7 million in Q3. Revenue decreased in the quarter compared to the prior year based on non-recurring milestones reported in Q4 2022, as well as reduced contributions from the smaller number of active collaboration programs during the quarter. Total revenue was $74 million in the quarter, an increase of 30% compared to Q4 2022, and a 74% increase compared to Q3 2023. The increase was driven by software revenue growth in Q4. For the full year, software revenue was $159 million, an increase of 17.4%, compared to the prior year. The growth was driven by significant increases in our existing customers, including multi-year renewals by large customers in Q4. For the full year, drug discovery revenue was $57.5 million, compared to $45 million in 2022. The increase was driven by progress in our existing collaborations, recognition of some revenue from new collaborations announced in 2022, and accelerated revenue recognition for previously disclosed programs returned to us by our collaboration partners. Total revenue for the year was $217 million, compared to $181 million in 2022. The increase in total revenue was driven by both software and drug discovery revenue growth. I have a little more color on trends in our software business. Throughout 2023, we disclosed that we were engaged in discussions with a number of large customers about stepping up their level of investment into our technology, and we are encouraged that several of them elected to renew at significantly increased scale and value during Q4. Those agreements contributed a substantial portion of the year-on-year reported growth in on-prem software. We view these companies as bellwethers in the industry and are engaged in discussions with other large companies about substantial renewals. At this stage of the year, we do see opportunities for growth from renewals this year, but since a number of our largest customers entered into multi-year contracts in 2023, the contributions from such additional renewals in 2024 is likely to be less than in 2023. We reported that we continue to have four customers with annual contract value of at least $5 million, and the average contract value for customers over $5 million grew significantly to $6.7 million. The number of customers with ACV of at least $1 million has increased from 18 to 27, as more and more emerging companies recognize the value of increasing their scale of adoption. We have disclosed a new key performance indicator of customer retention among customers of at least 500,000 in ACV. Among such customers, the retention was 98% in 2023 and was 100% in 2022. Our net customer retention for customers of at least 100,000 per year was 92% in 2023 compared to 96% in 2022. The decrease was associated with increased consolidation and discontinuation of R&D efforts by some biotech customers in the 100,000 to 500,000 ACV range. This discontinuation rate has been elevated since 2021 and appears likely to remain elevated in 2024. Moving now to expenses. During Q4, the gross margin on our software revenue was 87%. The gross margin performance in Q4 was particularly high based on the strong revenue result in the quarter. The full year gross margin performance was increased by favorable operating leverage and the shift in allocation of our structural biology team from customer-facing projects to internal and collaboration projects. We believe gross margin in future years is likely to be similar to 2023 with some potential variance depending on revenue performance and mix. The cost of delivering our drug discovery revenue in Q4 was $7.9 million and declined compared to $10 million in Q4 2022. For the full year, our cost of drug discovery revenue was $46.5 million compared to $50.4 million in 2022. The change reflects the reallocation of internal resources from collaboration projects to proprietary programs. The positive profit contribution from our drug discovery revenue for the year reflects the benefits of the one-time milestone reported in Q1. Overall gross margin in Q4 was 78% compared to 68% in Q4 2022 based on improved profitability for software and the shift in mix. For the full year, software gross margin was 81% compared to 78% for 2022. Our software gross margin for the year improved due to lower royalty obligations and favorable operating leverage on our fixed costs. Our drug discovery gross margin was 19% for 2023 compared to a loss ratio of 11% for 2022. It reflects the favorable effects of successful progression of our collaboration programs. Our overall gross margin for 2023 was 65% compared to 56% in 2022. The increase was due to the improvement in software and drug discovery gross margin. As a result of the strong revenue and gross margin performance in Q4, our gross profit increased by 49% compared to Q4 2022. For the full year, our gross profit was $141 million compared to $101 million in 2022. R&D expenses were $52 million in Q4 2023 compared to $35 million in Q4 2022. The main drivers of the increase were increased FTE numbers, CRO expenses and technology expenses. Compared to Q3, R&D expenses were 10% higher based on increased allocation of staff and resources to proprietary programs. Higher FTE numbers and increased CRO expenses contributed. For the full year, R&D expenses were $182 million, which was an increase of 44% compared to the $126 million reported in 2022. The increase for the year was driven by the shift in allocation from collaborations to proprietary programs, higher FTE numbers and increases in CRO expenses. As in the recent past, our R&D expenses are approximately balanced between our technology platform and our therapeutics. A significant portion of the increase in R&D investment from 2022 to 2023 has been associated with the progression of our clinical portfolio. We expect R&D expense growth to moderate in 2024. Sales and marketing expense for Q4 was $10 million compared to $9.4 million in Q4 2022. The increase was mainly due to increased staff and associated expenses. Compared to Q3, sales and marketing expense increased by 9% based on headcount and year-end incentive compensation. For the full year, sales