Q3 2020 Schrodinger Inc Earnings Call

Ladies and gentlemen, good morning, and welcome to the short end of third quarter 2020 earnings Conference call.

Operator: Ladies and gentlemen, good morning and welcome to the Schrodinger 3rd Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode.

At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference call is being recorded it is now my pleasure to turn the call over to the short Shorting Ritchie. Please go ahead.

Operator: A question and answer session will follow the formal presentation. As a reminder, this conference call is being recorded. It is now my pleasure to turn the call over to the Schrodinger team. Please go ahead.

Thank you operator, and thank you all for listening in on our third quarter financial results call. Today, you will hear from really three president and Chief Executive Officer, Karen I can Sarnia chief medical scientists from head of discovery, R&D and Joe Lebel, Our Chief Financial Officer.

Unknown Executive: Thank you, Operator, and thank you all for listening in on our third quarter financial results call. Today, you will hear from Ramy Farid, President and Chief Executive Officer. Karen Akinsanya, Chief Biomedical Scientist and Head of Discovery R&D, and Joel Lebowitz, our chief financial officer. Before we begin, I'd like to remind you that management will make statements related to our business that are forward-looking and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1999, including, without limitation, statements related to the potential advantages of our, Our Strategic Plan to Accelerate the Growth Risk related to the COVID-19 pandemic, our expectations related to the use of our cash, cash equivalents, and marketable securities, as well as our future operating performance. These forward-looking statements reflect our current views about our plans, intentions, expectations, strategies, and objectives.

Before we begin I'd like to remind you that management will make statements related.

Our business that are forward looking and you made pursuant to the sea Harbor provisions of the private Securities Litigation Reform Act of 19 anything.

Including without limitation statements related to potential advantages of our platform our strategic plans to accelerate the growth of our software business and advance our collaborative and into drug discovery programs, which is related to the Coca 19 engineering.

Expectations related to the use of our cash cash equivalents and marketable securities as well as ever future operating expenses. These forward looking statements reflect our current views about our plans intentions expectations strategies and prospects, which are based on the information currently available to us and on assumptions. We have made actual results may differ materially from those described in the forward looking statements.

Unknown Executive: So based on the information currently available to us and on assumptions... results may differ materially for those and are subject to a variety of assumptions, uncertainties, and risks that are beyond our control, including the demand for our software. Our ability to further develop our computational, Reliance upon our Drug Discovery Collaborators and other risks detailed under the Caption Risk Factors and elsewhere in our most Securities and Exchange Commission Filings, as required by law, we undertake no duty or obligation to update any forward-looking statements discussed on this call as a result of new information, future events, changes in expectations, or. These forward-looking statements should not be relied upon as representing our views as of any With that, I'd like to turn the call over to you.

And are subject to a variety of assumptions uncertainties risks and factors that are beyond our control, including the demand for our software solutions, our ability to further develop our computational platform reliance upon our drug discovery collaborators and other risks detailed under the caption risk factors and elsewhere in our most recent securities and Exchange Commission filings and reports.

Except as required by law, we undertake no duty or obligation to update any forward looking statements discussed on this call as a result of new information future events changes in expectations or otherwise. These forward looking statements should not be relied upon as representing our views as of any date subsequent to today with that I'd like to turn the call over to Ronnie Thanks and thank.

Ramy Farid: Thanks, and thank you everyone for joining the Schrodinger Call to review our most recent financial results. We had a very strong third quarter, building on the momentum of the first half of this year. As you ll hear from Karen shortly, we re making excellent progress on our pipeline as we prepare to initiate IND-enabling studies for our most advanced programs, and we also achieved important milestones in several of our collaborative programs. Also, as Joel will describe later on the call, we saw very strong revenue growth in our software business. We also continue to make excellent progress on the science that underlies our computational platform, which fuels both our drug discovery and software business. In the third quarter, we successfully raised $347 million in gross proceeds in a follow-on equity offer.

Hi, everyone for joining the Schrodinger call to review our most recent financial results. We had a very strong third quarter building on the momentum of the first half of this year.

As you'll hear from Karen shortly we're making excellent progress on our pipeline as we prepare to initiate I'd, enabling studies for our most advanced programs.

And we also achieved important milestones in several of our collaborative programs also.

Also as Joe will describe later on the call. We saw very strong revenue growth in our software business. We also continue to make excellent progress on the science that underlies our compensational platform, which feels both our drug discovery and software business.

In the third quarter, we successfully raised $347 million in gross proceeds in a follow on equity offering combined with the capital raised from our IPO in the first quarter. We raised a total of 579 million in gross proceeds this year, providing us with balance sheet strength and strategic Optionality.

Ramy Farid: Combined with the capital raised from our IPO in the first quarter, we raised a total of $579 million in gross proceeds this year, providing us with balance sheet strength and strategic optionality. We achieved total revenue of $25.8 million in the 3rd quarter, which represents 29% growth over the 3rd quarter of 2019. Underpinning this top-line growth was software revenue of $22.9 million, an increase of 42% compared to the third quarter last year.

We achieved total revenue of 25.8 million in the third quarter, which represents 29% growth over the third quarter of 2019 underpinning. This top line growth was software revenue of 22.9 million, an increase of 42% compared to the third quarter last year.

