Schrödinger Q1 2025 Earnings Report

Schrödinger EPS Results

• Actual EPS: -$0.82
• Consensus EPS: -$0.81
• Beat/Miss: Missed by -$0.01
• One Year Ago EPS: -$0.86

Schrödinger Revenue Results

• Actual Revenue: $59.55 million
• Expected Revenue: $54.60 million
• Beat/Miss: Beat by +$4.95 million
• YoY Revenue Growth: +62.70%

Schrödinger Announcement Details

• Quarter: Q1 2025
• Date: 5/7/2025
• Time: Before Market Opens
• Conference Call Date: Wednesday, May 7, 2025
• Conference Call Time: 4:30PM ET

Schrödinger (NASDAQ:SDGR), 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.

Schrödinger Q1 2025 Earnings Call Transcript

Key Takeaways

• Strong Q1 financial performance: Total revenue was $59.6 M, up 63% YoY, driven by 46% growth in software revenue ($48.8 M) and $10.7 M in drug discovery revenue from collaborations, with full‐year guidance reiterated.
• Robust cash position: Net operating cash flow of $144 M in Q1 reversed prior burn, boosting cash and marketable securities to $512 M, and management expects cash burn to remain well below last year’s level.
• Platform and product innovation: Launched a second software update with crystal structure prediction, protein degrader modeling, and T-cell receptor tools, and plan a beta release of a predictive toxicology solution later this year.
• Clinical pipeline milestones: Initial Phase I data for three proprietary programs—SGR1505 (MALT1 inhibitor), SGR2921 (CDC7 inhibitor) and SGR3515 (WEE1/MYT1 inhibitor)—will be disclosed starting this quarter, backed by positive preclinical results including for SOS1 inhibitor SGR4174.
• Positive outlook amid macro uncertainty: Confident in revenue growth despite economic headwinds, citing strong customer engagement, FDA support for reducing animal testing, stable gross margins and operating expense growth under 5%.

Presentation

[Operator]

Thank you for standing by. Welcome to Schrodinger's Conference Call to Review First Quarter twenty twenty five Financial Results. My name is Calvin, and I will be your operator for today's call. 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. Sharon Madden, Senior Vice President of Investor Relations and Corporate Affairs. Please go ahead.

[Jaren Madden, Senior Vice President of Investor Relations & Corporate Affairs 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 first 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 Jeff Porges, Chief Financial Officer and Karen Akansanya, President of R and D Therapeutics. Following our prepared remarks, we'll open the call for Q and A.

[Jaren Madden, Senior Vice President of Investor Relations & Corporate Affairs 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 the second 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 and initiation of and readouts from our clinical trials the clinical potential and properties of our compounds the use of our cash resources as well as our future expenses. These forward looking statements reflect our current views about our plans, intentions, expectations, strategies and prospects, which are based on the information currently available to us and on assumptions we have made. Actual results may differ materially due to a number of important factors, including considerations described in the Risk Factors section and elsewhere in the filings we make with the SEC, including our Form 10 Q for the quarter ended 03/31/2025. These forward looking statements represent our views only as of today, and we caution you 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, Senior Vice President of Investor Relations & Corporate Affairs 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, Sharon, and thank you, everyone, for joining us today. We are pleased with our progress during the first quarter, which builds on the positive momentum from 2024. Our software and drug discovery revenue demonstrated strong growth. We are confident about our revenue outlook for the year and are reiterating our full year financial guidance. We are having productive discussions with customers and are encouraged about the opportunities for increased adoption of our software even with the potential challenges of the macroeconomic environment.

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

Total revenue for the quarter was $59,600,000 Software revenue was $48,800,000 representing 46% growth. Drug discovery revenue for the quarter was $10,700,000 with growth driven by milestones from collaborative programs and the recognition of upfront revenue from our collaboration with Novartis. We are encouraged by the FDA's recently stated goal to reduce preclinical animal testing. We have been pioneering computational molecular discovery for nearly thirty five years and continue to develop new solutions that integrate physics with machine learning to accelerate the discovery of safer drugs. We already offer our customers solutions that can be used to reduce the potential for toxicity associated with binding to off targets.

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

We are also continuing to advance our predictive toxicology initiative. We have structurally enabled more than 50 off targets and have been leveraging this technology within our collaborative and proprietary programs with highly encouraging results. We expect to proceed with a beta release of this solution to select customers later this year and expect to make it broadly available to customers once beta testing is completed. We are optimistic about its potential to contribute meaningfully to our long term revenue growth trajectory. We are also continuing to advance the science underlying other aspects of our platform.

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

This week, we released our second software update of the year. Major enhancements include new crystal structure prediction software to identify stable crystal polymorphs, which has important applications for drug formulation. And we have also expanded support for protein degrader modeling and launched new capabilities to enable machine learning based T cell receptor structure prediction, which is important for biologics discovery. We are also continuing to advance our collaborative and proprietary pipeline. We look forward to sharing initial Phase I data from our three lead clinical programs starting this quarter with SGR1505, our MALT1 inhibitor.

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

Overall, we are well positioned to advance all aspects of our business in 2025. This is a pivotal year for the company, and we look forward to providing updates throughout the year. I will now turn the call over to Jeff.