and marketing expense was $37 million compared to $31 million in 2022. The increase of 21% was driven by higher headcount and associated expenses, as well as increased travel. G&A expense for Q4 was $26 million compared to $23 million in Q4 2022. The increase is mainly due to high headcount and one-time royalty obligations, partially offset by lower professional services. For the full year, G&A was $99 million, an increase by 9% compared to 2022. The increase is mainly due to high headcount and FTE expenses, as well as royalty obligations partially offset by lower professional services. For Q4, total operating expense was $87 million compared to $67 million in Q4 2022. The increase is mainly due to increases in R&D. For the year, total operating expense increased to $318 million, compared to $248 million in 2022. The increase is mainly driven by R&D. During Q4, our operating cash use was $37 million, and our cash and short-term investments declined by $34 million during the quarter. For the year, operating cash use was $137 million, compared to $120 million in Q2 2022. Our cash and marketable securities balance was $469 million at year-end, compared to $456 million at year-end 2022. During the year, our operating cash use was offset by the cash distributions from our investment in Nimbus and by favorable trends in working capital. Our operating loss for Q4 was $29.6 million, compared to $28.5 million in Q4 2022. Other items and expenses were $1.9 million in Q4 2023, compared to an income of $1.2 million in Q4 2022. Our reported net loss was $30.7 million in Q4 2023, compared to a loss of $27 million in Q4 2022 and a loss of $62 million in Q3 2023. For the full year, other income and expense items were $220 million, driven by the $147 million distribution from our investment in Nimbus, a gain of $53 million in the fair value of our investments and $19.7 million in other income, mainly interest. Our pre-tax income for the year was $43 million, and our tax expense was $2.2 million. Our net income was $40.7 million or $0.54 per diluted share. As we explained previously, we do not expect our profitability in 2023 associated with the Nimbus distribution to persist in 2024. For GAAP reporting purposes, our fully diluted share count at year-end was $75 million, compared to $71.2 million at the end of 2022. Our basic share count increased by 0.8% over the prior year. Looking ahead to 2024, I already highlighted specific outsized top-line contributions in 2023 that we have to grow past this year. We currently expect that software revenue growth for 2024 will be in the range of 6% to 13%. We firmly believe software is a growth business for us, but that growth remains lumpy with outsized contributions from large customers when they renew extended contracts. We have opportunities to significantly increase the adoption of our technology in our large accounts this year, but it is too early to forecast whether they can match or exceed the contribution from such renewals last year. We expect our growth outlook to benefit from the introduction of enhancements and new capabilities to our platform. Our metrics for our accounts of at least $500,000, at least a $1 million and at least $5 million trended positively in 2023, and we expect our revenue to grow in association with further changes in these metrics. While our largest customers are now purchasing significantly more than $5 million per year in software, this level of adoption is only occurring among a relatively small proportion of the population of global biopharmaceutical companies. Emerging biopharma companies are also among our largest accounts. And their relatively high level of adoption of our technology also suggests further opportunity for our commercial efforts in 2024. We expect software revenue in Q1 to be in the range of $33 million to $35 million and expect the distribution of revenue by quarters to be similar this year to that reported in recent years. We expect drug discovery revenue to be in the range of $30 million to $35 million for 2024. Our guidance incorporates uncertainty about the occurrence and timing of development decisions by our collaboration partners and uncertainty about the outlook for progress of programs in our ongoing collaborations. We have taken a cautious approach to including value for new business development activity this year. Although we continue to be actively engaged in discussions about such opportunities with a variety of emerging and global companies. We expect our software gross margin to be similar to our gross margin in 2023 and to vary slightly depending on customer mix and contract type. Operating expense growth in 2024 is likely to be in the 8% range, significantly below the 28% growth in 2023. In 2024, the growth is likely to be mainly for increased investment in R&D, particularly to support our growing portfolio of proprietary programs. We anticipate that our operating cash burn in 2024 will be higher than our cash burn in 2023. Our goal is to reduce our cash burn in 2025 and later years and that reduction will depend on continued growth in our software revenue, realization of value from our proprietary portfolio and continued operating expense and headcount growth discipline. To conclude, we had an excellent fourth quarter and a very strong year at Schrödinger in 2023 with progress in our software business, collaborations and proprietary programs. We realized considerable value from our collaborations and co-founded company investments. And we see opportunities to create even more value from these activities in 2024 and beyond. Our capital allocation is shifting towards our proprietary portfolio and we are excited that the early clinical data from those programs will emerge in the next one to two years. With the industry's leading computational chemistry platform and a growing portfolio of proprietary medicines and investments in co-founded companies and collaborations coming to fruition, the future is very bright for Schrödinger. Now I'll turn the call over to Karen to provide you with an update about our therapeutics R&D activities.