Ramy Farid: We continue to see deeper engagement with our platform by our customers, leading to this strong year-over-year growth in our software revenue. Our talented team of scientists and software developers continues to make significant progress in advancing the science that underlies our computational platform. We've recently published several papers describing advances in FEP+, including improved methods for accurately modeling binding affinities in metalloenzyme inhibitors, improved support for macrocycle design and optimization, and improved approaches to optimizing binding selectivity, which is a major way of reducing the potential toxicity of drug molecules.

We can tell.

Tenure to see deeper engagement with our platform by our customers leading to the strong year over year growth in our software revenue.

Our talented team of scientists and software developers continues to make significant progress in advancing the science that underlies our computational platform. We've recently published several papers describing.

Vance isn't EFI, plus including improved methods for accurately modeling binding affinities and Mattel will enzyme inhibitors improved supportive macro cycle design and optimization and improved approaches to optimizing binding selectivity, which is a major way of reducing potential toxicity of drug molecules.

Ramy Farid: We also released our active learning workflow for structure-based hit discovery, which can screen massive libraries of compounds with greatly improved computational efficiency. And finally, I'm pleased to report that despite the challenges of COVID-19, we are successfully engaging both existing customers and potential new customers and advancing our drug discovery programs and those of our collaborators. We're also executing on our hiring plan and continuing to add highly talented scientists and software developers to our already impressive team. We're excited by the many advances we've made as we continue to transform the way therapeutics and materials are discovered. I'll now turn the call over to Karen for an update on our drug discovery program. Thank you, Ramy, and good morning, everyone.

We also released our.

It of learning work flow for structure based hit discovery, which can screen massive libraries of compounds with greatly improved computational efficiency.

And finally I'm pleased to report that despite the challenges of COVID-19, we are successfully engaging both existing customers and potential new customers and advancing our drug.

ACA reprograms and those of our collaborators were also executing on our hiring plan and continue to add highly talented scientists and software developers to our already impressive ranks worksite.

Were excited by the many advances we made as we continue to transform the way therapeutics and materials are discovered I'll now turn the call over.

To Karen for an update on our drug discovery programs. Thanks.

Thank you Rami and good morning, everyone.

Karen Akinsanya: During the third quarter, we continued to make important advances on many fronts across our internal pipeline and portfolio of collaborative programs. The rapid pace at which these programs are advancing is a direct result of the hard work of our research teams, combined with the power of our platform. We have seen new drug candidates discovered in our collaborative programs progress into IND-enabling and first in human studies. We believe these advancing programs represent examples of the impact of our physics-based methods, not just in achieving broad exploration of chemical space but, more importantly, in the optimization of high-quality development candidates with balanced properties for clinical testing. As an example, Morphix Morph 057 for inflammatory bowel disease, which initiated a clinical trial in the third quarter, is one of several examples where Schrodinger technology enabled solutions to our partners' preclinical design challenges. In this case, the design of selective compounds for the integrin alpha-4-beta-7 was enabled by an important advance in our force field to properly treat the receptor's metal centers.

During the third quarter, we continued to make important advances on many fronts across our internal pipeline and portfolio of collaborative programs the rapid pace at which the programs are advancing as a direct.

The result of the hard work of our research team combined with the power of our platform.

We have seen new drug candidates discovered in our collaborative programs progress into R&D, enabling and first in human studies.

We believe these advancing programs represent examples of the.

Impact of our physics based methods not just in achieving broad exploration of chemicals space, but more importantly on the optimization of high quality development candidates with a balanced properties for clinical testing.

As an example, more fixed more 057.

For inflammatory bowel disease, which initiated a clinical trial in the third quarter is one of several examples where shredding a technology enabled solutions to our partners preclinical design challenges.

In this case the design of selective compounds for the integration Alpha four beta seven.

Was enabled by an important advance in our false failed to properly treat the receptors metal centers.

In our second quarter call, we reported a significant increase in the number of collaborative programs that had reached the later stages of drug discovery.

Karen Akinsanya: In our second quarter call, we reported a significant increase in the number of collaborative programs that had reached the later stages of drug discovery; we expect to see many of the collaboration programs in lead optimisation enter preclinical development over the next year. Turning now to our internal pipeline, as a reminder, starting in the second half of 2018, we launched five oncology programs targeting solid tumors and haematological malignancies. The preclinical data packages we have assembled to date include mechanistic validation and anti-tumour activity data. We believe, based on the data generated to date, that each of these assets could have monotherapy activity in specific populations, as well as utility in combination with other approved and late-stage oncology products. As the field of KRAS inhibition continues to make major advances in the clinic, our Advancing SOS-1 Inhibitor Program for potential use in combination with KRAS inhibitors also continues to advance preclinically.

We expect to see many of the collaboration.

Programmed in lead optimization into preclinical development over the next year, turning now to our internal pipeline.

As a reminder, starting in the second half of 2018, we launched five oncology programs targeting solid tumors and Hematological malignancies.

The preclinical data packages, we have assembled to date include mechanistic validation and anti tumor activity data.

We believe based on the data generated to date, but each of these assets could have monotherapy activity in specific populations as well as utility in combination with other.

Approved and late stage oncology products.