[Geoff Porges, CFO at Schrödinger]

Thank you, Rami, and good afternoon, everyone. We're very happy with our financial results for Q1. Software revenue growth was robust, and drug discovery revenue was higher than last year as we benefited from the recognition of revenue from our collaboration with Novartis as well as the recent expansions to other collaborations. Our operating expenses declined year over year, and our cash position was boosted by collections from contracts closed late in q four, including receipt of the upfront payment from Novartis. Our financial position is very strong, and our business is relatively protected from the turmoil that we are seeing in the capital markets and across many parts of the economy.

[Geoff Porges, CFO at Schrödinger]

Our technology continues to prove its value. And even in these challenging conditions, our customers are increasing their investment in our platform, enabling them to meet their innovation goals at lower costs and with better outcomes. We remain very positive about the outlook for the year and are excited to be advancing towards our first clinical data disclosure this quarter. For Q1, total revenue was $59,600,000 an increase of 63% compared to Q1 twenty twenty four. The increase was driven by higher software and drug discovery revenue.

[Geoff Porges, CFO at Schrödinger]

Software revenue was $48,800,000 and increased by 46% compared to Q1 twenty twenty four. The increase was driven by increased revenue from larger customer renewals in Q4 that were partially recognized in Q1 as well as early expansions and additions to preexisting multiyear contracts and the increasing contribution of recurring revenue from hosted software contracts. As expected, most of the growth in our software revenue came from increasing scale of deployments at global accounts. The growth contribution from new accounts and small and emerging biotech customers was minimal. On prem software increased by 44% to $25,400,000 and hosted revenue grew by 52% to 10,900,000.0 Maintenance revenue increased by 15%, and growth was lower due to the continued effect of the transition from on prem to hosted contracts in prior periods.

[Geoff Porges, CFO at Schrödinger]

Professional services revenue declined by 31% as service contracts from prior periods were completed, and contribution revenue was $3,800,000 this quarter as we continue to recognize revenue from the Gates funded Predictive Tox project. Drug discovery revenue was $10,700,000 compared to $3,200,000 in Q1 last year. Revenue this quarter was increased based on recognition of the upfront payment from the Novartis collaboration and from other recently expanded collaborations. Software cost of revenue was $13,500,000 in Q1 compared to $8,000,000 in Q1 of twenty twenty four. The increase was due to the expenses associated with the Gates Predictive Tox initiative.

[Geoff Porges, CFO at Schrödinger]

We also recognized increases in royalties associated with the Novartis software license and collaboration. Our software gross margin was 72% compared to 76% in Q1 twenty twenty four. The lower gross margin was due to the change in revenue mix associated with the Gates grant. Apart from this effect, software gross margin would have been consistent with the prior year. Drug discovery cost of revenue increased from $9,700,000 to $14,900,000 with the increase being driven by the high costs associated with the initiation of work on the projects in the Novartis collaboration as well as increased allocation of research staff to collaborations overall.

[Geoff Porges, CFO at Schrödinger]

Our overall gross margin was 52% and was very similar to the overall gross margin in Q1 twenty twenty four. R and D expense declined from $50,600,000 in Q1 last year to $46,000,000 in Q1 twenty twenty five. The decrease was due to the shift in allocation of staff from proprietary drug discovery to collaborations and also lower preclinical CRO expenses for proprietary programs that have advanced to the clinic or been discontinued. Sales and marketing expense increased by 2% to 10,400,000 based on slightly higher FTE expenses. G and A increased by 1% to $25,800,000 driven by slight increases in professional services.

[Geoff Porges, CFO at Schrödinger]

Total operating expenses were $82,000,000 compared to $86,000,000 in Q1 twenty twenty four. The reduction was mainly due to lower R and D. There were no gains in equity method investments in the quarter, and the change in fair value of equity method investments was a loss of 13,000,000 based on the mark to market of our shareholding in Structured Therapeutics. This compares to a gain in value of $8,000,000 in Q1 of twenty twenty four. Other income was $4,200,000 in Q1 compared to $5,000,000 in Q1 twenty twenty four.

[Geoff Porges, CFO at Schrödinger]

The lower other income was due to a lower cash balance and lower yields, partially offset by favorable effect of currency fluctuations on foreign currency balances. Total other expense was a loss of $8,900,000 compared to a gain of $13,000,000 in Q1 last year. Taxes were minimal, resulting in net loss after taxes of $60,000,000 or zero eight two dollars a share compared to a net loss after taxes of $54,700,000 or $0.76 per diluted share in Q1 twenty twenty four. The fully diluted share count for Q1 was $73,000,000 compared to $72,300,000 in Q1 twenty twenty four. Our net operating cash flow was $144,000,000 in Q1 compared to cash use of $39,000,000 in Q1 twenty twenty four.

[Geoff Porges, CFO at Schrödinger]

The reversal of our quarterly cash burn was driven by the receipt of the upfront payment from Novartis in Q1 as well as collections of other receivables that were outstanding at year end. Accounts receivable declined by $215,000,000 between year end and March 31. And as a result, our cash and marketable securities balance increased from $367,000,000 on December 31 to $512,000,000 at the end of Q1. Current liabilities decreased by 14%, and total deferred revenue declined by 5% and remains $210,000,000 I will now provide some comments on the risks and opportunities for our business associated with the ongoing political and economic uncertainty. Schrodinger's technology and business is built on a licensing and use platform.