Karen Akinsanya: Thank you, Geoff, and good afternoon, everyone. Our therapeutics team continues to advance the maturing pipeline of collaborative and proprietary programs. As Ramy and Geoff reported, companies we have co-founded are successfully advancing programs into clinical trials, including Phase 2 and 3, providing repeated and extensive validation of the impact of our platform when deployed at scale. A growing number of our proprietary programs are successfully transitioning into IND-enabling studies and clinical development. I'll now review recent progress on several of our proprietary programs in more detail. Starting with our MORT1 inhibitor, SGR1505. During our recent pipeline day, we reported that SGR1505 was well-tolerated in a completed Phase 1ne study of 73 healthy volunteers. No drug-related serious adverse events or dose-limiting toxicities were observed. Steady-state SGR1505 exposures achieved greater than 90% inhibition of IL-2 secretion in activated T-cells, confirming target engagement and meeting the pharmacodynamic goals for the study. The healthy subject data provide important insights into the safety and clinical pharmacology of SGR1505, and this obviates the need to explore food effect and drug-drug interaction potential in our patient study. At ASH, we presented data demonstrating that SGR1505 achieves maximum inhibition of IL-2 in ex vivo human blood at greater than 50-fold lower concentrations than the benchmark molecule, which has shown clinical responses in indolent or aggressive lymphoma and CLL. This builds our confidence in the profile of our compound. We are encouraged by the progress in our ongoing Phase 1 study of SGR1505 in patients with relapsed refractory B-cell lymphomas. We are continuing to expand a number of clinical trial sites globally, allowing us to increase enrollment and make good progress through dose escalation, despite the early enrollment challenges we previously discussed. We are encouraged that in patients, safety and tolerability is consistent with the profile observed in the 10-day healthy volunteer study. As of mid-February, all enrolled patients have remained on drugs. We are on-track to have initial clinical data, late in 2024 or in 2025. We are also looking forward to presenting details about the discovery of SGR-1505 in an oral presentation at the Spring ACS meeting next month. We are also continuing to advance our CDC7 inhibitor SGR-2921. In December, we reported data from a range of translational models representing treatment naive patients, relapsed refractory patients, and models incorporating p53 and FLT3 mutations that confirm broad sensitivity to SGR-2921. These preclinical data and key opinion leader feedback confirm high interest in mechanisms that have mutation-agnostic antiperipheral potential, providing compelling rationale for our on-going Phase 1 study in patients with acute myeloid leukemia or myelodysplastic syndrome. The primary objectives of this study are to evaluate the safety pharmacokinetics and pharmacodynamics and establish the recommended Phase 2 dose. The study is progressing well with multiple dose escalation steps completed, and we expect to report initial data in late 2024 or 2025. Turning to SGR-3515, we continue to be excited about the differentiated pharmacological profile of our molecule. SGR-3515 inhibits both Wee1 and Myt1 and concurrent loss of function of these two proteins confer selective vulnerability in cancer cells, termed synthetic lethality. In A427 non-small-cell lung cancer preclinical model, SGR-3515 has shown sustained tumor growth inhibition, while maintaining a favorable safety profile, using an intermittent dosing schedule. We are on-track to submit the IND for SGR-3515 in the first half of 2024 to enable the initiation of a Phase 1 dose escalation study by the end of this year. In addition, we are progressing several discovery programs, including inhibitors of EGFRC797S, PRMT5-MTA and NLRP3, highlighted at Pipeline Day. We have identified potent selective inhibitors that may overcome product profile design challenges observed across other programs and are on-track to select candidates that will support an additional IND submission in 2025. In our collaborative portfolio, we are excited about the progress we have made in identifying all small-molecule inhibitors for targets previously addressed by antibodies or that require intravenous administration, and we anticipate advancing early-stage proprietary modality switch programs such as these across multiple disease areas. In 2023, we completed our SGR-1505 healthy volunteer study and opened additional sites globally in the patient study. We initiated dosing in our 2921 oncology trial and advanced IND-enabling studies for SGR-3515. We also progressed several discovery programs to enable a steady flow of programs for internal or partnered development. I'll now turn the call back to Ramy.

