Q3 2021 Schrodinger Inc Earnings Call
Thank you for standing by welcome to <unk> Conference call to review the company's third quarter financial results. My name is Liz and I'll be your operator for today's call.
At this time all participants are in listen only mode. So if you require operator assistance during the call. Please press Star then zero.
After the presentation, there will be a question and answer session.
I'll ask a question. During this session you will need to press Star then one on your telephone keypad.
Please be advised this call is being recorded at the company's request.
Now I would like to introduce your host for today's conference call Jared Madden Senior Vice President Investor Relations and corporate Communications. Please go ahead.
Welcome to today's call during which we will provide an update on the company and review our financial results for the third quarter of 2021.
Earlier today, we issued a press release summarizing our financial results and progress across the company, which is available on our website at www dot shredding or dot com with me today are Rami <unk>, President and Chief Executive Officer, Joe Lebowitz, Executive Vice President and Chief Financial Officer, and Karen at this Tanya Executive Vice.
President Chief Biomedical scientist and head of discovery R&D.
Following our prepared remarks, we will open up the call for Q&A I'll remind you that during today's call management will make statements related to our business that are forward looking and are made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1095, including without limitation statements related to our future financial performance, including.
Our outlook for the full year 2021, the potential advantages of our platform our strategic plans to accelerate the growth of our software business and advance our collaborative and internal drug discovery program risks related to the COVID-19 pandemic, our expectations related to the use of our cash cash equivalents and marketable securities as well as our future operating expenses.
These forward looking statements reflect our current views about our plans intentions expectations strategies and prospects, which are based on the information currently available to us and on assumptions we have made.
Actual results may differ materially from those described in our forward looking statements 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 develop.
Our computational platform further our reliance upon our drug discovery collaborators and other risks detailed under the 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.
Changes in expectation or otherwise.
Forward looking statements should not be relied upon as representing our views as of any date subsequent to today and with that I'd like to turn the call over to Rami.
Thanks, Sharon and thank you everyone for joining us today at <unk>, we have developed a computational platform that is transforming the way therapeutics and materials are discovered we license our platform to biopharma and materials companies as well as government and academic institutions around the world. We also collaborate with companies to advance drug discovery program.
Grams by leveraging our broad expertise and the full potential of our computational platform.
We are seeing a shift in how our software customers and collaborators are incorporating digital chemistry into their research and we're excited about our leadership role in advancing a new discovery paradigm.
We are also applying our fully integrated computational approach at scale to rapidly advance our pipeline of internal drug discovery programs from target selection and in vivo testing through declaration of development candidates with plans to initiate our first clinical study next year.
Today, we reported 16% total revenue growth compared to the same period last year and we ended the quarter with cash resources of $600 million. We're very pleased with the progress. We have made so far this year our customer base continues to grow and we are on track to deliver double digit revenue growth for the full year.
Our financial strength also enables us to continue to invest in our scientific platform to drive our software business advance our internal pipeline and add new talent to support our strategic initiatives. We have over 20 active collaborative drug discovery programs as well as additional programs in preclinical or clinical.
<unk> development for which we are still eligible for milestones underscoring the impact and breath of our platform as we have established collaborations with biotech and pharma companies over the years, we have found many different ways to structure agreements our flexibility provides us with the opportunity to work with innovative companies gain access.
The expertise and create opportunities for long term growth.
Last month, we announced the collaboration with <unk> a company that is focused on the discovery of novel Therapeutics targeting the Orexin two receptor, which is known to play a role in a broad spectrum of sleep disorders, including narcolepsy under the agreement <unk> is responsible for preclinical research activities selection of development candidates.
Clinical development and commercialization, we will provide our expertise and access to our computational platform at an ultra large scale. We received an upfront software access payments. We will also be eligible to receive pre clinical development regulatory and sales based milestones as well as single digit royalties on net sales.
The <unk> collaboration is illustrative of a new approach to help support discovery efforts at biotech companies, where we apply our technology at scale on behalf of collaborators.
We're also very excited by the progress within our internal pipeline. We are on track to submit an IND to the FDA for our <unk> inhibitor program in the first half of next year and we're looking forward to presenting additional preclinical data from this program at Ash. We also recently selected a development candidate for our <unk> inhibitor and added a new encore.