[Geoff Porges, CFO at Schrödinger]

As such, at the present time, we do not expect any direct impact on our revenue outlook from U. S. Tariffs. It is unclear what former retaliatory tariffs or trade barriers could have, and for that reason, it is impossible to forecast if or when they could have a meaningful impact in the future. We are aware of the risks of new tariffs being applied to the pharmaceutical industry and the impacts they could have on industry profitability.

[Geoff Porges, CFO at Schrödinger]

At this stage, we are not encountering resistance or reluctance to purchase conversations, but of course, we are watching carefully for new policies or regulations that might affect the industry's outlook and R and D investments. Our direct exposure to revenue from China is small, with low single digit percentage of our revenue for software in 2024 coming from entities based in China. Although our software is ubiquitous in academic institutions, our revenue from that segment is also small, with U. S. Academic institutions and government affiliated organizations such as the NIH, contributing less than 4% of software revenue in 2024.

[Geoff Porges, CFO at Schrödinger]

Additionally, we are encouraged by the FDA's public statements about the importance of adopting alternative approaches, including computation, for drug discovery and development and believe that our technology is uniquely suited to supporting these goals. While the uneven treatment of biologics in small molecules has been a headwind for our software sales in certain accounts in recent years, that headwind could also be reduced by the executive order regarding the duration of the non negotiation period for Medicare Part D. Finally, currency has been a drag on our reported revenue growth from ex U. S. Markets for several years.

[Geoff Porges, CFO at Schrödinger]

And with the changing exchange rate, we could see some modest benefit to our reported sales from international markets later in the year. Overall, the effect of these variables is hard to quantify at this stage, and they are largely excluded from our financial guidance for the year, although our quarterly guidance reflects our latest and highest confidence expectations for the near term trends and outlook. Looking ahead, our financial guidance for the full year 2025 is unchanged. We still expect our software revenue growth to be 10% to 15% and expect drug discovery revenue to be in the range of $45,000,000 to $50,000,000 We continue to expect our full year software gross margin to be in the range of 74% to 75% and expect our operating expense growth to be less than 5% for the year. Our cash burn this year is expected to be significantly below our cash burn last year.

[Geoff Porges, CFO at Schrödinger]

I remain very confident about our current capital position and our long range financial outlook. We expect software revenue in Q2 to be in the range of 38,000,000 to $42,000,000 We expect that the majority of the year's remaining software revenue will be recognized in Q4, with the balance of drug discovery revenue likely to be approximately evenly distributed through the remaining quarters. To conclude, Schrodinger had an excellent Q1 with strong financial performance building on the positive announcements from Q4 and early in Q1. We remain very confident about the outlook for the year and see our business being relatively protected from the volatility and uncertainty affecting capital markets and other businesses and industry segments. We are excited about our approaching clinical data presentations and look forward to talking to you all about the first of those presentations in the coming weeks.

[Geoff Porges, CFO at Schrödinger]

With that, I'll turn the call over to Karen to discuss our therapeutics R and D.

[Karen Akinsanya, President of Research & Development Therapeutics at Schrödinger]

Thank you, Jeff, and good afternoon, everyone. Our therapeutics team continues to advance our pipeline of collaborative and proprietary medicines. Across our collaborations we are making important progress in the discovery of preclinical and clinical candidates for several high value targets. We are pleased with the growing number of emerging new medicines designed using our platform across programs initiated at companies we co founded such as Nimbus, Morphic, Ajax and Structure. As Rami mentioned, this is a pivotal year for Schrodinger, with initial Phase I clinical data expected across three proprietary programs.

[Karen Akinsanya, President of Research & Development Therapeutics at Schrödinger]

Beginning with SGR1505, our MALT1 inhibitor, our Phase I trial in patients with relapsedrefractory B cell malignancies is progressing and we look forward to reporting initial clinical data from this study at the European Hematology Association meeting in mid June. As a reminder, this is an open label dose escalation study. We plan to provide initial data describing the clinical profile of SGR1505. This data cut will include safety, pharmacokinetic and pharmacodynamic data across doses and schedules, as well as PKPD relationship and preliminary efficacy data from patients across a number of B cell malignancies and dose levels. We look forward to sharing the abstract when the EHA embargo lifts next week.

[Karen Akinsanya, President of Research & Development Therapeutics at Schrödinger]

The EHA poster will include additional data collected after the cut off date for the abstract submission. Following EHA, we will also present data at the International Conference on Malignant Lymphoma taking place later in June. In the second half of this year, we expect initial data readouts from the ongoing Phase I clinical studies of our CDC7 inhibitor SGR2921 and of our V1MIT1 co inhibitor SGR3515. SGR2921 is advancing in a dose escalation study in patients with acute myeloid leukemia or myelodysplastic syndrome. We are also evaluating SGR3515 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.

[Karen Akinsanya, President of Research & Development Therapeutics at Schrödinger]

These studies are progressing well with multiple dose escalation steps completed. As with the SGR1505 Phase I trial, the goal of the two ninety one and three thousand five hundred fifteen studies is to evaluate safety tolerability, preliminary clinical activity and to determine the recommended Phase II dose and schedule. We look forward to updating you on the progress of these studies later this year. Last week at the annual American Association for Cancer Research meeting, we presented preclinical data demonstrating that SGR3515 showed improved antitumor activity in preclinical models compared with other known We1 and MIT1 inhibitors. We also presented preclinical data showing how the dosing schedule for SGR3515 can be optimized to preserve efficacy while also allowing for complete recovery from target related side effects.

