Schrodinger Q1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
May 7, 2025

Key Takeaways

  • Schrödinger reported Q1 total revenue of $59.6 million, up 63% YoY, driven by software revenue of $48.8 million (+46%) and drug discovery revenue of $10.7 million, and the company reiterated its full-year 2025 guidance.
  • Net operating cash flow flipped to a $144 million inflow in Q1, boosting the cash and marketable securities balance to $512 million, thanks in part to the upfront Novartis payment.
  • A beta release of the new predictive toxicology solution—integrating physics-based methods with machine learning to reduce preclinical animal testing—is expected later this year and could materially enhance long-term revenue growth.
  • Schrödinger will present initial Phase I data for its three proprietary oncology programs starting with the MALT1 inhibitor SGR1505 at the European Hematology Association meeting in mid-June, with CDC7 and WE1/MIT1 readouts slated for H2 2025.
  • The second software update of 2025 introduces crystal polymorph prediction, expanded protein degrader modeling, and ML-based T cell receptor structure prediction, enhancing the drug discovery platform.
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Earnings Conference Call
Schrodinger Q1 2025
00:00 / 00:00

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Operator

Thank you for standing by. Welcome to Schrödinger's conference call to review first quarter 2025 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. Jaren Madden, Senior Vice President of Investor Relations and Corporate Affairs. Please go ahead.

Jaren Madden
SVP of Investor Relations and 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 2025 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.

Jaren Madden
SVP of Investor Relations and 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 2025, 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.

Jaren Madden
SVP of Investor Relations and Corporate Affairs at Schrödinger

Actual results may differ materially due to a number of important factors, including the considerations described in the risk factor section and elsewhere in the filings we make with the SEC, including our Form 10-Q for the quarter ending March 31, 2025. These forward-looking statements represent our views only as of today, and we caution you that, except as required by law, we may not update them in the future, whether as a result of new information, future events, or otherwise. 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.

Jaren Madden
SVP of Investor Relations and Corporate Affairs at Schrödinger

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
Ramy Farid
CEO at Schrödinger

Thanks, Jaren, 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. Total revenue for the quarter was $59.6 million. Software revenue was $48.8 million, representing 46% growth. Drug discovery revenue for the quarter was $10.7 million, 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.

Ramy Farid
Ramy Farid
CEO at Schrödinger

We have been pioneering computational molecular discovery for nearly 35 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. We're 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
Ramy Farid
CEO 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. 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 SGR-1505, our MALT-1 inhibitor. 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 Geoff.

Geoff Porges
CFO at Schrödinger

Thank you, Ramy, 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 Q4, 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. 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.

Geoff Porges
CFO at Schrödinger

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 $59.6 million, an increase of 63% compared to Q1 2024. The increase was driven by higher software and drug discovery revenue. Software revenue was $48.8 million, an increase by 46% compared to Q1 2024. 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 pre-existing multi-year 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.

Geoff Porges
CFO at Schrödinger

On-prem software increased by 44% to $25.4 million, and hosted revenue grew by 52% to $10.9 million. 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. Professional services revenue declined by 31% as service contracts from prior periods were completed, and contribution revenue was $3.8 million this quarter as we continue to recognize revenue from the Gates-funded predictive toxicology project. Drug discovery revenue was $10.7 million compared to $3.2 million 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 $13.5 million in Q1 compared to $8 million in Q1 of 2024. The increase was due to the expenses associated with the Gates predictive toxicology 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 2024. 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 $9.7 million to $14.9 million, with the increase being driven by the high cost associated with the initiation of work on the projects in the Novartis collaboration, as well as increased allocation of research staff to collaborations overall. Our overall gross margin was 52% and was very similar to the overall gross margin in Q1 2024. R&D expense declined from $50.6 million in Q1 last year to $46 million in Q1 2025.

Geoff Porges
CFO at Schrödinger

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 $10.4 million based on slightly higher FTE expenses. G&A increased by 1% to $25.8 million, driven by slight increases in professional services. Total operating expenses were $82 million compared to $86 million in Q1 2024. The reduction was mainly due to lower R&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 million based on the mark-to-market of our shareholding in Structure Therapeutics. This compares to a gain in value of $8 million in Q1 of 2024.