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

Operator: [Operator Instructions]. Our first question comes from the line of Michael Yee with Jeffries. Your line is open.

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

Ramy Farid: Geoff, do you want to take the first and then I'll...

Geoff Porges: Sure.

Ramy Farid: Thanks.

Geoff Porges: Yes. Regarding the guidance for the software business, we have a very high degree of confidence in the long-term growth potential of the software business. We have multiple opportunities to increase the adoption of the software in our largest customers, but also to move up what we sort of referred to as the next tier of customers that we highlighted today that are greater than $1 million, but still not at that $5 million per year. So there's a lot of opportunity. That being said, as I highlighted in my prepared remarks, there were significant renewals of multi-year contracts in the fourth quarter that delivered that very strong fourth quarter revenue number. And those renewals effectively pose a headwind for us to overcome in 2024. So we do believe that we can grow the business. We believe that we can continue with that growth trajectory that we mentioned from the previous years, but we have to overcome the effect of those deals in the fourth quarter, but the underlying dynamics of the business are still growing significantly. I will also highlight that in 2023, we did see some of the effects of the biotech capital markets in our smaller customers. And you can see that in some of the information about the KPIs where the renewal rate across the broad customer group went down slightly from I think 96% to 92%, but it remained very high in the larger customers. And to those smaller customers that we are seeing some of the turmoil associated with companies running out of capital, shutting down R&D, getting merged, acquired, etcetera. We think that that's been a drag on our growth in 2023. We think we're planning on that consisting in 2024, but if there's some relief in that, and some of those companies do go ahead and get funded, then that'll also provide us with opportunity. Ramy, do you want to talk about that?

Ramy Farid: Yeah, absolutely. So let me just also emphasize what Geoff just said. I mean, there's no question that we view this, our software business as a growth business, there's still, as Geoff said, many opportunities. Now, one of those, as you mentioned, is actually some nice progress in AI on structural biology and biology front. And the structural biology front, this is something we've actually published on recently. This is resulting in a bigger supply of protein structures, which is the input, of course, to our physics-based methods. As we've shown, these structures still need refinement with physics-based methods, which of course we've developed, but this is providing a larger pool of targets. Similarly, a lot of the work in AI on sort of elucidation of biology is also resulting in a larger number of targets that are of interest, and of course, that helps fuel growth in our business. Now, with regard to your comment about staying competitive, I think we've talked a lot about this. We have a very large effort in the area of developing state-of-the-art, using state-of-the-art machine learning methods, but as we've shown over and over again and discussed many, many times, these methods have no value without a training set, and of course, that's the definition of machine learning, and we've shown that our physics-based platform is in a unique position to be able to develop the sorts of training sets that are required to actually make machine learning to fully realize the utility of machine learning. And to date, we see no efforts in the space that are competitive with our physics-based approaches, so we're feeling very good about our sort of leadership position in this area.