As the field of K RAF inhibition continues to make major advances in the clinic, our advancing source one inhibitor program for potential use in combination with K Ras inhibitors also continues to advance pre clinically.

Karen Akinsanya: We believe that combining these two mechanisms has the potential to provide meaningful improvements in durable responses in patients with tumours harboring mutant KRAS. Our MOLT1 program is focused on developing novel allosteric MOLT1 inhibitors to treat relapsed or resistant lymphomas. We have observed similar tumor growth inhibition in in vivo preclinical studies when compared to data from activated B-cell diffuse large B-cell lymphoma, or ABCDL-BCL, xenograft models reported by Janssen at AACR for their clinical stage MOLT1 inhibitor compounds. We have confirmed plasma IL-10 and tumor BCL-10 as robust PD markers in PK-PD studies in both OCI-LY3 and OCI-LY10 tumor-bearing mice.

We believe the combined.

Finding these two mechanisms has the potential to provide meaningful improvements in durable responses in patients with tumors harboring mutant K Ras our moat. One program is focused on developing novel Alastair Merrick, not one inhibitors to treat relapsed or resistant lymphomas.

We have obviously.

Similar tumor growth inhibition in in vivo preclinical studies when compared to data from activated b cell diffuse large b cell lymphoma, or a b C. D. Our bcl xenograft models reported by Anthony HCR for their clinical stage moat, one inhibitor compound.

We have confirmed plasma I, all 10, and Cima Bcl 10, as robust PD markers in PK PD studies in both OCI L.Y., three and those C.I.L.Y. tend tumor bearing mice.

Dose dependent tumor growth inhibition was observed in Oh.

Karen Akinsanya: Dose-dependent tumor growth inhibition was observed in an OCI-LY3 xenograft model, with improved anti-tumor activity also observed in combination with venetoclax and ibrutinib, which are approved BCL2 and BTK inhibitors, respectively. Our physics-based software platform helped to accelerate compound optimization in our MORT1 program, enabling candidate selection in under two years. Data from our MORT1 program will be presented at the upcoming American Society of Haematology meeting on December 5th. In addition, targeting proteins that play important roles in DNA replication and replication stress is gaining momentum as a new class of anti-cancer therapeutics.

See I L Y three xenograft model with improved anti tumor activity also improved observed in combination with Venetoclax and Ibrutinib, which are approved bcl, two and BTK inhibitors, respectively.

The physics based software platform helped to accelerate compound optimal.

As I shared in our more one program, enabling candidate selection in under two years data from our more one program will be presented at the upcoming American Society of Hematology meeting on December fair.

In addition, targeting proteins that play important roles in DNA replication and replicates.

Patients stress is gaining momentum as a new class of anticancer therapeutics recently.

Karen Akinsanya: Recent monotherapy data for third-party clinical stage V1 inhibitors, reported at ASCO, and mechanistic studies for CDC7, published in Science Advances, provide important validation for these targets. Preclinical in vivo PKPD performance of our next generation PLK1 sparing B1 compounds and CDC7 inhibitors relative to benchmark compounds leads us to believe that we are well positioned to achieve differentiated profiles and dosing regimens in the clinic Target engagement data obtained during the last quarter with multiple of our CDC7 inhibitor chemical series triggered solid tumor and haematological xenograft studies that we expect will position us for future clinical combinations in both indication types. In the case of WE1, we have observed robust PK-PD relationships, including the PD biomarkers phosphorylated Cdc2, gamma H2AX, and phosphohistone H3. Superior target engagement has been observed relative to clinical benchmark compounds in both OVCAR3, a cyclin E amplified high-grade serious ovarian cancer model, and in A427, a KRAS mutant non-small-cell lung cancer derived CDX models.

Recent monotherapy data for third party clinical stage, we want inhibitors reported at ASCO and mechanistic studies for C. D. Seven published in science advances provide important validation for these.

Targets.

Preclinical in vivo PK PD performance of our next generation P.L.K., one sparing be one compounds and CDC seven inhibitors relative to benchmark compounds lead us to believe that we are well positioned to achieve differentiated profile and dosing regimens in.

In the clinic.

Target engagement dates are obtained during the last quarter with multiple of our CDC seven inhibitor chemicals series triggered solid Cima and Hematological demographic studies that we expect will position us for future clinical combinations in both indication types.

In.

So if we want we have observed robust PK PD relationships, including the PD Biomarkers phosphorylated CDC to gamma H., two x. and phosphate histone H three.

Superior targeting engagement has been observed relative to clinical benchmark compounds.

Both of Cadthree, a cycling E amplified high grade serious ovarian cancer model.

And in a four to seven K. kras mutant non small cell lung cancer derived cdx model.

Karen Akinsanya: From a pipeline perspective, we believe that novel and selective inhibitors identified across our programs over the last two years have significant potential as future monotherapies and as part of combination regimens that include important mechanisms such as PARP inhibitors, BTK, BCL2, and KRAS inhibitors. We are on track to initiate GLPTOC studies and regulatory interactions, including pre-IMD meetings with the FDA, for at least one of our programs in the first half of 2021. As these programs advance and transition to the next stage of development, we also expect to initiate new programs; we have prioritized several new program opportunities with genetic support in human cohorts and emerging pharmacology data in oncology and immunology. In addition to strategic hires in preclinical and early clinical development, we have also expanded our drug discovery team, adding key seasoned immunology expertise. In summary, our diverse portfolio of collaborative and internal programs is rapidly advancing toward the clinic. Activities to support the expansion of our pipeline into additional disease areas are well underway. We are extremely pleased with the overall progress and believe we have multiple value-creating opportunities ahead of us. I will now turn the call over to Joel. Thank you, Karen. Hello everyone.