Geoff Porges
CFO at Schrödinger

Other income was $4.2 million in Q1 compared to $5 million in Q1 2024. 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 $8.9 million compared to a gain of $13 million in Q1 last year. Taxes were minimal, resulting in net loss after taxes of $60 million or $0.82 a share compared to a net loss after taxes of $54.7 million or $0.76 per diluted share in Q1 2024. The fully diluted share count for Q1 was 73 million compared to 72.3 million in Q1 2024. Our net operating cash flow was $144 million in Q1 compared to cash use of $39 million in Q1 2024.

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 million between year-end and March 31, and as a result, our cash and marketable securities balance increased from $367 million on December 31 to $512 million at the end of Q1. Current liabilities decreased by 14%, and total deferred revenue declined by 5% and remains $210 million. I will now provide some comments on the risks and opportunities for our business associated with the ongoing political and economic uncertainty. Schrödinger's technology and business is built on a licensing and use platform. As such, at the present time, we do not expect any direct impact on our revenue outlook from U.S. tariffs.

Geoff Porges
CFO at Schrödinger

It is unclear what form 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 impact they could have on industry profitability. At this stage, we are not encountering resistance or reluctance to purchase in our customer conversations, but of course, we are watching carefully for new policies or regulations that might affect the industry's outlook and R&D investments. Our direct exposure to revenue from China is small, with a low single-digit % of our revenue for software in 2024 coming from entities based in China.

Geoff Porges
CFO at Schrödinger

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. 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 and 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.

Geoff Porges
CFO at Schrödinger

Finally, currency has been a drag on our reported revenue growth from ex-U.S. markets for several years, 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%-15% and expect drug discovery revenue to be in the range of $45 million-$50 million.

Geoff Porges
CFO at Schrödinger

We continue to expect our full-year software gross margin to be in the range of 74%-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. 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 million-$42 million. 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, Schrödinger had an excellent Q1 with strong financial performance building on the positive announcements from Q4 and early in Q1.

Geoff Porges
CFO at Schrödinger

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

Karen Akinsanya
Karen Akinsanya
President of R&D Therapeutics at Schrödinger

Thank you, Geoff, 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 Ramy mentioned, this is a pivotal year for Schrödinger, with initial phase I clinical data expected across three proprietary programs. Beginning with SGR-1505, our MALT-1 inhibitor, our phase I trial in patients with relapsed refractory 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.

Karen Akinsanya
Karen Akinsanya
President of R&D Therapeutics at Schrödinger

We plan to provide initial data describing the clinical profile of SGR-1505. This data cut will include safety, pharmacokinetic, and pharmacodynamic data across doses and schedules, as well as PK/PD 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. The EHA poster will include additional data collected after the cutoff 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 SGR-2921 and of our Wee1/Myt1 co-inhibitor SGR-3515. SGR-2921 is advancing in a dose escalation study in patients with acute myeloid leukemia or myelodysplastic syndrome.

Karen Akinsanya
Karen Akinsanya
President of R&D Therapeutics at Schrödinger

We are also evaluating SGR-3515 in patients with advanced solid tumors predicted to be sensitive to Wee1/Myt1 inhibition, including ovarian, uterine, and breast cancer, in addition to other solid tumors. These studies are progressing well, with multiple dose escalation steps completed. As with the SGR-1505 phase I trial, the goal of the 2921 and 3515 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 SGR-3515 showed improved anti-tumor activity in preclinical models compared with other known Wee1 and Myt1 inhibitors. We also presented preclinical data showing how the dosing schedule for SGR-3515 can be optimized to preserve efficacy while also allowing for complete recovery from target-related side effects.

Karen Akinsanya
Karen Akinsanya
President of R&D Therapeutics at Schrödinger

Additionally, at AACR last week, we reported preclinical data for SGR-4174, 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 SGR-4174 in GLP-tox studies, support 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 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 Ramy.