Apology target, our fifth internal program to our pipeline.
We recently opened up our new headquarters in New York City, and it's gratifying to see colleagues together after more than 18 months of working remotely.
Offices around the globe are open in accordance with local guidelines. Our sales teams are also beginning to resume in person visits as permitted by customers.
In summary, we are very pleased with the progress we've made in the first nine months of the year and we expect to finish the year with a strong fourth quarter I'll now turn the call over to Joel to review, our third quarter financial results. Thank you Ronnie and Hello, everyone. This morning, I will discuss our financial results for the third quarter of 2021 and provide an update on our outlook for the year.
We are excited by the progress we have made across all areas of the business. This year. Our software revenue expectation is on track and today, we are reaffirming our software guidance for the full year in the range of $102 million to $110 million. We were also very excited about the progress of our drug discovery programs and Karen will update you on that in a moment.
Turning to our results for the third quarter of 2021, we reported total revenue of $29 9 million up 16% compared to the third quarter of 2020 software revenue was $24 3 million compared to $22 9 million for the third quarter last year and this was in line with our expectations the 6% growth observed.
<unk> in the quarter versus prior year reflects the continued addition of new customers and increased sales to existing customers growth was partially offset by multiyear contracts executed in the third quarter of 2020 as well as a research project that contributed to revenue in the third quarter of 2020 and was completed earlier this year.
Drug discovery revenue was $5 6 million compared to $2 9 million in the third quarter of 2020. This included $4 4 million recognized from our collaboration with Bristol Myers Squibb gross profit was $11 1 million compared to $15 3 million in the third quarter last year software gross margin was 73%.
This quarter compared to 81% for the same period in the prior year.
Software gross margin this quarter and for the first nine months of the year is in line with our guidance for the year and reflects our investments to support the deployment of large scale platform adoption by our customers as revenue grows we expect to achieve economies of scale on these investments over time.
The third quarter gross margin was also impacted by the timing of royalties operating expense was $45 8 million compared to $30 7 million in the third quarter of 2020.
This is in line with our full year guidance and reflects our investment in R&D to advance our pipeline and our technology. The addition of staff to drive long term software sales growth and G&A expenses to continue to build the infrastructure necessary to support the company's growth as we scale globally. Other expense was 300000 in the third quarter of 2000.
<unk> 21, compared to other income of $18 7 million for the third quarter of 2020, which included a gain from our shares and relay following their IPO last year, we recorded a net loss for the quarter. After adjusting for non controlling interest of $35 million compared to net income of $3 9 million for the same period last year the very.
This is driven by planned investments to drive long term growth as well as the gain we recognized from our relay shares in the third quarter of 2020, we ended the third quarter with cash resources of $600 million compared to $617 million at the end of the second quarter of 2021 through the first nine months of this year, we have seen a reduction in cash balance.
<unk> of $43 million.
Turning to a summary of our financial outlook for the full year I mentioned earlier that we are maintaining our expectation for software revenue in the range of $102 million to $110 million, which implies year over year growth of approximately 15% at the midpoint of our range looking ahead at drug discovery revenue for the full year, the anticipated timing of miles.
Stones on several of our collaboration programs has changed shifting revenue opportunity from 2021 into 2022.
Revenue in this segment can be highly variable period to period as the decisions on program timelines are largely in the hands of our collaborators. Accordingly, we are adjusting our full year 2021 expectation for drug discovery revenue to a range of $22 million to $24 million updated from our previous expectation of $22 $32 million.
We anticipate this shifted revenue opportunity to be primarily spread throughout next year.
And I'd like to offer a little more color on our outlook on this segment, we expect solid growth in 2022, and as we look out over a longer time horizon, we see the opportunity for an inflection in revenue for this segment, starting in 2023 and beyond which would be driven by decisions to partner any of our internal programs as well as the continued progression of our collaborations.
<unk> will provide more on our 2022 outlook early next year and our fourth quarter call with this adjustment to our drug discovery revenue outlook. We expect total revenue in 2021 to range from $124 million to $134 million, representing approximately 19% year over year growth at the midpoint of the range.