[Karen Akinsanya, President of Research & Development Therapeutics at Schrödinger]

Additionally, at AACR last week we reported preclinical data for SGR4174, our SOS1 inhibitor, demonstrating differentiated potency, selectivity and drug like properties as well as evidence of monotherapy and additive activity in combination with MEK inhibitors or G12C KRAS inhibitors. These data, along with the well tolerated profile of SGR4174 in GLP tox studies, supports further development potential. Over the past three years, we have advanced several programs into the clinic and partnered some of our early stage programs. We continue to see additional opportunities for value creation from our portfolio through outlicensing, new ventures and collaborations. 2025 is poised to be an exciting year for Schrodinger.

[Karen Akinsanya, President of Research & Development Therapeutics at Schrödinger]

We expect broad pipeline progress and are very much looking forward to sharing Phase I data from all three clinical programs throughout the year. I'll now turn the call back to Rami.

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

Thank you, Karen. As you heard, we are off to a strong start in 2025. I'm optimistic about the rest of the year and look forward to updating you on our progress. At this time, we'd be happy to take your questions. Operator, can you queue up the questions?

[Geoff Porges, CFO at Schrödinger]

Operator, if you're speaking or somebody else is speaking, we can't hear anybody on our end.

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

Operator, can you allow us to speak? And we will read out the questions because they submitted to us by email.

[Operator]

Pardon the delay. We are now going to start the Q and A session. The first question comes from the line of Michael Yee with Jefferies. Please go ahead.

[Michael Yee, Managing Director at Jefferies Financial Group]

Hey guys, great. Thanks for taking two questions. One is thinking about your first ever presentation of wholly owned Drug Malt one coming up soon, maybe we'll guess which conference it is. But could you right size our expectations around any meaningful single agent activity? Do you expect it?

[Michael Yee, Managing Director at Jefferies Financial Group]

What is good? Or is this about safety in combination with other therapies in lymphoma? Maybe talk a little bit about what is more important and what should we think about in terms of what is great. And the second question is financial, maybe for Jeff. You've given guidance on cash burn this year, which is fantastic.

[Michael Yee, Managing Director at Jefferies Financial Group]

If you continue to want to push forward on R and D for your cancer drugs, should we expect that, that should be a consideration for growing expenses and growing burn? Or would you consider other options and when is the right time to partner? So those are two important questions as we come up on this data. Thank you.

[Karen Akinsanya, President of Research & Development Therapeutics at Schrödinger]

So first of all, on the 1505 update, we are very pleased that we have both EHA and ICML abstracts. So with respect to what we plan to share, we're really excited to share an update on the profile of SGR fifteen o five. As you asked, we are providing an initial update, of the dose escalation study. This is a dose escalation in a variety of B cell malignant, malignancy patients where we've been exploring, safety, PK, PD, and initial signs of activity. We're excited to present that, and we will be providing an initial part of the data, which will be in the abstract and then obviously an update once the poster is presented in the June.

[Geoff Porges, CFO at Schrödinger]

And then, Mike, to to your question about cash burn, we haven't guided to to cash burn for next year, but but I really think that we're in a position where we're maintaining optionality with respect to all three of the leading programs. As Karen pointed out, these are interim looks of ongoing phase one studies, and those phase one studies don't finish at the end of the calendar year. So I don't see a scenario in which our cash burn goes up substantially next year, and we still have a lot of options with respect to those programs. So with without giving a specific dime guidance or range for next year, I think that we're in very good shape, and I I don't see a significantly greater draw on our cash next year than the investment we're making in expenses this year.

[Michael Yee, Managing Director at Jefferies Financial Group]

Perfect. Thank you.

[Operator]

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

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

Great. Thanks for taking the questions everyone and congrats on the quarter. I did want to actually ask about the upcoming predictive tox model that you So when you look at what FDA is initiating with the new animal testing guidance and kind of the broader implications there, how should we think about potential points of differentiation for your offering versus maybe some of the other preclinical non animal simulators that are out there today? And just any thoughts on how you might price this software relative to the existing offerings that you have? Thanks.

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

Sure. Yeah. Yeah. We're we're obviously very excited about the FDA's goal of reducing animal testing. We're also, of course, excited about the solution that we've been working on, that we've been using actually, in a very in a prospective way on our collaborative and proprietary programs.

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

And what's differentiated is the same thing that I think differentiates almost everything that we do in our platform. We're developing highly accurate models that leverage both physics and machine learning where we have the benefit of physics based methods in the form of accuracy, very high accuracy in predicting binding to off targets, and the benefits of machine learning, which is, throughput, being able to do it on a large scale. So we think that's what the differentiation is. Accuracy and is is the key.

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

Okay. Great. And and, any thoughts on how you might price it relative to what you do today?

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

Yeah. We, have not have not talked about pricing. As we often do with solutions like this is, first, get feedback from customers on, on the level of accuracy, on the impact, and then we make determinations on, the price after that. As we said in our prepared remarks, we are going to be, releasing it in a beta form to customers this year. So we will start to get that feedback and make a determination on the pricing, following, the results of the beta testing.

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

Got it. Okay. Makes sense. Thanks, guys.

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

Thanks.

[Operator]

The next question comes from the line of Mani Fruhkar with Lyric Partners. Please go ahead.