Unidentified Analyst: Great, thank you.

Ramy Farid: Thanks.

Operator: Our next question comes from a line of David Lebowitz with Citigroup. Your line is open.

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

Geoff Porges: Yeah, thanks for your question, David. I totally understand it. Yes, we found it challenging to provide guidance that incorporates the uncertainty associated with partners' advancing programs that will trigger milestones to our benefit. And we just aren't in a position to have information about, for example, where a Phase 2 trial might start or a Phase 3 trial might read out. And so we have elected to take those milestones out of our guidance because we just can't determine what the probability of those programs advancing is or when they will advance. So that is a change that we have made. The second change we've made is that we aren't including any allowances or estimates for new business development transactions, that is, new collaborations with new partners or partnering proprietary programs. Now, of course, we're in active discussions with many participants in the industry, both large companies and emerging companies, about lots of different opportunities. But again, we just didn't think that we could reasonably estimate the probability, timing, value, etc., of what might emerge in those discussions. So we've also kept that out of the guidance for joint discovery. And we're guiding to what we believe today to be the most likely range of outcomes at the beginning of the year. But you can imagine that we're going to be very busy throughout the year looking for all these opportunities that I mentioned. But that's the most likely range of outcomes at this stage of the year.

David Lebowitz: Thank you for taking my question.

Operator: Your next question comes from the line of Vikram Purohit with Morgan Stanley (NYSE: MS ). Your line is open.

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

Ramy Farid: Karen, do you want to do the second question first?

Karen Akinsanya: Yeah. So as you know, we're in a patient trial right now where we're recruiting into B-cell malignancies. In terms of the data, obviously, we're still gathering PK, PD, and FACI [ph]. It's a phase one dose escalation trial. But we obviously will also be looking at activity in that trial. And in terms of what good looks like, I think that's still to be determined. We know that Janssen, for example, saw ORR and CRs and PRs in their trial. But that's something that obviously we're still looking at is what we believe a great outcome will be for this mechanism and monotherapy and then ultimately a combination. Whereas, you know, again, there was very interesting data presented previously by Janssen. And what was the second part of your question?

Geoff Porges: Well, the first question was about the software.

Ramy Farid: Yeah. So we'll answer that. But there were two parts, I think. Yeah. Did we answer your question, Vikram, about Mot1?

Vikram Purohit: Yeah. The second part of the Mot1 question was just any color you might have at this point on how much data we could see, how much follow-up we could see, tumor types, et cetera?

Karen Akinsanya: Yeah. I mean, it's a little bit too early to say. I think, as I said, you know, we're monitoring for PK, PD, and clinical activity. So I just think it's too early to say what we'll be able to share this year versus next year. But, yeah, the study's going well, enrollment's going well, and we look forward to giving you an update as you go.

Ramy Farid: Vikram, I'll take a first stab at your first question and hand it over to Geoff if there's anything else to add. Here's how we see it. There are – there's a remarkable heightened interest in computation among pharma companies and emerging companies. I mean, it's a really exciting time. It seems, as we said, this sort of decade-long debate of whether to use computation and how to use it and, you know, does it really work is – I mean, this is such an exciting thing to be saying given how long we've been in this field, you know, is over. So there's really significant demand. What's going to dictate sort of where we end up in the range is whether companies can get to the point of scaling up their software to the level that we see our largest customers at. And that's going to depend on things like, and we talked about this, you know, this sort of worldwide shortage of modelers. How long is it going to take to train modelers and to bring them on board? And how long is it going to take to get the IT system set up to be able to access the kinds of compute resources that are required to run our calculations? So the interest is there. It really is there. It's just a matter of sort of how quickly and how large the scale-up. And the scale-up has started to happen in the industry, and that's the exciting thing. It's just, has it happened across the board evenly with all top companies and the hundreds of emerging companies? No, not yet. The other thing that's important to keep in mind, and Geoff has talked about this, and again Geoff can add more color is, remember we have very different revenue recognition rules associated with on-prem versus hosted. And the sort of mix of hosted and on-prem has a big impact on this range. It doesn't impact, you know, the underlying growth is there, but how it gets recognized in what year and so on is obviously variable. So Geoff, do you want to add anything to it?