As we've previously stated we anticipate that full year operating expense growth will be higher than the 42% annual growth rate we saw in 2020.
Primarily driven by our commitment to fund R&D to advance our technology and our internal drug discovery pipeline as well as the need to build the infrastructure to support our global operations as we scale. We also anticipate that software gross margin will be lower than the 81% reported in 2020 to support large scale deployments of our software platform.
We are very pleased with the progress we've made in the first nine months of the year, we continued to see momentum across the business with the addition of new customers decisions by customers to increase adoption of our software platform and progress across collaborative and internal programs I'll now turn it over to Karen for a review of drug discovery. Thank you Joe.
Good afternoon, everyone. During the third quarter, we continued to make advances across our internal pipeline and portfolio of collaborative program powered by full scale deployment of our platform.
The fact of our internal program is on track to begin clinical development next year.
Several collaborative program because it bounced in the clinic this year.
We are excited about <unk> recent announcements about preparations to initiate phase II studies to move seven.
Kevin in Q1 next year.
Our multi target collaboration with Bristol Myers Squibb is our largest drug discovery partnership and we're pleased with how the programs are progressing well.
We announced today that the company has prioritized another precision oncology targets that will replace the hit to our <unk> program.
We now have full rights to this program, but given that there is now an FDA approved <unk> two alpha inhibitor and data regarding the prevalence. The mute feature is still pending we are focusing our resources on other promising target.
We also announced today that we have expanded our partnership with BMS and a new agreement to discover develop and commercialize bifunctional integrated with the same targets as our existing collaboration.
<unk> been blocking the activity of the target bifunctional integrators, which have emerged as a promising modality can eliminate proteins altogether through the protein degradation pathway.
Turning to our internal pipeline. In addition to our strong discovery research team. We are building a team as president translational and clinical expert.
The advancement of our internal programs as we prepare for clinical development.
Last week, we reported that we will present, new preclinical data from our lead program <unk> one of the Ash annual meeting. This will include data is showing strong binding affinity potent inhibition of enzymatic activity and anti <unk>.
Multiple amount one inhibitors in preclinical models of lymphoma.
Overall, we are very pleased with the characteristics of our compounds and we believe we have an opportunity to me as a potential best in class one inhibitor into the clinic.
Subject to completion of the preclinical data package, we are untrue.
Track to submit the R&D for our remote one development candidate to the FDA in the first half of next year.
We are also making great progress with our <unk> seven program, we have selected a development candidate, making this the second program to enter R&D, enabling studies. This year CBC seven it will be linked to cancer cell proliferative capacity and ability to bypass normal DNA damage response is targeting.
Proteins that play important roles in DNA damage replication and replication stress is gaining momentum as a therapeutic approach for cancer.
Picomolar CDK inhibitors have strong antitumor activity in preclinical models of AML in combination with the mattress Max and other marketed agents. We believe the data we have generated to date provide compelling opportunities for further studies in the clinic, both in Hematological malignancies and.
<unk> screen solid tumors, our third late stage Discovery program. We won is also a DNA damage repair target. We wanted the tyrosine kinase regulator, <unk> and cell cycle checkpoint, which when inhibited reduced yourself liability, Brian juicing apoptosis in cancer cells and has been.
So in third party studies to have clinical activity in solid tumors.
We have identified multiple highly selective we want inhibitors with desirable drug like properties.
Strong pharmacodynamic responses and antitumor activity in preclinical models.
We believe this profile may position, our compounds are promising candidates where applications, both as monotherapy and in combination with other agents in October we announced a strategic research collaboration with the University of Texas, MD Anderson Cancer Center.
The goal of the collaboration is to accelerate and optimize the clinical development path for our <unk> one program through biomarker driven tumor type prioritization patient stratification and validation of Biomarkers that predict response.
We've one inhibitor.
That first three internal programs advance toward the clinic.
New programs to our pipeline when we select programs. We look for targets that are structurally enabled and have established biological and clinical validation.
Additionally, we look for targets were a protein structure prediction, Andrew assignment capabilities gives us an advantage and where we believe we control the design challenge by applying our computational platform.