[Mani Foroohar, Senior Managing Director at Leerink Partners]

Thanks for taking the question. Congrats on another great quarter. A couple of quick ones. Some of your competitors admittedly are more levered towards late stage elements of drug development have reported challenges of customer dynamics. They've pointed to large pharma companies delaying decision making and some smaller players facing budget constraints.

[Mani Foroohar, Senior Managing Director at Leerink Partners]

Hasn't shown through in your numbers. Could you elaborate a little bit on the trends you'd observed year to date and how you'd compare these dynamics versus what you're seeing where you play? And then I have a quick follow-up.

[Geoff Porges, CFO at Schrödinger]

Sure. Hi, Manny. Yeah. Look. Obviously, we're playing close close attention to what's going on in the marketplace with all the noise, and I highlighted in my prepared remarks.

[Geoff Porges, CFO at Schrödinger]

The small sort of emerging biotech segment is you know, that's not growing. We're I think we're sort of level pegging in terms of the customers that aren't growing is offsetting the customers that are declining. The new new customers are offsetting the customers who who are, you know, terminating their contracts and scaling back on their R and D. So I'd say we're we're holding our ground there, and then the growth is being driven by the large accounts. Interestingly, we are not seeing any bumps or pushback on our renewals, and that includes the software contracts that we have with some of the largest companies in the industry.

[Geoff Porges, CFO at Schrödinger]

They're actually going through restructuring, not just in response to all all the issues that that we're seeing right now, but, you know, for their own reasons because of their portfolio status and things. So we think that the level of spend on our software is small compared to the scale of their r and d budgets. I think they generally view this as necessary to have, not nice to have. And for those reasons, we are seeing that that pushback, and that's consistent with the guidance that we maintain. So, hopefully, that's helpful.

[Mani Foroohar, Senior Managing Director at Leerink Partners]

That is. And you have told me approximately 1,100 times that Schrodinger is not an AI company, but is a company that's native that natively uses AI, that being the case. Obviously, we've seen, you know, a lot of concerns around incumbents industry being disrupted by AI fast followers, etcetera, even companies as large as Google slash slash Apple and today's news. How do you think about threats that you might face from companies native to a that are also native AI users? And how do you think about threats to your base business or growth?

[Mani Foroohar, Senior Managing Director at Leerink Partners]

And what's and what metrics do you follow to make sure that you are defending yourself from these emerging threats most effectively?

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

Yeah. Thanks for the question. So first of all, of course, there's no evidence of, any threat at the moment. We're very well aware of what, other people are working on. And I think the other thing that's really important to keep in mind is that we have a very deep understanding of what the domain of applicability of AI is, where its advantages are, and what its limitations are.

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

And I think we've, addressed that very well by, developing well, first of all, remember, we have we have, tens of thousands of users of our software. We have all these internal programs that we're working on. So we have a really good understanding of what's required to advance programs and what's required to, make accurate predictions. So I think our main thesis that machine learning is only as powerful as the training set is is not something that's all of a sudden gonna change. That's a fundamental fact of machine learning, whether it applies to chat GPT, LLMs, self driving cars, image processing, or chemistry.

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

Machine learning is only as powerful as the training sets. And nobody can just sort of magically produce, a training set that, will replace the kinds of predictions and the level of accuracy that's possible with the physics based methods that we've been developing over the last thirty five years. So I think the key is, you know, that deep understanding of the fundamental aspect of the technology and, making sure that we're, always using the state of the art technology both in the in the in the physics, but also, of course, in machine learning and AI.

[Mani Foroohar, Senior Managing Director at Leerink Partners]

Thanks, guys. I'll I'll hop off. I know you've got a lot of other questions in the line.

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

Thanks, Manis. The

[Operator]

next question comes from the line of Evan Segerman with BMO Capital Markets. Please go ahead.

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

Hi, Thank you so much for taking my questions. I want to follow-up on some comments that you made, Jeff, around your conversations with your farmer partners. Let me ask differently, what could break their sentiment and maybe change their approach to investing in a platform like yours? Like what are they really looking for? And secondarily, when you look at kind of the FDA guidance on reducing animal testing, can you just remind us what you guys have done in the space that contribute to this goal? Thank you so much.

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

What are customers looking for? We'll start there. What they're looking for is impact, is is the technology, allowing them to design better molecules with a higher success probability. And that takes a little bit of time to determine that, and it requires using the technology on a really large scale as we talked about many times. So there's a little bit of a chicken and egg problem where, you know, you have to be sort of convinced that the technology will have an impact, in order to scale up the usage.

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

But in order to scale up your usage, you need to be convinced that it's, that's gonna have an impact. So what we're finding is, of course, we've succeeded in in doing that quite a number of times. But what we're finding now is that something new is happening, which is the companies that are taking a little bit longer than other companies are to to to sort of break that cycle and and start using the technology at a large scale are listening to those other companies. These companies now that are using the technology at scale and seeing this enormous impact are starting to talk about, the impact that technology is having more widely. And we think, that's going to start to have a a really big impact on, transforming the industry and how how how companies deploy this technology at scale.

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

But that's what it is, its impact. And that can either come internally from them using it themselves or, of course, by attending scientific conferences and and seeing seeing the impact that other companies that have scaled up and are willing to talk about it. And that's just happening right now. So I think the other question you asked was about predictive tox, but I don't

[Geoff Porges, CFO at Schrödinger]

remember FDA animal testing? Yeah. FDA's guidance on animal testing and what we have already that the question started.

