Schrodinger Inc

NASDAQ:SDGR

Earnings Call Transcript 2022-Q2

[Operator]

Thank you for standing by. Welcome to Schrödinger's conference call to review second quarter 2022 financial results. My name is Didi, and I'll 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 introduce your host for today's conference, Ms. Jaren Madden, Senior Vice President of Investor Relations and Corporate Affairs. Please go ahead, Jaren.

[Jaren Madden, SVP, IR & Corporate Communications]

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 2022 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 www.schrodinger.com.

Here with me on our call today are Ramy Farid, Chief Executive Officer; Jenny Herman, Senior Vice President, Finance and Corporate Controller; and Karen Akinsanya, President of R&D Therapeutics. Following our prepared remarks, we'll open the call for Q&A.

I'd like to remind you that during today's call, management will make statements related to our business that are forward-looking and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including, without limitation, statements related to our future financial performance, our outlook for the full year 2022 and for the third quarter ending September 30, 2022, our strategic plans to accelerate the growth of our software business and advance our collaborative and internal drug discovery programs, the timing of potential IND submissions and the initiation of clinical trials for our internal drug discovery programs, risks related to the COVID-19 pandemic, our expectations related to the use of our cash, cash equivalents and marketable securities as well as our future operating 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 from what we project today 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 period ended June 30, 2022. These forward-looking statements represent our views only as of today, and we caution you that we may not update them in the future, whether as a result of new information, future events or otherwise.

With that, I'd like to turn the call over to Ramy.

[Ramy Farid, CEO, President & Director]

Thanks, Jaren, and thank you, everyone, for joining us today. At Schrödinger, we have developed a computational platform that is transforming the way therapeutics and materials are discovered, we license our platform to biopharma and materials companies as well as government and academic institutions around the world. Today, we reported second quarter software revenue of $30 million, a 25% increase over the prior year. We also recognized milestones from multiple collaborative programs during the second quarter, which helped drive drug discovery revenue of $8.5 million. The strong performance across both aspects of our business led to total revenue of $38.5 million for the second quarter and $87.1 million for the first half of 2022, representing 29% and 41% growth over the respective prior periods. We are very pleased with the performance we've had in the first half of 2022, and we are maintaining our full year financial guidance.

We have built a highly differentiated company that we believe enables us to continue to innovate while providing a solid foundation for growing revenue. We ended the quarter with approximately $513 million in cash. We believe our strong financial position provides sufficient runway to fund our operations for the foreseeable future, including advancing our wholly owned programs into clinical studies.

We are pleased that revenue growth from both our software business and drug discovery collaboration enables us to make continued investments in our platform and pipeline while also providing a path to profitability.

As you'll hear shortly from Karen, we're also continuing to make progress across our wholly owned pipeline. During the second quarter, we submitted the IND for our MALT1 inhibitor SGR-1505, and we are not clear to proceed with our Phase I clinical trial. This was our first internal IND submission and represents a tremendous achievement for Schrödinger. We are looking forward to initiating the Phase I trial for SGR-1505 in patients with relapsed or refractory B-cell lymphoma in the fourth quarter of this year.

We are continuing to invest in the science underlying our platform. For example, we've broadened the applicability of our platform through an important advancement with our induced fit docking methods to optimize homology models to enable predictive modeling of targets where experimental structures have been unavailable. We have already successfully applied this method to advance a collaborative drug discovery program for a target that was not structurally enabled. We were pleased to advance the project from early discovery to lead optimization entry nearly 6 months ahead of the originally targeted schedule.

Our scientists continue to publish our independent and collaborative scientific advancements and recently coauthored a manuscript with Nimbus Therapeutics based on data from our ongoing collaboration, describing how our predictive computational methods accelerated the discovery of Nimbus' potent, selective Tyk2 inhibitors with activity in preclinical models of psoriasis.

We are excited by the progress we have made, and we expect continued achievements across all aspects of our business throughout the year as we advance our vision of transforming drug discovery and materials design.

I will now turn the call over to Jenny to review our second quarter financial results.

[Jenny Herman, SVP, Finance & Corporate Controller]

Thank you, Ramy, and hello, everyone. I'm pleased to discuss our financial results for the second quarter of this year. Total revenue was $38.5 million for the quarter, up 29% compared to the second quarter of 2021. Software revenue was $30 million, representing 25% growth compared to the second quarter of 2021.

