Q4 2022 Schrodinger Inc Earnings Call

Speaker 1: The con-

Operator: Thank you for standing by. Welcome to Schrodinger's conference call to review fourth quarter and full year 2022 financial results. My name is Liz, and I will be your operator for today.

Operator: fourth quarter and full year 2022 financial results. My name is Liz, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a

Speaker 2: results.

Speaker 2: My name is Liz and I will be your operator for today's call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session.

Operator: To withdraw your question, please press Star 1-1 again.

Speaker 2: To ask a question during the session, you'll need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. Please be advised that this call is being recorded at the company's request. I would now like to introduce your host for today's conference, is Jaren Madden, Senior Vice President of Investor Relations and Corporate Affairs. Please go ahead. Jaren Madden, Senior Vice President of Investor Relations and Corporate Affairs

Operator: Press Star 1-1 again. Please be advised that this call is being recorded at the company's request.

Operator: I would now like to introduce your host for today's conference, Jaron Madden, Senior Vice President of Investor Relations and Corporate Affairs. Please go ahead.

Jaren Irene Madden: Thank you and good afternoon, everyone. Welcome to today's call, during which we will provide an update on the company and review our fourth quarter and full year 2022 financial results. Earlier today, we issued a press release summarizing our financial results in progress across the company, which is available on our website at Shredinger.com. Here with me on our call today are Rami Farid, Chief Executive Officer; Jeff Porges, Chief Financial Officer; and Karen Akinzanya, President of R&D Therapeutics. Following our prepared remarks, we'll open the call for Q&A.

Speaker 3: Thank you and good afternoon, everyone. Welcome to today's call, during which we will provide an update on the company and review our fourth quarter and full year 2022 financial results. Earlier today, we issued a press release summarizing our financial results and progress across the company, which is available on our website at Schrodinger.com.

Speaker 3: Here with me on our call today are Rami Fareed, Chief Executive Officer, Jeff Porges, Chief Financial Officer, and Karen Acansanya, President of R&D Therapeutics. Following our prepared remarks, we'll open the call for Q&A. I'd like to remind you that during today's call, management will make statements related to our business that are forward-looking and made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, including without limitations, statements related to our outlook for the full year 2023, and a

Jaren Irene Madden: I'd like to remind you that during today's call, management will make statements related to our business that are forward-looking and made pursuant to the Safe Harbor provisions of the Private Security Litigation Reform Act of 1995, including, without limitation, statements related to our outlook for the full year, 2023, and for the first quarter ending March 31, 2021, 2023, our strategic plans to accelerate the growth of our software business and advance our collaborative and proprietary drug discovery programs programs, the clinical potential and favorable properties of our compounds, our expectations related to the use of cash resources, as well as our future operating expenses.

Speaker 3: and for the first quarter ending March 31, 2023, our strategic plans to accelerate the growth of our software business and advance our collaborative and proprietary drug discovery programs, the timing of potential IND submissions and the initiation of clinical trials for our proprietary drug discovery programs, the clinical potential and favorable properties of our compounds, our expectations related to the use of cash resources, as well as our future operating expenses.

Jaren Irene Madden: These forward-looking statements reflect our views about our plans, intentions, expectations, strategies, and prospects, which are based on the information currently available to us and on assumptions we have made. Actual results may differ materially from what we project today due to a number of important factors, including the considerations described in the risk factors section and elsewhere in the filings we make with the SEC, including our Form 10K for the year ended December 31, 2022.

Speaker 3: These forward-looking statements reflect our views about our plans, intentions, expectations, strategies, and prospects, which are based on the information currently available to us and on assumptions we have made. Actual results may differ materially from what we project today due to a number of important factors, including the considerations described in the risk factors section and elsewhere in the filings we make with the SEC, including our Form 10K for the year ended December 31, 2022.

Jaren Irene Madden: These forward-looking statements represent our views only as of today, and we caution you that we may not update them in the future, whether as a result of new information, future events, or otherwise. With that, I'd like to turn the call over to Rani.

Speaker 3: These forward-looking statements represent our views only as of today, and we caution you that we may not update them in the future, whether as a result of new information, future events, or otherwise. With that, I'd like to turn the call over to Rami. Thanks, Sharon, and thank you, everyone, for joining us today. Our strong fourth quarter performance exceeded our revenue expectations and capped a tremendous year at Schrodinger. In 2022, we continued to expand and enhance the capabilities of our computational platform, made strong progress in our existing collaborations, entered into new collaborations, and increased sand-in-thead center.