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

Ah, okay. Yes. Because we did yeah. Sure. Of course.

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

So, yeah, we, you know, obviously, the predictive talks, initiative that we've been focusing on is going to have, you know, we think a really dramatic impact on that. And and and, like I like we said, you know, we're already seeing a pretty big impact from that on our collaborative and proprietary programs. But there are, many, many properties of molecules that dictate the success in preclinical studies and animal studies and and even in the clinic. And and we have many solutions in that area, bioavailability, oral bioavailability, solubility, permit, even efficacy, by the way. So efficacy is has a big impact on therapeutic window. So that's also, something that, is is going to have a a really big impact on, the success in in preclinical and clinical studies. In in the area of predictive tox so and and or toxicity associated with off target binding, recall that we have had, solutions for some of those really key off targets, available to customers already. Most notably, and we published on this, is HERD, which is a, ion channel that, has disrupted preclinical and clinical trials quite a bit by molecules binding to it. So we already have solutions available for predicting selectivity, against some of the really bad actors.

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

Like like HEARD, is is a good example. Of course, the predictive task project is meant to scale that one or two off targets that we already have to hundreds. That's the goal of the project.

[Operator]

The next question comes from the line of Michael Ryskin with Bank of America. America. Congrats

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

on the quarter, strong start to the year. I want to follow-up on one of the earlier questions that kind of touched on opportunities for incremental spend, but I want to phrase it differently. Think that question was sort of in regards to ability to continue to support your three or four leading programs. I want to ask about maybe sort of broadening the pipeline. You've got the MALD-one, CDC-seven, the various programs that are already in the clinic where you've got Phase I readouts upcoming this year.

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

But you've also got a pretty healthy pipeline, lot of which you haven't disclosed openly. Just talk about given the balance sheet and the $150,000,000 you brought in from Novartis, thoughts on sort of broadening that pipeline, moving more programs, of your ability to scale your R and D expense and to expand your clinical assets?

[Geoff Porges, CFO at Schrödinger]

Yeah. Thanks for the question, Mike. I'll just talk about the the the sort of balance sheet and the cash use, and then Carol talk about some of the preclinical programs. So you're right. We we are continuing to make a significant investment in identifying and advancing more proprietary preclinical programs that's in effect to sort of backfill the existing clinical programs.

[Geoff Porges, CFO at Schrödinger]

That's an investment that we plan to continue. I don't foresee that investment having to step up materially. It's the research group has been very productive already. And and, frankly, between what we're advancing ourselves and what we're putting into collaborations, I think we're getting a good yield from that, but we we're not sensing that we need to make that much larger. So I think that we're as I said to in response to the earlier question, we're in pretty good shape in terms of our expense outlook for next couple of years, not just this year.

[Geoff Porges, CFO at Schrödinger]

And, therefore, I I think that we shouldn't be anticipating, a materially higher cash burn as a result of that even though we have a lot of options available to us with the clinical programs and then also with that next wave of preclinical programs. So, Karen, maybe you wanna talk about programs?

[Karen Akinsanya, President of Research & Development Therapeutics at Schrödinger]

Yeah. Certainly. So, as you've heard, ACR, we did present data on some of the emerging programs from our portfolio. Obviously, we're very happy with the profile of those compounds as we described at that recent cancer meeting. However, for the next batch, I think what I'll say is today, we're super focused on the releases that we'll be making in our clinical portfolio this year.

[Karen Akinsanya, President of Research & Development Therapeutics at Schrödinger]

The decision around what to do with those next programs in oncology, I think, we will continue to evaluate that, and we'll provide you with updates, in due course. But I also want to emphasize something that Jeff just said. Over the last three years, we have actually taken several of our wholly owned programs and partnered them with companies like Novartis and with Lilly. And so those programs, actually have already been funded to some degree through the next stages, and we have a ready made partner as those programs complete discovery. And so, obviously, those will not necessarily be transparent because they're partnered already.

[Karen Akinsanya, President of Research & Development Therapeutics at Schrödinger]

But we do continue to identify new programs that we think have high potential, and we will consider, as they progress whether to partner them early on in discovery or whether to advance them. So I think, yeah, more to come over time.

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

Okay. That's all really helpful. And then, for my follow-up, I I hate asking this question, but I still wanna make sure I get it right. It's gonna be about the the quarterly pacing through the year. I know we've talked about this ad nauseam, just sort of how we shouldn't worry too much about quarterly volatility both in software and drug discovery.

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

Think about it on a more twelve month basis. But still 1Q software came in a little bit better than the guide and then that we had expected. 1Q drug discovery came in a little bit better. Jeff, I think I caught in your prepared remarks saying that you expect drug discovery for the rest of year to be a little bit more even throughout the year 2Q, 3Q, 4Q. And then you got it to about $40,000,000 at the midpoint on software.

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

So just in terms of where how those quarters fall versus how they may have looked three months ago, this is just confirming, is this just the usual some of the noise or is there any significant change in how we should think about quarterly pacing timing?

[Geoff Porges, CFO at Schrödinger]

Yeah. No. Good question. I I understand the the sort of background. So we've been talking about the transition to hosted revenue for for some time and that that puts a base into our revenue, particularly in the early quarters of the year.