As in prior quarters, the growth in software revenue was primarily driven by increased adoption of our software solutions by existing customers as well as the addition of new customers during the quarter.

Drug discovery revenue was $8.5 million for the second quarter of 2022 compared to $5.7 million in the second quarter of 2021. And Drug discovery revenue for the quarter included $5.4 million in revenue recognized from our ongoing collaboration with Bristol-Myers Squibb as well as revenue from preclinical milestones related to 2 of our collaborative programs. Gross profit was $17.1 million in the second quarter, up 43% over the second quarter of 2021. Software gross margin was 76% in the second quarter of 2022 compared to 77% for the second quarter last year. We continue to make investments to support the rollout of large-scale deployments of our platform.

Operating expense was $60.6 million compared to $42.3 million for the same quarter last year. This reflects our continued investment in R&D to advance the science underlying our platform and to progress our internal drug discovery programs as well as infrastructure costs and the addition of staff and G&A functions to support our business.

We recorded a net loss of $47.7 million for the second quarter of 2022 compared to a loss of $35 million for the same period in the prior year. As we mark-to-market the equity stakes we hold in our collaborators each quarter, we can experience significant fluctuations in the value of our holdings. And included in our $47.7 million net loss was a loss of $15.7 million on our equity holdings in the second quarter of 2022 compared to a loss of $4.9 million on our equity holdings in the second quarter of 2021.

We ended the quarter with cash equivalents, marketable securities and restricted cash balances of approximately $513 million compared to approximately $529 million on March 31, 2022.

In February, we provided our financial outlook for the full year. And today, we are pleased to reaffirm our 2022 financial guidance.

Before reviewing our financial outlook in detail, I'll remind you that our software revenue fluctuates quarter-to-quarter due to the seasonality of our business, with the second and third quarters historically being our quarters with the lowest software revenue.

For the third quarter of 2022, specifically, we expect software revenue to range from $23 million to $25 million, similar to software revenue for the third quarter of last year, which was $24.3 million. We have fewer customers up for renewal in the third quarter and anticipated growth is expected to be offset by multiyear contracts executed over the past 2 years. The fourth quarter is expected to be our largest quarter for software revenue which was the case in the last 2 years. We have a high level of visibility into our existing accounts, which have been the primary driver of growth given our broad customer base. We are pleased with the level of engagement by software users as well as ahead of R&D, and we are encouraged by the continued scale-up of adoption of our software platform.

Let me now review our 2022 financial outlook in more detail. We continue to expect total annual revenue to be in the range of $161 million to $181 million, corresponding to 17% to 31% growth over 2021. We expect software revenue to range from $126 million to $136 million, representing 11% to 20% growth over last year.

We continue to expect drug discovery revenue to range from $35 million to $45 million, representing 42% to 82% growth over last year. Drug discovery revenue fluctuates from quarter-to-quarter, largely based on the timing of achieving certain milestones within our collaborative programs.

Finally, we continue to anticipate that operating expense growth will be slightly lower than the 42% annual growth we saw in 2021. We expect our software gross margin percentage to be in the mid-70s. We are very pleased with the strong start to our year, and we expect continued progress in the second half of this year.

I'll now turn the call over to Karen for an update on our drug discovery programs.

[Karen Akinsanya, President, Research & Development Therapeutics]

Thank you, Jenny, and good afternoon, everyone. We are continuing to make important advances on many fronts across our portfolio. We are pleased to see a growing number of our collaborative programs advance through discovery, preclinical and clinical development.

With respect to our collaborations, 3 programs are currently in Phase II and 5 are in Phase I clinical development. There has also been significant progress across our collaborative discovery portfolio with several programs expected to reach development candidates over the next year.

As you heard from Ramy in 1 program transitioning to lead optimization ahead of schedule was enabled by a modeled protein structure and our brain penetration predictions, which has exciting implications for future programs.

Today, I will review our 3 most advanced wholly owned programs, starting with SGR-1505 and the MALT1 inhibitor. MALT1 is emerging as a potential therapeutic target for the treatment of certain B-cell lymphomas, including relapsed or resistant B-cell and mantle cell lymphoma. MALT1 inhibition also has potential in solid tumors and autoimmune disease. During the second quarter, we submitted our IND for SGR-1505 to the FDA, and we recently announced that we are clear to proceed to Phase I.