Geoff Porges: Yeah, I would just say the timing and type of the renewals that we see during the year has a large impact on how those renewals translate to revenue. So first, if we renew with multi-years versus single years, that has an impact. And secondly, if we renew on a hosted basis versus on-prem. And I did highlight a little bit in my prepared remarks that there is a slow trend towards more hosted that of course slows down our reported revenue growth as we make that transition, but ultimately we think that is beneficial because it produces a more steady and predictable revenue outlook. So we're not going to advance that transition on a sudden basis rapidly, but it is underway. So the type of contract, the timing of the contract during the year, and of course the degree of scale-up, whether a customer is going from a 1 million a year contract to a 2 million or 3 million a year contract, that's the fundamental driver. And we see lots of opportunity, as Ramy alluded to, for that scale-up, but of course it does get down to every single contract and how it gets recognized.

Vikram Purohit: Got it. Thank you.

Ramy Farid: Thanks, Vikram.

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

Evan Seigerman: Hi guys. Thank you so much for taking the questions. You know, take a step back as you think about kind of your dual business model where you have your software licensing and then your own internal development. I guess a question for Ramy, just how, say two, three years from now, how do you expect your internal pipeline to kind of drive your business? Are you going to be bringing these to Phase 2, 3, and then out-licensing them? Are you going to bring them all the way to Phase 3 and out-licensing them? I'm just trying to understand how this evolved, you know, understanding that your business is a bit in flux with some of the nuances between hosted software and out-licensed software. Love the commentary on that. Thank you so much.

Ramy Farid: Yeah. Thanks, Evan. I think, you know, we talked a little bit about this before. You can see we have a, you know, rather a larger pipeline than we had a few years ago. We have these three more advanced programs, two in the clinic, one more that's going to be in the clinic. We just said we're going to be expecting to file an IND for one of the now, you know, next cohort of programs next year. There are quite a number of those and so we have a lot of options. That's a number of programs. We expect, as we said, some of those programs, it'll make sense to partner them and after Phase 1, in some cases, it may make sense to take them further and we're making sure that we allow ourselves to have the opportunity to have that sort of flexibility. So, I think you'll see a mix of all the things that you said over the next several years.

Matthew Luchini: Ken, do you want to add anything?

Ramy Farid: Sorry.

Evan Seigerman: No, I was going to say my follow-up. What's the hurdle that you need to come up, you know, get over to bring something really forward into, you know, a mid-phase trial and use your capital to advance that versus out-licensing it at Phase 1? I'm just trying to think about how, you know, this becomes part of your business in a way that's efficient when it's in the hands of Schrödinger versus in the hands of someone else.

Karen Akinsanya: Yeah, I mean, I think to some extent, I'll start and maybe Geoff can add. I mean, I think to some extent it depends on the target. We believe that there are targets where when they're first in the industry, first in the world, and there's a lot of interest and demand in the target, you know, we don't necessarily even need to take it to the clinic. However, we, you know, we'll assess that on a case-by-case basis. But from a clinical development standpoint, we are very comfortable doing Phase 1 dose escalation. We've got two of those ongoing and a third about to start. But I think for some programs, when it's in multiple tumor types, you've got lots of different potential indications. You've got combinations to pursue. We do see that having a partner for that development could be very, very helpful. So I think it really depends on the target, whether we feel comfortable taking it into the clinic in the first place but then expanding the program later on. So I don't know, Geoff, if you want to add to that.

Geoff Porges: Yeah, Ellen, I think from an economic standpoint, clearly we're going to consider cost. We're also going to consider value. Is there what's required to really create a lot of value from the program? And then lastly, we're also going to consider what the industry requires. Now, in some cases, what the industry requires is 10 subjects showing that you have a differentiated PK profile or a safety profile. In other cases, what the industry might require is a very large randomized Phase 2b study, which we might not be inclined to do. So I think on a case-by-case basis, we're going to consider all of those components to make a decision. I don't think that we're inclined to make a blanket decision one way or another.