[Geoff Porges, CFO at Schrödinger]

And I think you were seeing that consistently, you know, in the in the early quarters, we're north of 20% of our software revenue coming from hosted contracts, and and and that base is gonna continue to build. So so that will help q one, two, and three. We still think that the majority of the remaining revenue for the year will come in the fourth quarter. But if I was looking ahead, I'd be saying that maybe, you know, there was a, you know, a big fourth quarter last year. And with the transition to hosted, maybe we won't have quite the same degree of fourth quarter concentration for software, this year that we had last year, but it's still gonna be our largest quarter.

[Geoff Porges, CFO at Schrödinger]

And then with respect to drug discovery, yeah, we we don't I don't wanna get into guiding to individual quarters for drug discovery, but I I think it's reasonable to assume that the the balance to our guide is spread out through the remainder of the year. You know, as you know, that that revenue is a mixture of of of recognizing over extended period of time, the upfront payments associated with contracts such as Novartis, and that, of course, is gonna build. And then, you know, recognizing smaller milestones as they come along, and in some cases, large milestones when they occur. But those large milestones, if we have confidence about them, we'll be including them in our in our guidance. So that's the way I would think about modeling.

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

Okay. Very helpful. Thanks a lot.

[Operator]

The next question comes from the line of Scott Schoenhaus with KeyBanc. Please go ahead.

[Scott Schoenhaus, Managing Director at KeyBanc Capital Markets]

Hey, team. Thanks for taking my question. I guess, really a follow-up, Jeff, on that last question. So you noted the a large customer pushed forward a renewal. I'm assuming that would have happened in fourth quarter.

[Scott Schoenhaus, Managing Director at KeyBanc Capital Markets]

Can you maybe give us color on why they did that customer decided to do that? And then as the second part of that, was that contract renewal shifted to a hosted versus on prem? Thanks.

[Geoff Porges, CFO at Schrödinger]

Yeah. No. Good question. So the that particular contract had multiple elements to it, and most of the renewal occurred in the fourth quarter, and then there was a part of that contract that was stood up and renewed in the first quarter. So that contributed principally to like, it it contributed a portion of the growth in the on prem revenue in q one compared to the prior year.

[Geoff Porges, CFO at Schrödinger]

And then separately, on the drug discovery side, of course, there's a there was a significant step up as we started to recognize the upfront payment of the Novartis, you know, upfront contract. Once we geared up the work on those projects, then we saw that revenue start to be recognized, and that will continue throughout the duration of that contract.

[Scott Schoenhaus, Managing Director at KeyBanc Capital Markets]

Thanks. And then following up on just the phasing out, potential phasing out of animal testing. Are you seeing more demand or inbounds from interested parties, clients broad based? Is it more biotech given sort of the monoclonal antibody first kind of direction here? Or is it is it broad based in in large pharma also coming to you guys?

[Scott Schoenhaus, Managing Director at KeyBanc Capital Markets]

Yeah. Just curious about sort of how broad based that demand is. Thanks.

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

Yeah. Yeah. What what we can tell you is that since that announcement in early April, we have had inbound interest from or questions, I should say, about our initiative, which, of course, was widely known to learn more about it. It's very clear that there's significant interest in a solution like the one that we're building. And I think there's exciting because, of course, they're hearing that we've enabled already 50 targets and that the beta is coming out soon.

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

So that has drummed up interest. I think you're asking something else, though, in addition, which is is there somehow increased interest in antibodies? Is that what you're is no. You're not asking that. Okay. Good. Just predict the talk. Go ahead, John. Yeah.

[Scott Schoenhaus, Managing Director at KeyBanc Capital Markets]

No. I was just seeing if demand if the yeah.

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

Yeah. What I what I said answered your question. Right? Yeah. Or no? Good.

[Scott Schoenhaus, Managing Director at KeyBanc Capital Markets]

Well, I was wondering if it was more if if it was more pronounced by tier of your clients. Like, it Yeah. Is it broad based, or is it more are you seeing more demand in one specific faction of your client base?

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

Yeah. I I think it I'm not sure I would call it demand. I I would say, you know, significant interest in the solution from biotech companies. I think the re pharma companies were already so deeply engaged in those discussions. We've already been talking to them for quite a while, about this.

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

So nothing has changed. We've been talking to them about it since last year, actually, when the grant was actually announced, significant grant from the Gates Foundation. So that interest is already there. What's built up since that announcement is now continued interest from even from smaller companies. Yeah.

[Scott Schoenhaus, Managing Director at KeyBanc Capital Markets]

Got it. Thanks.

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

Yep.

[Operator]

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

[Vikram Purohit, Executive Director, Equity Analyst at Morgan Stanley]

Hi, good afternoon. Thanks for taking our questions. We had two. The first on the Malt one data expected in the next couple of months here. Understood that it's regarding to it being bit of an early read, but what sort of read through do you think is fair to draw between the data you'll show here versus the data we'll get from your other molecules later on?

[Vikram Purohit, Executive Director, Equity Analyst at Morgan Stanley]

I know investors often try to draw like a sense of platform potential and R and D productivity from one molecule to another. So I just was curious if you have any thoughts on what this data set for the first from the first readout might tell you about other molecules. And then secondly, on business development and partnerships outside of your currently internal oncology programs, what is your appetite towards BD broadly throughout the year? And are there specific therapeutic areas that you would find more interesting than others? Thanks.