Our early clinical development team is currently working through clinical site activation in preparation to begin dosing patients with relapsed or refractory B-cell lymphomas in the fourth quarter of this year. This will be the first clinical study emerging from our internal pipeline, and we look forward to reaching this important milestone.

This multi-center dose escalation trial will evaluate the safety, pharmacokinetics, pharmacodynamics and early signals of antitumor activity of SGR-1505 as a monotherapy. Once the recommended dose is determined, an expansion cohort is planned to evaluate SGR-1505 in combination with other therapies such as BTK and BCL-2 inhibitors.

Moving to our Wee1 program. We share the enthusiasm of physicians and scientists studying Wee1 inhibition in multiple solid tumor types. We are encouraged by the clinical activity demonstrated to date in third-party Wee1 inhibitor trials. We view the side effect and pharmacokinetic profile of Wee1 inhibitors as crucial to the therapeutic potential and the opportunity to be combined with chemotherapy and other anticancer agents.

We are using our computational platform to identify molecules that are highly selective with balanced properties, which we believe may help avoid some of the drug-drug interactions and off-target effects that have been observed with other Wee1 inhibitors.

We have already identified compounds from multiple series that are potent, selective and demonstrate antitumor activity with desirable pharmacokinetic and pharmacodynamic properties in multiple preclinical models, including models of lung, ovarian and breast cancer.

We are currently conducting additional preclinical studies to ensure we select a development candidate with the most desirable differentiated properties. We believe conducting these additional studies gives us an opportunity to advance a potential best-in-class Wee1 inhibitor into the clinic. We expect to select a Wee1 development candidate by the end of this year and submit an IND at the end of 2023.

Now I'll turn to our CDC7 program. Our CDC7 development candidate, SGR-2921 has demonstrated strong antitumor activity in preclinical models of AML in combination with venetoclax and other marketed agents.

Our time line for IND submission has been impacted by supply chain issues including delays at the CRO that is conducting certain required GLP toxicology studies. We now expect to submit an IND for this program to the FDA in the first half of 2023 and subject to regulatory clearance initiate a Phase I study in the second half of 2023. These shifts represent approximately a 1-quarter delay.

As our wholly owned programs progress, we are continuing to add new programs to our discovery pipeline. In the first half of this year, we've added 4 new programs in precision oncology and immunology for a total of 6 early discovery programs.

Our growing portfolio reflects our strategy to select and enable targets with substantial human validation and solve key design challenges with our platform, positioning us to selectively advance first-in-class and differentiated programs.

We maintain a high bar for what we will progress beyond the lead optimization stage. Our focus is on projects with a strong line of sight to value-inflecting data in discovery or in Phase I to support potential partnering or that merit continued internal development.

In summary, our diverse portfolio of programs is advancing and activities to support expansion of our pipeline are well underway. We are pleased with the progress that we and our collaborators are making and look forward to providing updates on our R&D activities throughout the year.

I will now turn it back over to Ramy.

[Ramy Farid, CEO, President & Director]

Thanks, Karen. 2022 has the potential to be another strong year for Schrödinger. We are very pleased with the progress we have made across all aspects of our business in the first half of the year, and we remain focused on the key objectives that we believe can generate value and position us for continued success.

We will be hosting a webcast on October 6 to provide a deeper dive into our computational platform, and we hope you will join us to learn more about how we are solving grand challenges in drug discovery.

At this time, we'd be happy to take your questions. Operator?

[Operator]

[Operator Instructions]. And our first question comes from Michael Ryskin of Bank of America.

[Michael Ryskin, Bank of America Merrill Lynch]

Congrats on the quarter. My first question is going to come back to the software guide for the third quarter. I just want to make sure I have all the moving pieces down. You had some comments about fewer customers up for renewal and some multiyear contracts. I'm just wondering if you could sort of give a little bit more clarity on that, sort of how much of that variability is specific to 3Q? And just looking at the year numbers, you did about 25% in the first half, both in 1Q and 2Q software growth. So is this really just a comp issue from last year? How do we think about that variability going forward? And then I got a follow-up.

[Ramy Farid, CEO, President & Director]

Yes. Thanks for the question. Jenny, you want to...