From a pipeline perspective, we believe that novel and selective inhibitors identified across our.

Programs over the last two years have significant potential future monotherapy agent and as part of combination regimens that include important mechanisms such as PARP inhibitors, BTK Bcl, two and K Ras inhibitors.

We are on track to initiate GLP Tox studies.

Sales and regulatory interactions, including pre R&D meetings with the FDA for at least one of our programs in the first half of Twentytwenty one.

As these programs advance and transition to the next stage of development. We also expect to initiate new programs.

We have prioritized several new programs.

Janet Hayes with genetic support in human cohorts and emerging pharmacology data in oncology and immunology in.

In addition to a strategic hires in preclinical and early clinical development. We have also expanded our drug discovery team, adding key seasoned immunology X.

Teas.

In summary, our diverse portfolio of collaborative and internal programs is rapidly advancing towards the clinic active.

Activities to support expansion of our pipeline into additional disease areas are well underway.

We are extremely pleased with the overall progress.

Pets and believe we have multiple value, creating opportunities ahead of us I will now turn the call over to Joel.

Thank you Karen Hello, everyone I'm pleased to be speaking with you today about our third quarter results as Rami mentioned total revenue was 25.8 million in the third quarter up 29.

David Neil Lebowitz: I'm pleased to be speaking with you today about our third quarter results. As Ramy mentioned, total revenue was $25.8 million in the third quarter, up 29% versus the third quarter of 2019. This performance was driven by software revenue of $22.9 million, an increase of 42% over the third quarter of 2019. The growth in software revenue reflects the continuing trend of increased adoption of our solutions by large customers, as well as the addition of new customers. As was the case in the first half of the year, we experienced growth in both life sciences and materials science. We continue to see strong uptake in live design, our enterprise solution for drug discovery. LiveDesign integrates Discovery workflows and can be especially powerful in fully remote work environments that many of us are still experiencing.

10% versus the third quarter of 2019.

This performance was driven by software revenue of 22.9 million, an increase of 42% over the third quarter of 2019 the growth in software revenue reflects the continuing trend of increased adoption of our solutions by large customers as well as the addition of new.

Customers as was the case in the first half of the year, we experienced growth in both life Sciences and material science, we continue to see strong uptake in like design, our enterprise solution for drug discovery.

Like design integrates discovery workflows, and can be especially powerful and fully remote work environments than many of us are still is.

Sensing.

David Neil Lebowitz: In our Drug Discovery segment, we recorded revenue of $2.9 million in the quarter, down 24% versus the third quarter of 2019. As I've mentioned before, revenues in this segment will vary from period to period, as they primarily depend upon the timing of achieving specific program milestones. As you heard from Karen, our collaborative programs are continuing to progress, with the Morphix Alpha 4 Beta 7 program entering Phase 1 being a great example.

Our drug discovery segment, we recorded revenue of $2.9 million in the quarter down 24% versus the third quarter of 2019 as I've mentioned before revenues in this segment will vary period to period as they primarily dependent upon the timing of achieving specific program milestones.

As you heard from Karen our collaborative programs are continuing to progress more fix alpha four beta seven program entering phase one being a great example in.

David Neil Lebowitz: In addition to revenue from this segment, we recorded a non-cash equity gain of $18 million in the third quarter related to the successful IPO of one of our biotech equity holdings, Relay Therapeutics, demonstrating how we continue to drive value from our collaborations and partners. Before shifting to the rest of the P&L, I'd like to point out that our deferred revenue balance at the end of the quarter was $21.7 million, an increase of 13% compared to the end of the third quarter of 2019. As a result of the strong revenue performance in the quarter, total gross profit was $15.3 million, an increase of 43% versus the third quarter of 2019. Software gross margin was 81% this quarter, unchanged from the third quarter of 2019.

In addition to revenue from this segment, we recorded a noncash equity gain of $18 million in the third quarter related to the successful IPO of one of our biotech equity holdings relate.

Therapeutics, demonstrating how we continue to drive value from our collaborations and partnerships.

Before shifting to the rest of the piano I'd like to point out that our deferred revenue balance at the end of the quarter was $21.7 million, an increase of 13% compared to the end of the third quarter of 2019 as a result of the strong revenue performance.

In the quarter total gross profit was $15.3 million, an increase of 43% versus the third quarter of 2019.

Software gross margin was 81% this quarter unchanged from the third quarter of 2019 opt.

David Neil Lebowitz: Operating expenses were $30.7 million for the quarter, up 40% versus the third quarter of 2019, primarily reflecting the continued investment in research and development for the advancement of our technology platform and support of our internal drug discovery programs, particularly our three most advanced programs that are approaching preclinical development. We're planning to take at least one of these programs into IND-enabling studies in the first half of 2021. G&A expense also contributed to operating expense growth relative to 2019 from increased costs associated with operating as a public company. Loss from operations was $15.4 million in the quarter versus $11.3 million in the third quarter of 2019, primarily as a result of the increased investment in research and development.