Ramy Farid: Thanks, Sharon, and thank you, everyone, for joining us today. Our strong fourth quarter performance exceeded our revenue expectations and kept a tremendous year at Schrodinger. In 2022, we continued to expand and enhance the capabilities of our computational platform, made strong progress in our existing collaborations, entered into new collaborations, and advanced our first internal development candidate, SGR-1505, to the clinic. Total revenue for the year was $181 million, a 31% increase over

Speaker 3: and advanced our first internal development candidate, SGR1505, to the clinic. Total revenue for the year was $181 million, a 31% increase over 2021. Software revenue grew by 20% year over year as we successfully implemented a number of commercial initiatives for facilitating broader adoption and scale-up of our platform.

Ramy Farid: Software revenue grew by 20% year over year as we successfully implemented a number of commercial initiatives for facilitating broader adoption and scale-up of our platform. We are also seeing an inflection in drug discovery revenue, with drug discovery revenue of $45.4 million in 2022, which is nearly double that of the prior year. Progress at collaborator companies in which we hold equity stakes further validates our platform and underscores the strength of our business model. Earlier this month, we received a cash distribution from Nimbus following Takeda's acquisition of NIMS's TIC2 inhibitor following positive results from the Phase 2B trial and psoriasis.

Speaker 3: We are also seeing an inflection in drug discovery revenue with drug discovery revenue of 45.4 million in 2022, which is nearly double that of the prior year. Progress at collaborator companies in which we hold equity stakes further validates our platform and underscores the strength of our business model. Earlier this month, we received 111.3 million cash distribution from Nimbus following Takeda's acquisition of Nimbus' TIK2 inhibitor following positive results.

Ramy Farid: We began working with NIMB in 2009, and we are delighted to see this program partner with Takeda and advance toward pivotal trials. We are also co-founders of Structure Therapeutics, a clinical stage company that successfully completed an IPO earlier this month. As you'll hear from Karen, our pipeline continues to progress and has expanded into neurology. We now have 15 collaborative projects and 18 proprietary programs. We expect to provide additional details on some of our undisclosed programs later this year.

Speaker 3: collaborative projects and 18 proprietary programs. We expect to provide additional details around some of our undisclosed programs later this year. Our computational platform is the foundation of our company and a key driver for continued success. We have world-class computational chemistry, computer science, and machine learning development teams.

Ramy Farid: Our computational platform is the foundation of our company and a key driver for continued success. We have world-class computational chemistry, computer science, and machine learning development teams that continue to push the boundaries of molecular design to advance our platform. This includes advances to increase hit rates and hit discovery, to enhance the predictive accuracy of a wide range of key drug-like properties, and to broaden our exploration of available chemical space. We are also advancing technology to further enable the discovery of novel biologicals.

Speaker 3: that continue to push the boundaries of molecular design to advance our platform. This includes advances to increase hit rates and hit discovery, to enhance the predictive accuracy of a wide range of key drug-like properties, and to broaden our exploration of available chemical space.

Speaker 3: We are also advancing technology to further enable the discovery of novel biologics. Looking ahead, we are very excited about the opportunities we have this year. We believe we can continue to grow our software business by increasing adoption among the largest companies in the pharmaceutical and materials industries, as well as increasing the adoption by emerging biotech companies. We also have a growing number of both collaborative and proprietary programs that are being used to improve the development of new technologies.

Ramy Farid: Looking ahead, we are very excited about the opportunities we have this year. We believe we can continue to grow our software business by increasing adoption among the largest companies in the pharmaceutical and materials industries, as well as increasing adoption by emerging biotech companies. We also have a growing number of both collaborative and proprietary programs and expect continued progress across the pipeline this year. Before turning the call over to Jeff to review our fourth quarter and full year 2022 financial results, I'd like to take the opportunity to express my deep gratitude to our exceptionally talented and dedicated employees who are absolutely critical to our overall success.

Speaker 3: and expect continued progress across the pipeline this year. Before turning the call over to Jeff to review our fourth quarter and full year 2022 financial results, I'd like to take the opportunity to express my deep gratitude to our exceptionally talented and dedicated employees who are absolutely critical to our overall success. Jeff?