We announced an undisclosed immunology programs and today, we're announcing the addition of an undisclosed precision oncology program to our pipeline. We now have five wholly owned programs and expect to initiate several more in 2022.
In summary, our diverse portfolio of collaborative programs continue to advance and activities are underway within our internal pipeline to enable R&D submissions and the status of clinical trials next year. We are extremely pleased with the overall progress and believe we have multiple value.
Creating opportunities ahead of us.
I'll now turn the call back to Rami.
Thanks, Karen as we look back on our work. This year. We are very pleased with the progress we have made across our business. Our technology is having significant impact on our collaborative and internal drug discovery programs as well as our material science programs.
Our software customers are increasingly recognizing the benefits of deploying our platform at scale.
And we now have five internal programs with two development candidates advancing toward the clinic and.
And we are growing our team of exceptional scientists and professionals to deliver on our mission of transforming drug discovery and materials design at this time, we'd be happy to take your questions operator.
If you'd like to ask a question at this time, please press the star and the number one key on your Touchtone telephone.
All your question press the pound key.
Again that is star then one if you'd like to ask a question at this time.
Our first question comes from Michael <unk> with Bank of America.
Hey, Thanks for taking the question guys I wanted to follow up on your comments in the prepared remarks regarding that drug discovery business and sort of the updated view for 2021 versus 2022 at.
It sounds like some projects got delayed or some milestone and some collaboration based payments got delayed into next year. I know you kind of noted that 2023 is going to be the inflection here I just want to clarify if we if we move some of those revenues from from this year to next.
Is there any reason why youre not expecting a pretty big uptick the big jump in drug discovery <unk> extra and also just thinking at all of that on a on a multiyear basis. If you go back to 2019 2020 it.
It seems like we've been waiting for some of those collaboration payments to stair step up and you could point to and sort of big picture wise, it's taken a little longer to play out.
Yeah.
Sure.
Okay.
Thanks So.
You are right in our prepared remarks, we did indeed indicate that.
We see the opportunity for solid growth next year in the drug discovery segment and.
A real opportunity for inflection in 2023 and beyond in terms of revenue.
<unk>.
That's driven primarily by the fact that we see very large milestone opportunities as we look out over a longer time horizon.
I just should I just.
Refer to the BMS deal.
A good example of this so we have the opportunity to earn.
Two $7 billion in milestones across five programs as they advance and $1 6 billion of that is.
Is achievable starting as early as late preclinical phases on through development.
Development and regulatory phase and so.
So when we say a real inflection we're talking really about just very the possibility and the opportunity for some very large numbers, we're not saying that we wouldn't have strong or solid growth next year relative to the.
The base, but these numbers are still growing in that business is still very much in its early stages.
Okay, Great I appreciate that and then on the internal pipeline.
John I know you touched on multiple one and you indicated.
IND application in the first half of 2022.
But could you touch a little bit on the on some of the other programs.
In the past you had indicated potential for up to three total IND, enabling.
I'd submission next year could you give us an update on how those I'd, enabling studies are going and what the updated view for applications next year.
Yeah, I think so.
Good question Mike.
Actually.
<unk> announced today that we've selected a development candidate the CDC seven so as you.
Hey, thanks.
<unk>.
That puts us on track.
Paul.
Keeping progress on Baas program toward.
You know completing the RMB 19 package next year.
The next step is the submission.
And then draw fed pause.
We won.
Similarly, making great progress and we're on track.
We are a little bit far out to talk about the exact number of RMB submissions. All I can say is that so far so good in terms of the.
Nomination of Pcs, and moving things into that next stage R&D, enabling studies that will keep you updated.
Great. Thanks, I appreciate that.
Our next question comes from Gary Nachman with BMO capital markets.
Sorry about that hi, good.
Afternoon.
So first on the software revenue how much deeper because when you go with existing customers how much more growth can you generate from your existing customers and then for new customers do you expect that pace to accelerate or moderate in the next one to two years.
And then are you still very confident in the high Ninety's renewal rate.
Across the board.
And how close to year end Rami do you get better visibility on that just in terms of those renewal rates.