Ramy Farid
Ramy Farid
CEO 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.

Geoff Porges
CFO at Schrödinger

Operating, can you queue up the questions?

Ramy Farid
Ramy Farid
CEO at Schrödinger

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

Geoff Porges
CFO at Schrödinger

Operator, can you allow us to speak, and we will read out the questions as they're submitted to us by email?

Operator

Pardon the delay. We are now going to start the Q&A session. If you have dialed in and would like to ask a question, please press star followed by the number one on your telephone keypad. If you would like to withdraw your question, simply press star one again. If you are called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Thank you. The first question comes from the line of Michael Yee with Jefferies. Please go ahead.

Michael Yee
Michael Yee
Managing Director at Jefferies

Hey, guys. Great. Thanks for taking two questions. One is thinking about your first-ever presentation of your wholly owned drug MALT-1 coming up soon. Maybe we'll guess which conference it is. Can you right-size our expectations around any meaningful single-agent activity? Do you expect it? What is good? 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. The second question is financial, maybe for Geoff. You've given guidance on cash burn this year, which is fantastic. If you continue to want to push forward on R&D for your cancer drugs, should we expect that that should be a consideration for growing expenses and growing burn? Would you consider other options, and when is the right time to partner?

Michael Yee
Michael Yee
Managing Director at Jefferies

Those are two important questions as we come up on this data. Thank you.

Karen Akinsanya
Karen Akinsanya
President of R&D Therapeutics at Schrödinger

First of all, on the 1505 update, we are very pleased that we have both EHAR and ICML abstracts. With respect to what we plan to share, we're really excited to share an update on the profile of SGR-1505. 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 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 cut of the data, which will be in the abstract, and then obviously an update once the poster is presented in the middle of June.

Geoff Porges
CFO at Schrödinger

Mike, to your question about cash burn, we have not guided to cash burn for next year, but I really think that we are in a position where we are maintaining optionality with respect to all three of the leading programs. As Karen pointed out, these are interim looks at ongoing phase I studies, and those phase I studies do not finish at the end of the calendar year. I do not 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. Without sort of giving a specific guidance or range for next year, I think that we are in very good shape, and I do not see a significantly greater draw on our cash next year than the investment we are making in expenses this year.

Michael Yee
Michael Yee
Managing Director at Jefferies

Perfect. Thank you.

Operator

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

Brendan Smith
Brendan Smith
Director of Life Science and Diagnostic Tools, and Biotech Analyst at TD Cowen

Great. Thanks for taking the questions, everyone, and congrats in the corner. I did want to actually ask about the upcoming predictive tox model that you've referenced a few times now. When you look at what FDA's 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 stimulators that are out there today? Any thoughts on how you might price this software relative to the existing offerings that you have? Thanks.

Ramy Farid
Ramy Farid
CEO at Schrödinger

Sure. Yeah. 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 prospective way on our collaborative and proprietary programs. 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. We think that's what the differentiation is. Accuracy is the key.

Brendan Smith
Brendan Smith
Director of Life Science and Diagnostic Tools, and Biotech Analyst at TD Cowen

Okay. Great. Any thoughts on how you might price it relative to what you do today?

Ramy Farid
Ramy Farid
CEO at Schrödinger

Yeah. We have not talked about pricing. As we often do with solutions like this, is first get feedback from customers 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. We will start to get that feedback and make a determination on the pricing following the results of the beta testing.

Brendan Smith
Brendan Smith
Director of Life Science and Diagnostic Tools, and Biotech Analyst at TD Cowen

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

Ramy Farid
Ramy Farid
CEO at Schrödinger

Thanks.

Operator

The next question comes from the line of Mani Foroohar with Leerink Partners. Please go ahead.

Mani Foroohar
Mani Foroohar
Senior Managing Director of Genetic Medicines at Leerink Partners

Thanks for 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 with customer dynamics. They've pointed to large pharma companies delaying decision-making and some smaller players facing budget constraints. 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? I have a quick follow-up.