[Jenny Herman, SVP, Finance & Corporate Controller]

Yes, I can take that. 3Q specifically, it is generally our lowest quarter. Second quarter and third quarter are our lowest quarters. We do not have any large customers up for renewal in Q3. It's a historical timing, and that is one of the large sources of growth we see is our largest existing customers. We do have some growth in Q3. It is offset by some of your deals signed in the last couple of years, but it really is a combination of it's just a lower revenue quarter, and there's not a lot of large customers in Q3, which doesn't create the same kind of opportunity for growth as we see in some of the other quarters.

[Michael Ryskin, Bank of America Merrill Lynch]

Okay. And then just a follow-up on that. Have you seen any weakness in general in terms of customers indicating appetite for renewal when we think about the broader market and balance sheets among biotechs and sort of some of their willingness to spend versus cut back on some of their operating expenses? Are you seeing any change in order patterns, renewals, on customers expansion? And sort of as a follow-on of that, you keep pointing to ACV growth of over 20% in 2023? Any way you can give us a sense of how that's trended this year just so we can get a feel for how that's going? Just trying to get the underlying demand among the pharma biotech one of their willingness to spend.

[Jenny Herman, SVP, Finance & Corporate Controller]

Sure. As far as ACV, it isn't something that we guide to in the year. We'll report that with the Q4 numbers. We did directionally give that number for 2023 just as an indication of kind of the overall growth for the software business to expect in 2023.

As far as customers' spending patterns, we are not seeing any indication. We do think that the Q4 is going to be our largest quarter. The range that we expect Q4 to -- we are maintaining our guidance, and that range does reflect the variety of outcomes of the entities that we have with our existing customers in Q4.

[Operator]

Our next question comes from Michael Yee of Jefferies.

[Unidentified Analyst]

This is [indiscernible] on for Mike. Just wondering if you have more visibility into the 2023 drug discovery guidance as previously guided to $100 million. Wondering how confident you feel about that as we're nearing 2023.

[Ramy Farid, CEO, President & Director]

Yes. We're not changing that guidance. We still feel as confident as we were when we first announced that we were expecting in 2023, $100 million plus revenue from the drug discovery business. That excludes any revenue that may come from partnering over internal programs. And yes, still maintaining that guidance.

[Operator]

Our next question comes from Gary Nachman of BMO Capital Markets.

[Gary Nachman, BMO Capital Markets]

First, what has the pace been for new business wins, both in life sciences and material sciences? Just if you could give some more color there, Ramy. Where are you seeing a greater uptick with these new wins and trying to get a sense of what the funnel looks like to the extent that you have visibility on that. And then I have a couple for Karen after.

[Ramy Farid, CEO, President & Director]

Great. Yes. No, it's a good question. And let me remind you, first, though, that the majority of our growth does come from scaling up our existing customers. So that's a very important point in that, and that we continue -- we expect to continue to see that. Again, to the extent that we have so many customers on life science side. Of course, all the pharma companies, a really large number of biotech companies. That's where the growth comes from.

We are still seeing, but it's still -- some of the growth does come from new customers. And we're still seeing that happening in the last 2 quarters on material -- that was on the life science, side.

On the material side, as we said before, to the extent that that's an earlier business, we still see a larger portion of the growth coming from new customers. And we're not seeing any impact of any sort of macro headwinds impacting that to date.

[Gary Nachman, BMO Capital Markets]

Okay. That's good to hear. And then for Karen, as you're moving to the clinic with your lead internal candidates, just talk about your capabilities internally just in terms of drug development. And have you hired some new people recently now that you're going to be starting a Phase I pretty soon.

And then talk broadly about the 4 new oncology immunology, early discovery programs. When we could have visibility on those? And would they be similar to the 3? You talked about that are moving into the clinic. And is that a typical cadence for you when we think about those new programs?

[Karen Akinsanya, President, Research & Development Therapeutics]

Thanks, Gary. So your first question around the capability build. We have continued over the last year actually to add additional experts to our teams. We're very pleased with the early development team. We have obviously a physician working on the protocol, who is a member of our team as well as clinical operations, regulatory, clinical science, biomarkers and clinical PK/PD. So we have what we believe to be the right team to advance this first protocol.

We will, over the next year, be adding additional expertise to the team as we look to expand the number of programs in the clinic and obviously, advance the trials that we are going to be conducting.