Operating expenses were $30.7 million for the quarter up 40% versus.

As the third quarter of 2019, primarily reflecting the continued investment in research and development for the advancement of our technology platform and support of our internal drug discovery programs, particularly our three most advanced programs that are approaching preclinical development.

We're planning to take at least one of these programs in tiny enabling studies.

He is in the first half of 2021.

GNS expense also contributed to operating expense growth relative to 2019 from increased costs associated with operating as a public company.

Loss from operations was $15.4 million in the quarter versus $11.3 million in the third quarter of 2019, primarily as a result of the increase.

Increased investment in research and development.

David Neil Lebowitz: As I mentioned earlier, our results this quarter include an $18 million non-cash gain from our equity stake in Relay Therapeutics, reflected in the $18.7 million of other income. For the quarter, we record a net income adjusted for non-controlling interests of $3.9 million versus a net loss of $11.5 million in the third quarter of 2019. Another important event in the third quarter was our follow-on public offering. We issued 5.25 million new shares for gross proceeds of $347 million, $326 million in net proceeds for the company.

As I mentioned earlier our results. This quarter include an $18 million noncash gain from our equity stake in relay therapeutics reflected in the $18.7 million of other income.

In the quarter, we recorded net income adjusted for non controlling interest of 3.9 million versus.

It is a net loss of $11.5 million in the third quarter of 2019.

Another important event in the third quarter was our follow on public offering we issued 5.25 million new shares for gross proceeds of $347 million $326 million in net proceeds for the company.

This resulted in third quarter ending.

Cash and equivalents balances of $599 million up 315 million from the second quarter of 2020 with regard to the business impact coated we continued to experience no material impacts to our business both in the quarter and year to date looking ahead. The same risks we referenced previously with respect to our saw.

David Neil Lebowitz: This resulted in a third quarter ending cash and equivalence balance of $599 million, up $315 million from the second quarter of 2020. With regard to the business impact of COVID, we continue to experience no material impacts on our business, both in the quarter and year to date. Looking ahead, the same risks we referenced previously with respect to our software sales remain, particularly if our existing or potential new customers come under extended budgetary pressure. On the drug discovery side, the pandemic could cause temporary delays in some programs. In any case, we do not anticipate a long-term impact from COVID on our ability to execute on our strategy.

Adding core sales remain, particularly if our existing or potential new customers come under extended budgetary pressures.

On the drug discovery side, the pandemic could cause temporary delays in some programs.

In any case, we do not envision a long term impact from cobin on our ability to execute on our strategy.

As we can.

After our performance in the third quarter and the year to date, we are very pleased with the execution across our business, resulting in strong revenue growth increasing collaboration equity value progress in our internal and collaboration programs continued scientific advancement of our technology and the successful IPO and follow on financings that string.

Operator: As we consider our performance in the third quarter and the year to date, we are very pleased with the execution across our business, resulting in strong revenue growth, increasing collaboration equity value, progress in our internal and collaboration programs, continued scientific advancement of our technology, and the successful IPO and follow-on financings that strengthen our balance sheet and provide strategic optionality. We believe we are better positioned than ever to deliver on our mission to transform drug discovery and materials design. With that, we would like to open the call to your questions. Operator. Ladies and gentlemen, if you have a question or a comment at this time, please press the star, then the one key on your touch-tone telephone. If your question has been answered and you wish to move yourself from the queue, please press the pound key.

Sit on our balance sheet and provide strategic optionality.

We believe we are better positioned than ever to deliver on our mission to transform drug discovery and materials design.

With that we would like to open the call to your questions.

Operator.

Ladies and gentlemen, I have a question or a comment at this time. Please press Star then one.

Key on your Touchtone telephone if your question has been answered your stomach yourself from the queue. Please press the pound.

Our first question comes from Bill Kim with BMO capital markets.

Good morning, Thanks for taking my questions and congrats on the quarter.

I was hoping if you could talk more about how you've been able to capitalize.

One is on on the deeper engagement of the platform and converted to.

Larger license agreements or.

New customers and have you seen some of that conversion lately.

Yes, hi, Thanks for the question this is Ronnie.

Ramy Farid: Our first question comes from Bill Kim with VMO Capital Markets. Good morning. Thanks for taking my questions and congrats on the quarter. I was hoping you could talk more about how you've been able to capitalize on the deeper engagement of the platform and convert it to larger license agreements or new customers. And have you seen some of that conversion lately? Yes, hi, thanks for the question. This is Ramy.

So.

What's happened is really pretty extraordinary because as.

As you know this is a steel debts.

Over 35 years old and for a large portion of that time.

The field that is of using computers to.

Slide calculate our predictive properties of molecules and forward looking back on it for much of that period.

Ramy Farid: So, what's happened is really pretty extraordinary because, as you know, this is a field that's, you know, over 35 years old, and for a large portion of that time, this field has been using computers to calculate or predict the properties of molecules. And when you look back on it, for much of that period, you know, essentially, we were doing no better, not much better than a random number generator. And as you know, in recent years, we've been able to really change that in a very significant way. And we can now, at a very, very large scale, I mean, something that was not even imaginable just even a few years ago, or even something we could imagine a few years ago. We can compute the properties of a massive number of molecules.