Geoff Porges
CFO at Schrödinger

Sure. Hi, Mani. Yeah. Obviously, we're paying close attention to what's going on in the marketplace with all the noise. I highlighted in my prepared remarks the small sort of emerging biotech segment, that's not growing. I think we're sort of level-pegging in terms of the customers that are growing is offsetting the customers that are declining. The new customers are offsetting the customers who are terminating their contracts and scaling back on their R&D. I'd say we're holding our ground there, and the growth is being driven by the large accounts. Interestingly, we are not seeing any bumps or pushback on our renewals. 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 the issues that we're seeing right now, but for their own reasons because of their portfolio status and things. We think that the level of spend on our software is small compared to the scale of their R&D budgets. I think they generally view this as necessary to have, not nice to have. For those reasons, we aren't seeing that pushback, and that's consistent with the guidance that we maintain. Hopefully, that's helpful.

Mani Foroohar
Mani Foroohar
Senior Managing Director of Genetic Medicines at Leerink Partners

That is. You have told me approximately 1,100 times that Schrödinger is not an AI company, but is a company that natively uses AI. That being the case, obviously, we have seen a lot of concerns around incumbents' industry being disrupted by AI fast followers, etc., even companies as large as Google/Apple in today's news. How do you think about threats that you might face from companies native to AI that are also native AI users? How do you think about threats to your base business or growth? What metrics do you follow to make sure that you are defending yourself from these emerging threats most effectively?

Ramy Farid
Ramy Farid
CEO at Schrödinger

Yeah. Thanks for the question. 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. 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. I think we've addressed that very well by developing—first of all, remember, we have tens of thousands of users of our software. We have all these internal programs that we're working on. We have a really good understanding of what's required to advance programs and what's required to make accurate predictions.

Ramy Farid
Ramy Farid
CEO at Schrödinger

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 going to change. That's a fundamental fact of machine learning, whether it applies to ChatGPT, LLMs, self-driving cars, image processing, or chemistry. Machine learning is only as powerful as the training sets. 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 35 years. I think the key is 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 physics, but also, of course, in machine learning and AI.

Mani Foroohar
Mani Foroohar
Senior Managing Director of Genetic Medicines at Leerink Partners

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

Ramy Farid
Ramy Farid
CEO at Schrödinger

Thanks, Mani.

Operator

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

Evan Seigerman
Evan Seigerman
Managing Director and Head of Healthcare Research at BMO Capital Markets

Hi, guys. Thank you so much for taking my questions. I want to follow up on some comments that you made, Geoff, around your conversations with your pharma partners. Let me ask differently. What could break their sentiment and maybe change their approach to investing in a platform like yours? What are they really looking for? 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 this space that contributes to this goal? Thank you so much.

Ramy Farid
Ramy Farid
CEO at Schrödinger

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

Ramy Farid
Ramy Farid
CEO at Schrödinger

What we're finding is, of course, we've succeeded 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 sort of break that cycle 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. We think that's going to start to have a really big impact on transforming the industry and how companies deploy this technology at scale. That's what it is. It's impact.

Ramy Farid
Ramy Farid
CEO at Schrödinger

That can either come internally from them using it themselves or, of course, by attending scientific conferences and seeing the impact that other companies that have scaled up and are willing to talk about it. That is just happening right now. I think the other question you asked was about predictive tox, but I do not remember.

Geoff Porges
CFO at Schrödinger

FDA animal testing?

Ramy Farid
Ramy Farid
CEO at Schrödinger

Yeah.

Geoff Porges
CFO at Schrödinger

FDA's guidance on animal testing and what we have already that refreshes that?

Ramy Farid
Ramy Farid
CEO at Schrödinger

Oh, okay. Yes, because we didn't—yeah, sure, of course. Yes, obviously, the predictive tox initiative that we've been focusing on is going to have, we think, a really dramatic impact on that. Like we said, we're already seeing a pretty big impact from that on our collaborative and proprietary programs. There are many, many properties of molecules that dictate the success in preclinical studies and animal studies and even in the clinic. We have many solutions in that area: bioavailability, oral bioavailability, solubility, even efficacy, by the way. Efficacy has a big impact on therapeutic window. That is also something that is going to have a really big impact on the success in preclinical and clinical studies.