Evan Seigerman: Great. Thank you, guys. Appreciate it.

Geoff Porges: Thanks, Evan.

Operator: Our next question comes from a line of Scott Schoenhaus with KeyBanc. Your line is open.

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

Geoff Porges: I just want to clarify something. The hosted on-prem shift is a small component of the trends in our business. I mean, it's what I call without deliberately, but the bigger factor is whether our business materializes in the form of multi-year contracts or single-year contracts. Because if we do an on-prem annual renewal, then all of the revenue is recognized or almost all of the revenue in the year in which that contract is signed. And most of it in that quarter. But if we do a multi-year on-prem, it's even more of the revenue is recognized in that quarter. So the biggest variable is the mix of duration of contract. The second biggest most important variable is the size of contract, whether we're scaling up big contracts or small contracts. And then probably the least influential variable is the hosted versus on-prem shift. But to the extent that there is a shift to hosted in the year in which that occurs, it reduces the reported revenue growth rather than increasing it. So that does have some effect, but I don't want to convey that that's most of the effect.

Ramy Farid: Yeah, and then just the answer to the other, that's absolutely right. And just to touch on the last part of your question, there's really no barrier to companies shifting, for us to shift companies from on-prem to hosted because it's not actually the software itself or the compute engine that's being hosted. It's just the license server, which is a trivial piece of code that just controls the licensing. So it doesn't matter large, small, and it's completely under control and there doesn't seem to be much resistance. In fact, a lot of companies like it when that's being managed because we can serve them better. But just to be clear, 99.999% of the computation that's being run is still on-prem. It's just that tiny little bit of code. And when that little bit of code is hosted, then the whole entire contract is considered hosted. That's not our rule. That's the rule. Okay, I hope that helps.

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

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

Scott Schoenhaus: Great. Thank you so much.

Operator: Our next question comes from a line of Chad Wiatrowski with TD Cowen. Your line is open.

Chad Wiatrowski: Hey, everyone. This is Chad Wiatrowski on for Steven Mah. I guess on the software revenues, how does a validating expansion of an agreement like with Lilly, for example, in the fourth quarter, how does that translate when you're looking into that tier two customer expansions and what does that specifically validate about the platform itself?

Ramy Farid: Yeah, that's a great question. We really see that as highly validating and the beginning of an important trend of adoption of our computational platform at scale by the pharma industry overall. It's extremely unlikely that, and it's not just Lilly, there are a number of customers that are, you see what our KPI is for, for example, customers spending over $5 million. We believe a critical number of pharma companies that have scaled up their usage of the software and using it at a scale that's approaching what we're doing internally as, again, as a beginning of a trend and it's extremely unlikely that it'll just be those handful of customers that will do that. And the reason we're saying that is sort of the obvious thing, but also the level of engagement from the other companies that are working their way up to that is really quite positive and we're sure that it's going to happen. It's a matter of, as Geoff was saying, we're saying just sort of, when exactly is it going to happen? Is it going to be in multiple stages where they go from one tier then to the next over a couple of years? That's where the uncertainty comes from, but it seems pretty clear that that trend that we're seeing, and we're obviously very encouraged by those handful of customers spending at that level, that trend will continue. I should mention one other thing that's actually, sorry, go ahead, please.

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

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

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

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

Matthew Luchini: Thanks for the questions.

Operator: Our next question comes from a line of Matt Hewitt with Craig-Hallum Capital Group. Your line is open.

Unidentified Analyst: Hi, guys. This is Jack on for Matt. Thanks for taking my questions. Firstly, with the former Bristol-Myers and ZAI Labs program now being solely Schrödinger assets, will that alter the timing of trials and how should we think about those assets? And then my second question, when you previously mentioned that Eli Lilly (NYSE: LLY ) renewed and expanded their software agreement, are there any other large customer renewals this year we should be monitoring? Thanks.