Yeah. Those are all really good questions first with regard to the renewal rates, yes, we're very confident of being able to maintain our <unk>.
<unk> historic extremely high retention rate, we see no evidence whatsoever to suggest that it won't be in the very very high <unk> and so that kind of answers. The other part of the question right that there is still.
There's a lot of visibility on that but the more important question I think is the first one that you asked.
It really is the opportunity.
And what what where where are we now relative to where we see customers going so first of all as we said in the prepared remarks, we really are.
Seeing a real shift in the nature of the discussions that we're having with heads of research, where there's clear interest in scaling up and here's what's really neat about it.
We're able to do now is talk about what it took for us to advance our programs I think when you look at how how rapidly our collaborative programs and our internal programs are progressing how we're able to get to.
Development candidates in just a couple of years, but so few compounds being made.
We're able to relay that information to our customers and it turns out the answer is and we've talked a lot about this is is application of the technology in a much larger scale. So simply what that means is that customers require significantly more licenses than what they have access to now and we.
It's a pretty simple calculation, we've determined that.
Our software customers if they were using our software at the same level that we're using it internally and collaborative programs.
The spend would be somewhere in the range per company of around $30 million to $40 million and were approximately an order of magnitude from that for the very largest customers our largest customers. So thats, where we see the opportunity and again like I said.
The.
Nature of the discussions we're having with quite a number of these companies points towards.
That being a real opportunity in the coming years.
Okay.
And then on the internal pipeline I'm curious what are the economics with the MD Anderson collaboration for the development of the <unk> program and what will they do for you.
Typically and could that potentially be expanded her.
Other oncology programs, whether it's <unk>.
I've been in the malt, one or the new target that you guys talked about.
Yes. Thanks for the question, we have not revealed economics I think what we can say is that these are pretty backend Ed.
On the basis of success.
Just.
Buying and progressing bond market and patient selection strategies, but also clinical advancement of our program.
The back end loaded as far as software sales are concerned and I'm just curious a month into the quarter, how things are progressing how the discussions with customers are progressing any color along those lines.
Sure Yeah like talk about Oh go ahead go ahead sorry.
On the.
The software outlook so.
I think the thing that we.
Want to refer to want to draw out of the third quarter is that the third quarter was always seen as.
A slower growth quarter because of some base your impacts where we had a handful of multiyear deals in third quarter of 2020.
At the same time, we saw growth from the two key underpinned.
Key growth drivers.
Namely the addition of new customers in the quarter as well as customers continuing to increase adoption of our solutions.
We see that momentum we've seen that momentum over many many quarters now and.
We're confident in delivering in the fourth quarter, we're on track to what we expected and that's why we're reaffirming the guidance.
I will say that the fourth quarter is a heavy volume quarter pretty much always and.
And that's why.
The numbers are big and its back end loaded.
Understood and then maybe kind of tango take onto that a little bit.
With the new customers that are coming in and given.
You're prepared remarks regarding customers and accelerating some of their adoption.
Of the software in their development.
How are you seeing are are you seeing a change with new customers when they come in relative to customers, maybe a few years ago, where now they're coming in and maybe buying more upfront and so they're starting at a higher point and then growing from there.
Sure. So we are we are seeing that so we're seeing.
In some cases, new customers coming in at much higher levels obviously.
There are new biotech companies coming online.
Every quarter I think that the proof points in our business are pretty in our software and our solutions are pretty widely understood and well known and so we are seeing a lot of traction there and it's a it's a pretty significant contribution to our growth rate, we're really excited to see that.
And similarly, where we see new customers on the materials science side.
We see the potential for the starting points.
There to be higher as well.
That's great maybe if I could one last one here regarding the materials science side as you are seeing more and more interest on that side of the business are you, adding more resources.
Both of them the sales and support side to address that growing market. Thank you.
Sure. Yes, we are meant we are investing in materials science, we're investing in the underlying technology, which we've talked about through in multiple ways. One is the research.
Project that we have with regard to battery technology.
We're also investing in the sales and marketing support.
Both in the U S and globally.
Pretty much around the world, we'd see opportunity in across different regions too.