Ramy Farid
Ramy Farid
CEO at Schrödinger

In the area of predictive tox 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 hERG, which is an ion channel that has disrupted preclinical and clinical trials quite a bit by molecules binding to it. We already have solutions available for predicting selectivity against some of the really bad actors, like hERG is a good example. Of course, the predictive tox project is meant to scale that one or two off-targets that we already have to hundreds. That is the goal of the project.

Operator

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

Michael Ryskin
Michael Ryskin
Managing Director at Bank of America

Hey, thanks, guys. Congrats on the quarter's strong start to the year. I want to follow up on one of the earlier questions that kind of touched on opportunity for incremental spend, but I want to phrase it differently. I 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 MALT-1, CDC7, the various programs that are already in the clinic where you've got phase I readouts upcoming this year, but you've also got a pretty healthy pipeline, a lot of which you haven't disclosed openly.

Michael Ryskin
Michael Ryskin
Managing Director at Bank of America

Just talk about, given the balance sheet and the $150 million you've brought in from Novartis, thoughts on sort of broadening that pipeline, moving more programs to sort of your ability to scale your R&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 sort of balance sheet and the cash use, and then Carol will talk about some of the preclinical programs. You're right. We are continuing to make a significant investment in identifying and advancing more proprietary preclinical programs that, in effect, sort of backfill the existing clinical programs. That's an investment that we plan to continue. I don't foresee that investment having to step up materially. The research group has been very productive already. 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're not sensing that we need to make that much larger.

Geoff Porges
CFO at Schrödinger

I think that we're, as I said in response to the earlier question, we're in pretty good shape in terms of our expense outlook for the next couple of years, not just this year. Therefore, 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. Karen, maybe you want to talk about the programs?

Karen Akinsanya
Karen Akinsanya
President of R&D Therapeutics at Schrödinger

Yeah, certainly. As you've heard, at AACR, 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. 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. I also want to emphasize something that Geoff 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.

Karen Akinsanya
Karen Akinsanya
President of R&D Therapeutics at Schrödinger

Those programs actually have already been funded to some degree through the next stages, and we have a ready-made partner as those programs conclude discovery. Obviously, those will not necessarily be transparent because they're partnered already, 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. I think, yeah, more to come over time.

Michael Ryskin
Michael Ryskin
Managing Director at Bank of America

Okay. That's all really helpful. For my follow-up, I hate asking this question, but I still want to make sure I get it right. It's going to be about 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. Think about it on a more 12-month basis. Still, 1Q software came in a little bit better than the guide and than we had expected. 1Q drug discovery came in a little bit better. Geoff, I think I caught in your prepared remarks saying that you expect drug discovery for the rest of the year to be a little bit more even throughout the year, 2Q, 3Q, 4Q. You guided to about $40 million at the midpoint on software.

Michael Ryskin
Michael Ryskin
Managing Director at Bank of America

Just in terms of 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 and unpredictability, 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 understand the sort of background. We've been talking about the transition to hosted revenue for some time, and that puts a base into our revenue, particularly in the early quarters of the year. I think you were seeing that consistently in the early quarters were north of 20% of our software revenue coming from hosted contracts. That base is going to continue to build. That will help Q1, 2, and 3. We still think that the majority of the remaining revenue for the year will come in the fourth quarter. If I was looking ahead, I'd be saying that maybe there was 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.

Geoff Porges
CFO at Schrödinger

It is still going to be our largest quarter. With respect to drug discovery, yeah, I do not want to get into guiding to individual quarters for drug discovery, but I think it is reasonable to assume that the balance to our guide is spread out through the remainder of the year. As you know, that revenue is a mixture of recognizing over an extended period of time the upfront payments associated with contracts such as Novartis, and that, of course, is going to build. Recognizing smaller milestones as they come along, and in some cases, large milestones when they occur. Those large milestones, if we have confidence about them, we will be including in our guidance. That is the way I would think about it.