Karen Akinsanya: With respect to the first question about the BMS and ZAI program, obviously we've described in the past that some of these are for commercially targeting, commercially validated targets, whereas others were more novel targets. We have been looking at how we will incorporate these into our portfolio. Right now, there is no impact of those programs on our pursuit of clinical programs. The three programs, or the two that are in the clinics and the one that's about to enter, are all wholly owned, proprietary programs that came from our own efforts. We continue to look at some of the programs that have been returned as potential opportunities in the future, but we have not made a decision on that yet.

Ramy Farid: And then with regard to your other question, we're, as I said, really engaged in a number of discussions with large companies and, as Geoff said, emerging companies. That's very important to keep in mind. It's not just the top 10, 20 pharma companies that have the potential to scale up their usage of the software. The conversations are encouraging. We're certainly having them, but at this point in the year, we're certainly not prepared to name the next company that's going to be, if you want to call it the next Lilly. We're certainly having those conversations.

Unidentified Analyst: Understood. Thank you.

Ramy Farid: Yes.

Operator: [Operator Instructions]. Our next question comes from the line of Michael Ryskin with Bank of America (NYSE: BAC ) Securities. Your line is open.

Unidentified Analyst: Hi, thanks. This is Wolfe on for Mike. I appreciate you taking questions. So the multi-year renewal dynamic that you have going on in software is pretty well understood, but also software only came in modestly above your guide and 3Q, even with these big renewal benefits and your 4Q outlook is fairly well below. So kind of backing out these timing and comp-related dynamics, have you seen some change in the underlying markets or what's it going to take for software to get back to that 20% plus multi-year – profile? I had then follow-up.

Geoff Porges: Okay. No, I understand the question. So we highlighted some of the flux in the smaller customers that have been affected by financing, consolidation in the industry, et cetera. And there is no doubt that that was a significant, if one phrases it the right way, a drag on what we reported in 2023. We think that there is a path to more than offsetting that and the growth opportunity in what I refer to as the sort of mid-cap companies, let's just say greater than 500,000, the 50 are there, more than offset the effect of that drag, if you like, in the smallest accounts. So, and we're not counting on those small accounts coming back, although theoretically that's a possibility. Now, we deliberately called out the multi-year contribution in Q4 and specifically highlighted the Lilly deal because of the size of that and the impact that it had. That was something that we were working towards throughout the year and there are a number of other multi-year agreements that we worked towards through the year, some of which became closed contracts and generated revenue, but others that we're still working on. So, there is plenty of wood to chop and plenty of opportunity to drive things this year, but we're being pretty careful not to suggest that there's another Lilly out there right now because clearly that was a major opportunity for us that we pulled out in the fourth quarter. Ramy, do, you want to add?

Ramy Farid: I think that's perfect, yes.

Unidentified Analyst: Okay, got it, thank you. And then on the other side of the business in drug discovery, I think the change in guidance methodology is pretty clear there. I'm not going to ask you to guide to 25 or the out years, but given that there was kind of this inflection expected for drug discovery previously, should we now be thinking of more of a kind of steady ramp there barring any clear indications and milestones or just how should we think about the trajectory for that segment?

Geoff Porges: I hope that we conveyed the challenges we find in forecasting this segment in my answer to questions and prepared remarks. It is difficult because of the nature of this business and of our business there and the programs to estimate when programs will go ahead, particularly as they become more advanced. And of course, as they become more advanced, the milestones become larger, and so the outside effect becomes even greater. We continue to be very confident that if we keep initiating those programs and advancing them and they continue to progress that there are opportunities for that revenue to grow. But the other way we are thinking about this, of course, is that we are shifting our capital allocation towards our proprietary programs. And as we advance our proprietary programs into the clinic or even to advance preclinical development, we believe consistent with industry standards that they're going to be worth more in partnering transactions. So we are planning that a number of our programs will be partnered in the foreseeable future because obviously we couldn't take everything in our very rich portfolio already forward and our therapeutics group is continuing to come up with promising new development opportunities. So we do think that there's a very significant revenue opportunity there, but given the methodology and the approach we're taking, we think it's prudent to be not guiding to the timing or value of those transactions.

Unidentified Analyst: Got it. Thanks for your time.

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

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

Drop an image here or Supported formats: *.jpg, *.png, *.gif up to 5mb

Error: File type not supported

Drop an image here or


Related Articles