Essentially we were doing no better not much better than a random number generator.

And as you know in recent years.

We've been able to.

Really change that in a in a very.

Inefficient way and we can now at a very very large scale I mean, something that was not even not imaginable, just even a few years ago and we could imagine a few years ago. We can compute the property of a massive number of molecules and at the same time, we can actually.

Because we are using that.

Software, we're producing the sort of validation that is getting out there and being recognized by these pharma companies. So now what's happening is that there is very very clear understanding and again validation of the technology and now it's just a matter of scaling it up.

Ramy Farid: And at the same time, we can actually... And because we're using that software, we're producing the sort of validation that is getting out there and being recognized by these pharma companies. So now what's happening is that there is a very, very clear understanding, and again, validation of the technology, and now it's just a matter of scaling it up. And that's exactly, and this is now to your question, that's what's happening at these larger companies. They're scaling up the use of advanced technologies, and they have to scale up the use of the software that we've developed to be able to manage all this huge amount of data. And that's live design, as you know. So how we've done it, it's kind of straightforward, right? It doesn't take a lot of marketing or a lot of convincing.

And that's exactly in this is to now to your question Thats whats happening at these larger companies. They are scaling up the use of the advanced technology and they have to scale up the use of the software that we've developed to be able to manage all this huge amount of data and that's like design as you know.

So.

So so how we've done it.

It's kind of straight forward right doesn't take a lot of marketing or a lot of convincing you just look at the progress of the huge number of collaborative programs that continue to enter the clinic as as Karen mentioned up at least one of them at or others and as as we continue to see the progress of our internal programs. It's kind of becomes very clear that's a nice way.

Thats, a nicer way of.

Or more convincing way of that of validating the technology than just sort of trying to convince people in sales at some black box really works.

Karen Akinsanya: You just look at the progress of the huge number of collaborative programs that continue to enter the clinic. As Karen mentioned, at least one of them; there are others. And as we continue to see the progress of our internal programs, it kind of becomes very clear. That's a nice way of, that's a better way of, or a more convincing way of validating the technology than just sort of trying to convince people that some black box really works. That's great. And a question on the internal pipeline for Karen. When would you make a decision to move an internal drug into clinical studies yourself?

That's great and then a question on the internal pipeline for Ken.

And.

When would you make a decision the decision to move and internal throughout two clinical the clinical studies yourself and.

What's your current capacity to take on that.

Development and clinical programs and would you need to start ramping up those capabilities.

Yeah. Thanks for the question, yes, Indeed as we described we are very excited about our programs. We think the profile looks a preclinical packages.

Karen Akinsanya: And what's your current capacity to take on that development in clinical programs? And would you need to start ramping up those capabilities? Yeah, thanks for the question. Yes, indeed, as we've described, we are very excited about our programs. We think the profile of the preclinical packages does support the notion of taking these into initial clinical studies.

Support the notion of taking these into.

Into initial clinical study and in preparation for that we.

We have already begun to build the info.

Infrastructure and hire the people are required to take these programs into the clinic. So.

Karen Akinsanya: And in preparation for that, we have already begun to build the infrastructure and hire the people required to take these programs into the clinic. So we've hired a number of translational folks, as well as started to work on things like clinical operations, and preclinical development, of course, as you heard from Gerald. Moving forward, and that means initiating GLP talks working with the FDA. So all of this is in motion, and we're very pleased with the progress so far in that bill. Great. Congratulations again.

We've hired a number of translational folks.

As well as starting to work on things like clinical operations I'm preclinical develop.

Let me just close on.

Joe will be taking these program.

Full it means initiating GLP tox working with the FDA. So all of this is in motion and we're very pleased with the progress so far.

Yes.

Great Congrats again.

Thanks for taking my question.

Operator: Thanks for taking my questions. Thank you. Our next question comes from Michael Yee with Jeff. Hey guys, thanks for the question and congrats on a very solid quarter. Two questions, one was sort of following on the idea of the acceleration you're seeing. Are there any metrics or any data points to support the idea that customers are accelerating the use of per license or more licenses per company? Same-store sales types of metrics or average value of each license.

Thank you.

Our next question comes from Michael you with Jefferies.

Hi, guys. Thanks for the question and congrats on a very solid quarter.

Two questions one was sort of following on the idea of.

The acceleration you're seeing are there any metrics or any data points to support.

The idea that customers are accelerating they use per license or more licenses per per company same store sales types of metrics, our average value of each license maybe the idea of that.

Ramy Farid: Maybe the idea that it's not just new customers but actually just a lot more usage. So that's question one. And then question two is you have talked about a potential partnership, and I definitely get the sense that you really want to bring your stuff forward into the clinic yourself. You know, a year ago, there was sort of guidance for a potential partnership this year, and I think ConsenSys has a lot of upfront work maybe in this year as well in the fourth quarter. So can you just maybe talk to the idea that it definitely sounds like you want to move forward yourself and that we shouldn't be having milestones or anything in the fourth quarter? Thank you so much.

Again, not just new customers, but actually just a lot more utilization.