Michael Ryskin
Michael Ryskin
Managing Director at Bank of America

Okay. Very helpful. Thanks a lot.

Operator

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

Scott Schoenhaus
Scott Schoenhaus
Managing Director and Equity Research Analyst at KeyBanc

Hey, team. Thanks for taking my question. I guess it's really a follow-up, Geoff, on that last question. You noted a large customer pushed forward a renewal. I'm assuming that would have happened in fourth quarter. Can you maybe give us color on why that customer decided to do that? As the second part of that, was that contract renewal shifted to a hosted versus on-prem? Thanks.

Geoff Porges
CFO at Schrödinger

Yeah. Good question. That particular contract had multiple elements to it. Most of the renewal occurred in the fourth quarter, and there was a part of that contract that was stood up and renewed in the first quarter. That contributed principally to, well, it contributed a portion of the growth in the on-prem revenue in Q1 compared to the prior year. Separately, on the drug discovery side, of course, there was a significant step up as we started to recognize the upfront payment of the Novartis upfront contract. Once we geared up the work on those projects, we saw that revenue start to be recognized, and that will continue throughout the duration of that contract.

Scott Schoenhaus
Scott Schoenhaus
Managing Director and Equity Research Analyst at KeyBanc

Thanks. Following up on just the 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? Is it broad-based in large pharma also coming to you guys? Just curious about sort of how broad-based that demand is. Thanks.

Ramy Farid
Ramy Farid
CEO at Schrödinger

Yeah, yeah. What we can tell you is that since that announcement in early April, we have had inbound interest 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. I think there's excitement because, of course, they're hearing that we've enabled already 50 targets and that the beta is coming out soon. 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 asking? No, you're not asking that. Okay. Good. Just the predictive talk. Go ahead, Geoff.

Scott Schoenhaus
Scott Schoenhaus
Managing Director and Equity Research Analyst at KeyBanc

No, I was just seeing if demand, yeah.

Ramy Farid
Ramy Farid
CEO at Schrödinger

Yeah. What I said answered your question, right?

Scott Schoenhaus
Scott Schoenhaus
Managing Director and Equity Research Analyst at KeyBanc

Yeah.

Ramy Farid
Ramy Farid
CEO at Schrödinger

Or no? Good.

Scott Schoenhaus
Scott Schoenhaus
Managing Director and Equity Research Analyst at KeyBanc

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

Ramy Farid
Ramy Farid
CEO at Schrödinger

Yeah. I'm not sure I would call it demand. I would say significant interest in the solution from biotech companies. I think the pharma companies were already so deeply engaged in those discussions. We've already been talking to them for quite a while, actually, about this. Nothing has changed. We've been talking to them about it since last year, actually, when the grant was actually announced, the significant grant from the Gates Foundation. That interest is already there. What's built up since that announcement is now continued interest even from smaller companies. Yeah.

Scott Schoenhaus
Scott Schoenhaus
Managing Director and Equity Research Analyst at KeyBanc

Got it. Thanks.

Ramy Farid
Ramy Farid
CEO at Schrödinger

Yep.

Operator

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

Vikram Purohit
Vikram Purohit
Equity Research Analyst at Morgan Stanley

Hi. Good afternoon. Thanks for taking our questions. We had two. First, on the small one data expected in the next couple of months here, understood that it's regarding to it being a 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? I know investors often try to draw a sense of platform potential and R&D productivity from one molecule to another. I just was curious if you have any thoughts on what this data set from the first read might tell you about other molecules. Secondly, on business development and partnerships outside of your currently internal oncology programs, what is your appetite towards BD broadly throughout the year?

Vikram Purohit
Vikram Purohit
Equity Research Analyst at Morgan Stanley

Are there specific therapeutic areas that you would find more interesting than others? Thanks.