To start to expand.
Not just the vertical that we're in today, but also into new vertical so we're investing and all of that.
Great. Thank you.
Okay.
As a reminder, if you'd like to ask a question at this time that is star 91.
Our next question comes from Gore uncle provide you with Banbury capital.
Hey, guys. Thanks for taking my question just just one for me and then all up right after.
2020, you recorded can you hear me okay.
Yes, yes, yes, yes in 2020, you guys recorded 60% year over year growth of customers with a C.
Over a million Bucks some of the first question is no at this point in the year are you seeing similar growth in the specific cohort as we creep into the end of the year and how does that growth differ from the other ACP groups.
Sure so.
It's.
We don't currently report on our quarterly progress towards those year end figures, we will be reporting on that in early next year at our fourth quarter call. I can just tell you, though that each quarter. We're seeing the continued pattern where customers are increasing.
Making decisions to increase the adoption of our solutions and so fourth quarter being a high volume quarter with a lot of large customers and number really rounds into shape at the end of the year and we'll we'll update you will update you at that point.
Got it got it and then just a quick follow up more of the drug discovery side. So I know you guys mentioned the show T financing 100 million just on dining alone if you're able to disclose if not no worries. If you have any program updates for that collaboration yes, I know the cardiopulmonary program was in phase one and the metabolic was in it.
Enabling study so just based on the financing you know if there's anything that worth mentioning if you're able of course it would be great. Thanks.
Yeah. Thanks for asking me, we're really pleased with the progress of those two programs and other programs of the company, but we're not in a position at this time to disclose any additional information beyond what you just said and that was correct. What you what you said.
No problem. Thanks, guys appreciate the call.
Our next question comes from Michael E with Jeffries.
Hey, guys. Good afternoon can you hear me okay.
Yeah perfect.
Okay, great. Thanks.
Two part question, it's a tough question, but I think it's a fair question and that is in regards to figure out why guidance range that we still out for the four year can we just talk a little bit about.
Upper end of that given I think there's only like five weeks left in the quarter literally that business.
Business that can still close in just the last five weeks.
But certainly consensus.
Because the consensus high end of the guidance already how that range could still be so far and play with just how many weeks left in the quarter and the second part of the question is related in 2001. He told her that sort of a big impact positive and your clothing your skills in 2020, I wonder the changes and come over to the pandemic.
Are impacting things and the time and and the cadence of contracts as there's a lot going on these guys are people going back to work and budget.
Two guys or maybe help us out with the guidance.
Thank you.
Sure I can talk about the.
The first element of that.
And offer my thoughts so.
Thanks for the question so I think.
What's important to keep in context here is that fourth quarter is a is a truly a large volume quarter. Many a large number of are very large contract renewals or in the fourth quarter. We of course have ongoing discussions with these customers.
All year long talking about the benefits of ultra large deployment of our solutions.
And we're making a lot of progress so.
We are on track for the full year.
The however, the.
The extent to the.
These customers make that decision in this timeframe at particular sizes will determine where we fall in that range and so as you know some of our customers are contracts are getting pretty large and can swing the results, but we're really excited about the underlying momentum that we're seeing in this regard in addition to.
They continued addition of new customers.
And we think it really does bode well for not only delivering on what we're telling you in the fourth quarter, but also setting up setting us up well for 2022 and beyond.
With regard.
Yeah, Yeah, all up her mind and then a promise from you might have additional perspectives, but with regard to COVID-19.
I would again point to the same thing the same underlying momentum that we're seeing this year.
In in there is no hesitation in or.
Difficulty in adding new customers, we're seeing that pattern continue this year and we are seeing customers make.
Decisions to upsize their deployment of our solutions.
With pretty large contracts and pretty large commitments and so while we may have gotten a boost last year.
And the growth rates.
For a comparing against a very high growth rate year.
Those.
The underlying trends and the momentum of the business of those key to key growth factors.
Continuing and really bode well as we go forward Romney do you do you have any additional.
You could very well.
Great.
Okay. Thank you.
Thanks, Mike.
I'm showing no further questions in queue at this time.
This concludes today's conference call. Thank you for participating you may now disconnect.
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