Thats question, one and then question two edge.

You have talked about it.

Oral partnership and I definitely get the sense that you really want to bring your stuff forward into the clinic your shelf.

Our year ago, you look back and there.

Sort of a guidance for <unk> potential partnership this year and I think consensus has a lot of an upfront maybe in this year as well in the fourth quarter. So can you just maybe talk to the idea that it definitely sounds like you want to move forward at yourself and that we shouldn't be having milestones stuff for anything in the fourth quarter. Thank you so much.

Thanks, Michael Joe what.

David Neil Lebowitz: Thanks, Michael. Joe, can you take the first question, the metrics question, and I'll answer the second question? Sure. Thanks, Michael. So, yeah, with regard to metrics around what's driving the growth. So what we look at internally, you know, obviously on an annual basis, we provide some metrics around, you know, the number of large customers and how much spend in particular buckets we're seeing. What we look at, but we don't do that quarterly. What we look at internally, though, is the number of customers, and we do look at the amount of spend of our large customers and whether or not we're seeing an increasing contract size driven by the number of licenses, the adoption of live design, as Ramy said.

Would you can you will take the first question. The mattress question I'll answer the second question.

Sure.

Thanks, Michael so.

Yes with regard to.

Metrics around what's driving the gross so what we look at internally.

You are obviously on an annual basis, you know we provided some metrics around.

No.

The number of large customers and how much spend.

In particular buckets, we're seeing.

Well, we look at it but we don't do that quarterly what we look at internally though.

We do look at the number of customers and we do look at.

The amount of spend of our large customers and whether or not we're seeing.

Increasing.

Contract size driven by.

The number of licenses the adoption of Leidos.

Fine as Rami said, so we look at all those things and what we can confidently say is that we are seeing a significant contribution coming from.

David Neil Lebowitz: So we look at all those things, and what we can confidently say is that we are seeing a significant contribution coming from the increased adoption of the solutions by large customers. And so you are getting to some larger contract sizes and additional licenses. But we'll report more on that at the end of the year. And then, Michael, with regard to your second question, you know, thank you for that.

The increased adoption from large customers of other solutions and so you are getting to some larger contract size.

And additional licenses.

Well, we'll report more on that at the end of the year.

All right great and.

And then Michael with regard to your second question. Thank you for that.

Ramy Farid: As you know, and Karen said it, you know, we are really, obviously, very excited about the progress that our internal programs are making, and we are, as you heard, preparing to begin our first ID-enabling studies next year. And also, as we've said, you know, our decision to partner and when to partner will be made on a program-by-program basis. And we are absolutely considering opportunities to partner some of our programs preclinically. And, of course, as you know, we plan to also take some of our programs into the clinic ourselves. So I think that's it. And that's what we can say at this point.

As you know and Karen started and we really are obviously very excited about the progress that our internal programs are making and we.

As you heard preparing to begin our first R&D, enabling studies next year.

And also as we said.

Our decision to partner and went to partner will be made on a program by program basis and we are.

Absolutely considering opportunities to partner some of our programs.

Our clinically.

And of course as you know we plan to also take some of our programs into the clinic ourselves. So.

So I think Thats a.

That's what we can say at this at this point.

Okay, great. Thank you thanks, Michael.

Operator: Okay. Great. Okay, ladies and gentlemen, if you have a question or a comment at this time, please press the star, then the one key on your touch-tone telephone. Our next question comes from Michael Ryskin with Bank of America. Hey, how are you guys doing?

Ladies and gentlemen, I have a question or comment at this time. Please press. The Star then the one key on your Touchtone telephone.

Our next question comes from Michael rest of Bank of America.

Hey, how are you guys doing.

The second question.

Ramy Farid: Thanks for taking the question. I'd like to ask a little bit about the material science business, which always gets a little bit of color in the prepared remarks, but then, you know, we haven't really seen as much of that, just given that it's an earlier stage. So I was hoping you'd give us an update on some of the programs you're working on there, if there's anything in particular we should be looking at, and, you know, how that's trended over the past quarter. Is it still sort of growing, you know, in line or above overall software? So how do we think about the material science possibilities in the next couple of years? Yeah, absolutely.

I would like to ask a little bit on the material science.

Business that always gets a little bit of color in the prepared remarks, but then we haven't really seen as much of that is just given the earlier stage. So I was hoping give us an update on some.

Some of the programs you're working on there. If there is anything in particular should be looking at and how that's trended over the past quarter is it still sort of growing in line or above overall saw.

Where in sort of how do we think about the material science possibilities.

Possibilities in the next couple of years.

Yes, absolutely I appreciate the question. So as you know we aren't reporting.

Separate revenue from the materials business.

Versus the life science business, but we can.

It's become report that it continues to grow very rapidly and actually at a higher percentage wise.

[noise] software part of the business compared to the life Science business.

Ramy Farid: I appreciate the question. As you know, we aren't reporting separate revenue from the materials business versus the life science business, but we can report that it continues to grow very rapidly and actually at a higher, you know, percentage-wise, versus other types of displays. And then, as you know, we are beginning to have more discussions with companies that are focused on energy storage and batteries. So we're also investing more heavily. We talked a lot about this at the beginning.

So we also are definitely adding new customers and new verticals.