[Karen Akinsanya, President of Research & Development Therapeutics at Schrödinger]

So first of all, on, the clinical update, we are sharing, initial data, as you point out, monotherapy dose escalation study, maybe some malignancies for SGR fifteen oh five. We will be sharing, as we said earlier, a safety PK and PD. We think that PD is really important. It let lets us tie back to the healthy volunteer study, the the results we saw there, and now assess that in patients. But it is an early read.

[Karen Akinsanya, President of Research & Development Therapeutics at Schrödinger]

It is across multiple dose levels, multiple different tumor types. And so, it is just that initial read, but we are excited to share the update. Now your second part of the question with respect to how this reads through potentially to the other studies, I will say that MORT1 was our first IND, therefore, is a bit more advanced than the others. What what we are proposing to share across all three of these programs is really just the initial profiles of these compounds. But not one is more advanced.

[Karen Akinsanya, President of Research & Development Therapeutics at Schrödinger]

We've we've obviously accumulated a bit more data there, and and so that will be the first one that we share. And then later this year, we'll have the opportunity to share an update on, I would say, just the preliminary, again, PKPD safety, and we will determine whether there is additional information that we'll be able to share about those molecules. These three assets are for different indications. So, while cdc7 and malt1 are both hemoch, they are in different, settings. So AML versus B cell malignancy.

[Karen Akinsanya, President of Research & Development Therapeutics at Schrödinger]

So it's very difficult to compare and contrast there. But I think that we feel these molecules are performing well and therefore will, give people a sense of the original goals of the program, the goals of how we use the platform. And and so that will be, something that will be, something we can comment on as we go through the year here. With respect to BD, I mean, I think we we say this often, but it's correct that we are constantly in conversation, because of the nature of Schrodinger, obviously, having a platform that is embedded so broadly across the industry. We're constantly in conversation with other companies.

[Karen Akinsanya, President of Research & Development Therapeutics at Schrödinger]

That is across disease areas. I think you're aware that we have programs, across many disease areas, including immunology and our whole new pipeline. We are partnering across disease areas, historically across the deals that we've done. I mean, I think I've said in the past that neuro is a tough space with respect translation because there aren't great benchmarks, in the clinic or on the approved landscape, and we like to do, those types of, targets, neuro targets in particular in collaboration. But that doesn't restrict us from collaborating across all different therapeutic areas.

[Vikram Purohit, Executive Director, Equity Analyst at Morgan Stanley]

Fair enough. Thank you. Appreciate you taking the questions.

[Operator]

The next question comes from the line of David with Citi. Please go ahead.

[Ike Lee, Biotech Equity Research Analyst at Citi]

Hi, there. This is Ike Lee on for David Levowitz. Thanks for taking our question. Two for us. One, your gross margins on the software side have come down slightly from years ago, used to be in the low 80s.

[Ike Lee, Biotech Equity Research Analyst at Citi]

Now we're looking at guiding for mid-70s in the short term. In the long term, as you're looking to add on these additional products, the prementioned toxicology products and other software products What do you expect gross margins will be on the software side? And then two, with regards to the FDA guidance on shifting attention away from animal testing, other than the theoretical benefit to your company and the programs you've had, have you had any conversations with regulators before or after the announcement as to what that actually means for different business segments you might be thinking about? Thank you.

[Geoff Porges, CFO at Schrödinger]

I'll I'll jump in on on the gross margin question. We think that our gross margin should revert to that prior range after we have completed the Gates funded predictive talks project. We had signaled that that that that revenue was contribution was going to negatively affect gross margin for the period, but we are recognizing that revenue and and funding that project. You know, currently, I think we're we're expecting that to be mostly completed by the middle of next year, unless, of course, it there's it's it's standard for some reason, which would be fine too. So and then we, over longer term, I would expect the gross margin to be similar to the that range that you mentioned or perhaps slightly better.

[Geoff Porges, CFO at Schrödinger]

Over time, I think, as the scale of our software deployments go up and also as some of the royalties drop away a little bit, you could see, you know, slight no. I'm not talking about multiple percentage points, but a slight increase in that gross margin performance.

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

And with regard to speaking with the FDA, absolutely, just very simply, we are, of course, engaged with them at at multiple levels, and we fully expect to continue to, increase that engagement as our predictive talk solution, essentially comes online.

[Operator]

And it seems that there are no further questions at this time. That concludes today's question and answer session in today's conference call. You may now disconnect your lines at this time.

Participants

Executives

• Karen Akinsanya, President of Research & Development Therapeutics

Analysts

• Jaren Madden, Senior Vice President of Investor Relations & Corporate Affairs at Schrödinger
• Ramy Farid, CEO, President & Director at Schrödinger
• Geoff Porges, CFO at Schrödinger
• Michael Yee, Managing Director at Jefferies Financial Group
• Brendan Smith, Director & Senior Analyst at TD Cowen
• Mani Foroohar, Senior Managing Director at Leerink Partners
• Evan Seigerman, MD & Senior Research Analyst at BMO Capital Markets
• Michael Ryskin, Managing Director at Bank of America Merrill Lynch
• Scott Schoenhaus, Managing Director at KeyBanc Capital Markets
• Vikram Purohit, Executive Director, Equity Analyst at Morgan Stanley
• Ike Lee, Biotech Equity Research Analyst at Citi