Karen Akinsanya
Karen Akinsanya
President of R&D Therapeutics at Schrödinger

First of all, on the clinical update, we are sharing initial data, as you point out, monotherapy dose escalation study in B-cell malignancies for SGR-1505. We will be sharing, as we said earlier, safety, PK, and PD. We think the PD is really important. It lets us tie back to the healthy volunteer study, the results we saw there, and now assess that in patients. It is an early read. It is across multiple dose levels, multiple different tumor types. It is just that initial read, but we are excited to share the update. Your second part of the question with respect to how this reads through potentially to the other studies, I will say that MALT-1 was our first R&D. Therefore, it is a bit more advanced than the others.

Karen Akinsanya
Karen Akinsanya
President of R&D Therapeutics at Schrödinger

What we are proposing to share across all three of these programs is really just the initial profiles of these compounds. MALT-1 is more advanced. We've obviously accumulated a bit more data there. That will be the first one that we share. Later this year, we'll have the opportunity to share an update on, I would say, just the preliminary, again, PK, PD, safety. 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. While CDC7 and MALT-1 are both hemo, they are in different settings. AML versus B-cell malignancy. It's very difficult to compare and contrast there.

Karen Akinsanya
Karen Akinsanya
President of R&D Therapeutics at Schrödinger

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. That will be something we can comment on as we go through the year here. With respect to BD, I mean, I think we say this often, but it's correct that we are constantly in conversation because of the nature of Schrödinger, obviously, having a platform that is embedded so broadly across the industry. We're constantly in conversation with other companies. That is across disease areas. I think you're aware that we have programs across many disease areas, including immunology and our whole line pipeline. We are partnering across disease areas historically across the deals that we've done.

Karen Akinsanya
Karen Akinsanya
President of R&D Therapeutics at Schrödinger

I mean, I think I've said in the past that neuro is a tough space with respect to translation because there aren't great benchmarks in the clinic or on the approved landscape. We like to do those types of targets, neuro targets in particular, in collaboration. That doesn't restrict us from collaborating across all different therapeutic areas.

Vikram Purohit
Vikram Purohit
Equity Research Analyst at Morgan Stanley

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

Operator

Once again, if you are dialed in and would like to ask a question, please press star followed by the number one on your telephone keypad. The next question comes from the line of David Lebowitz with Citi. Please go ahead.

Ike Lee
Ike Lee
Biotech Equity Research Analyst at Citi

Hi there. This is Ike Lee on for David Lebowitz. 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. 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 pre-mentioned toxicology products and other software products in the future, what do you expect gross margins will be on the software side? 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

Okay. I'll jump in 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 tox project. We had signaled that that revenue contribution was going to negatively affect gross margin for the period, but we are recognizing that revenue and funding that project. Currently, I think we're expecting that to be mostly completed by the middle of next year, unless, of course, it's extended for some reason, which would be fine too.

Geoff Porges
CFO at Schrödinger

Over the longer term, I would expect the gross margin to be similar to that range that you mentioned or perhaps slightly better 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 a slight—I am not talking about multiple percentage points, but a slight increase in that gross margin performance.

Ramy Farid
Ramy Farid
CEO at Schrödinger

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

Operator

It seems that there are no further questions at this time. That concludes today's question and answer session and today's conference call. You may now disconnect or relax at this time.

Executives
Analysts
    • Vikram Purohit
      Equity Research Analyst at Morgan Stanley
    • Evan Seigerman
      Managing Director and Head of Healthcare Research at BMO Capital Markets
    • Brendan Smith
      Director of Life Science and Diagnostic Tools, and Biotech Analyst at TD Cowen
    • Jaren Madden
      SVP of Investor Relations and Corporate Affairs at Schrödinger
    • Mani Foroohar
      Senior Managing Director of Genetic Medicines at Leerink Partners
    • Ike Lee
      Biotech Equity Research Analyst at Citi
    • Michael Ryskin
      Managing Director at Bank of America
    • Michael Yee
      Managing Director at Jefferies
    • Scott Schoenhaus
      Managing Director and Equity Research Analyst at KeyBanc
    • Geoff Porges
      CFO at Schrödinger
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