As we extend into into new verticals from where we started which was really just focused on OLED. So we're getting more into customers that are focused on polymers and.

Other types of displays and then as you know begin.

Beginning to have as the technology matures more discuss.

Sales and with companies that are focused on energy storage and batteries.

So we're also investing more heavily we talked a lot about this at the beginning we.

At the beginning of this project or this this initiative and the formation of this division in our company.

Ramy Farid: At the beginning of this project or this initiative and the formation of this division, our company, we were focused on leveraging the existing technology. And now, and this is really important, we're finding applications where we can continue to leverage the existing technology but build on it. And it makes new advances in science.

We were focused on leveraging the existing.

Russia technology and now and this is really important were finding applications, where we can continue to leverage the existing technology, but build on it.

And it make new advances in the science and so that's a new area that were investing in that we're obviously very excited about and as you know and.

Ramy Farid: And so that's a new area that we're investing in that we're obviously very excited about. And as you know, and we talked about this the last... Paul, And it relates to what I just mentioned earlier, which is the initiative to develop software for designing batteries. And you know about our collaboration with the Gates Foundation. So, you know, we continue to be really pleased with the progress that we're making on materials as the fraction of our software business attributed to materials grows. Great, thanks.

And we talked about this at the last.

Call.

It relates to what I, just mentioned earlier, which is the.

Initiative to develop software for designing batteries and you know about our.

Collaboration with with the Gates Foundation.

So we continue to be really pleased.

With the progress that we're making on materials as as the fraction of our software business.

Attributed to materials gross.

Great. Thanks, and if I could ask a follow up actually just continuing on that exact point on.

Ramy Farid: And if I could ask a follow-up question, actually, just continuing on that exact point about investing in the business, following the equity raise, I think, as you said, you're sitting at right around 600 million in cash on the balance sheet. How should we think about the investment priorities going forward, you know, balancing existing programs in drug discovery, you talk about some new programs, you've got some programs potentially moving to the clinics that require a ramp up, then you also do have the material science business. Between all those moving pieces, how should we think about priorities over the next, you know, six to 12 months?

Investing in the business.

Following the equity raise.

I think as you said, you're sitting at right around 600 million in cash on the balance sheet how.

How should we think about the investment priorities going forward balancing between.

Existing programs.

In drug discovery, you talked about some new programs, you've got some programs that should move into the clinics that requires a ramp up then you also do you have the material science business.

Yes between all those moving pieces, how should we think about priorities over the next six to 12 months and then also.

Ramy Farid: And then also, you know, are there any additional opportunities in terms of M&A to bring additional technologies or capabilities in house? Yeah, so as you heard from Karen, the rapid progress of our internal programs and our requirement to really ramp up our capabilities to be able to run IND-enabling studies and take some of these programs into the clinic is certainly a high priority, and obviously that's something we're going to focus on. The fact that we have this extraordinary platform that is having this profound impact on drug discovery projects, you know, allowing us to get to development candidates so much more rapidly, and, as Karen said, with higher quality molecules and with a much higher success probability, that's obviously an area that we're really focused on.

Are there any additional opportunities in terms of M&A to bring additional technologies or capabilities in house.

Yes.

So as you heard from Karen.

The rapid progress of our internal programs and our requirement to really ramp up our capabilities to be able to run our IND, enabling studies and take some of these.

Programs into the clinic is certainly a high priority and and obviously, that's something we're going to focus on.

The fact that we have this.

Extraordinary platform that is.

Having this profound impact on drug discovery projects, you know, allowing us to get to development candidates.

So much more rapidly and as Karen said with higher quality molecules and with a much.

Higher success probability that's obviously an area that we're really focused on as you can imagine in a situation like this.

Ramy Farid: As you can imagine, in a situation like this, it's attracting a lot of attention, and that means it's, of course, going to inspire people to try and replicate it, and in order to maintain the significant lead that we currently enjoy, that's going to require, really, investing in it, maintaining that lead, and we absolutely intend to do that. And as I said, that's not only going to be in the underlying science for With regard to M&A, that's something we're always exploring; as you can imagine, we get a lot of inbound interest, you know, to work with us. Now, as the leader in this space, we explore all of those opportunities, and we're open to the possibility of M&A, but there's nothing right now that we can report. Great, thanks. And since there are no further questions at this time, this does conclude today's presentation. We thank you for your participation. You may all disconnect and have a wonderful day. Thanks very much. BF-WATCH TV 2021

It's attracting a lot of attention and that means.

Of course, we're going to.

Also.

Inspire people to try and.

Replicated and in order to maintain a significant lead that we currently enjoy that's going to require.

Really in a very serious way investing in it maintaining that lead and we absolutely intend to do that and as I said thats not only going to be in the underlying science for the life science busy.

And for the drug discovery business, but absolutely in the materials business with regard to M&A.

That's something we're always exploring as.

As you can imagine we get a lot of inbound interest to work with us.

As the leader in this in this space and we expect.

All of those opportunities and we're open to the possibility of.

M&A, but theres nothing right now that we can report.

Great. Thanks.

Thanks.

Sure.

And since there are no further questions.

At this time this does conclude todays presentation. We thank you for your participation you may all disconnect and have a wonderful day.

Thanks very much.

Sure.

[music].