With respect to the new programs, if I can turn to that, the addition of these programs is pretty exciting for us. As you know, we have spent time thinking very hard about the types of programs we want to work on with our platform. This includes some opportunities that we think are, again, opportunities for differentiation on very well-validated targets, whether we think, really interesting chemistry challenges to solve. But it also includes some first-in-class targets where we think that we could be the first people in the world to have agents against targets that are particularly well considered in the biology and sort of genetics community. So we're very pleased with those projects. We still would describe them as precision oncology and to some extent, precision immunology targets that will be moving forward.

In terms of when you can expect visibility, we've got some work to do in terms of moving these to the stage where we would feel comfortable sharing. But as we have done over the last couple of years, we've been submitting obviously, to scientific meetings on our existing programs. We plan to continue doing that as we have data packages that are appropriate.

[Gary Nachman, BMO Capital Markets]

Okay. And then just lastly on the cadence. Was that a particularly productive first half of the year to have 4 of these new programs? Or is that basically a reasonable assumption going forward? What you can do?

[Karen Akinsanya, President, Research & Development Therapeutics]

We actually are continuously looking at targets and thinking about enablement of those targets, both for the platform and more broadly to conduct those through discovery. The team last year, we spent a lot of time building out our early discovery team. And we expect, as I think we've discussed on previous calls, to have a steady-state of programs in the lead-up space, but we are expanding options in the early space so that we can pick the very best programs to move forward into LO. So yes, we expect to see a lot of new programs entering the pipeline and our strongest options moving forward into late-stage discovery.

[Operator]

[Operator Instructions]. Our next question comes from Vikram Purohit of Morgan Stanley.

[Vikram Purohit, Morgan Stanley]

So I had two, both on the proprietary pipeline. So first, on the multiple inhibitor. Now that the IND has been cleared and you're moving towards dosing patients in 4Q '22. I just wanted to see if you had any more detail you could provide us about the design of the study, the time lines to initial data here, and what the first set of data that we'll get could tell us about the molecule?

[Karen Akinsanya, President, Research & Development Therapeutics]

Yes. Thanks for the question. So as you slated, we're moving into dosing in the fourth quarter. This study is really designed to establish the safety, tolerability of the molecule. But in addition, we will be collecting pharmacokinetic, pharmacodynamic data, so those are the primary end points that we're collecting, and the whole point of the study is to identify a recommended dose for combination studies and future study of our compound.

In terms of when we would expect to see data, it's a little bit too early to say. We will be escalating through various dose cohorts. And at this point, it's a bit hard to say, obviously, when we will have sufficient data to be able to share that publicly. But I would say that this study is expected to run through next year, and we'll keep you updated as we are getting more visibility on when we'll have data that we can share with you and the rest of the community. I think that answers your question. I don't know if there was a second part, sorry.

[Vikram Purohit, Morgan Stanley]

No. That's helpful on the first question. And my follow-up was on another program in your pipeline. So as you likely note, there was a discontinuation of Wee1 inhibitor recently. So we just wanted to get your thoughts on what you think the potential read through is here for your program and what the discontinuation might do for the opportunity set for our Wee1 inhibitor?

[Karen Akinsanya, President, Research & Development Therapeutics]

Yes. As you noted, we did see the news of the discontinuation of the most advanced, I think, of the Wee1 inhibitors. As AstraZeneca said publicly, they see opportunity with Wee1 in the clinical space. From what we can glean from the public announcement, this was a prioritization of the portfolio activity. From a sort of perspective of our program and where it sits in the landscape, we maintain what we have said from the very beginning about the Wee1 inhibitors that are the existing compounds, we think there's an opportunity to enhance the properties of Wee1 inhibitors. First and foremost, with regard to selectivity.

And then secondly, the drug-like properties we think that a compound with an optimized profile will allow for a further study in the clinic of combinations. And when I say that, I'm referring to the issues around drug-drug interactions and household activity may impact the safety profile of Wee1 inhibitors.

We are obviously still preclinical, but we're very excited about the molecules we have and published some of that work last year or earlier this year at scientific meeting. And so we continue forward with this program with optimism based on the clinical data for both monotherapy and some of the combination data that's already been studied and shown for this mechanism.

[Operator]

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