Speaker 3: progress across the pipeline this year. Before turning the call over to Jeff to review our fourth quarter and full year 2022 financial results, I'd like to take the opportunity to express my deep gratitude to our exceptionally talented and dedicated employees who are absolutely critical to our overall success. Jeff? Thanks, Rami, and good afternoon, everyone.

Speaker 4: As Rami explained, we had a great fourth quarter and excellent year in 2022. Revenue growth was strong and ultimately exceeded our expectations. Software profitability increased. Drug discovery revenue almost doubled. Our portfolio expanded and advanced and we added two new collaborations.

Speaker 4: Our operating expense growth was lower than we forecasted at the start of the year, and our cash burn was towards the low end of the range of our expectations for the year. Our balance sheet remains strong, and with the addition of the cash distributions from Nimbus and our expectations for declining cash burn in the future, we believe that we have sufficient capital to fund our operations for the foreseeable future.

Geoffrey Craig Porges: Thanks, Rami, and good afternoon, everyone. As Rami explained, we had a great fourth quarter and an excellent year in 2022. Revenue growth was strong and ultimately exceeded our expectations. Software profitability increased. Drug discovery revenue almost doubled. Our portfolio expanded and advanced, and we added two new collaborations. Our operating expense growth was lower than we forecast at the start of the year, and our cash burn was towards the low end of the range of our expectations for the year.

Speaker 4: I'll start off by outlining our Q4 results and we'll then take you through the highlights of our full year 2022 results and conclude with our initial financial guidance for 2023. Software revenue for Q4 was $47.8 million, an increase of 24% compared to Q4 2021. This increase reflects significant step-ups in adoption of our technology by existing customers.

Speaker 4: as well as the effect of combined collaboration software agreements and other new commercial strategies implemented during the quarter. Increases in adoption and multi-year contract renewals late in the quarter were significantly above our expectations at the start of the period and more than offset the previously expected headwind to revenue growth from multi-year contracts signed in Q4 2021.

Geoffrey Craig Porges: Our balance sheet remains strong, and with the addition of the cash distributions from Nimbus and our expectations for declining cash burn in the future, we believe that we have sufficient capital to fund our operations for the foreseeable future.

Speaker 4: Drug discovery revenue for the quarter was $9 million, compared to $7.6 million in the same quarter of 2021. Revenue increased in the quarter compared to the prior year due to the progress of projects and recognition of revenue for new collaborations signed in the period. Total revenue was $56.8 million in the quarter, an increase of 23%, which is driven by both software and discovery revenue growth.

Geoffrey Craig Porges: I'll start off by outlining our Q4 results and will then take you through the highlights of our full year 2022 results and conclude with our initial financial guidance for 2023. Software revenue for Q4 was $47.8 million, an increase of 24% compared to Q4 2021. This increase reflects significant step-ups in adoption of the technology by existing customers, as well as the effect of combined collaboration software agreements and other new commercial strategies implemented during the quarter. Increases in adoption and multi-year contract renewals late in the quarter were significantly above our expectations at the start of the period and more than offset the previously expected headwind to revenue growth from multi-year contracts signed in Q4 2021.

Speaker 4: Moving out to expenses during the quarter of gross margin on a software revenue is 83%. We have seen improvements in our gross margin on software to use the changes in our royalty obligations this year, as well as the positive impact of accelerated purchases by existing customers during the quarter. The cost of delivering our drug discovery revenue is 10 million in Q4 2022 and declined compared to the 11.5 million in Q4 2021.

Speaker 4: The loss ratio for our discovery revenue was 11%, which was significantly lower than the 51% loss ratio in Q4 of 2021. The improving cost ratio of our discovery revenue mainly reflects the shift of our activities and staff to proprietary programs from collaborations, the progress and percentage completion during the period of existing collaborations, and the growth of our discovery revenue.

Geoffrey Craig Porges: Drug Discovery revenue for the quarter was 9 million compared to 7.6 million in the same quarter of 2021. Revenue increased in the quarter compared to the prior year due to the progress of projects and recognition of revenue for new collaborations signed in the period.

Speaker 4: and the timing during the quarter for the initiation of new collaboration programs. While the profitability of our discovery revenue is likely to fluctuate from quarter to quarter, we do expect the profitability of our discovery revenue to continue to improve as more programs advance through later stages of development, the milestones increase in size, and our ongoing research and development obligations to such programs decline in cost. Overall growth margin was 58% compared to 57% in Q4 2021 based on improved profit...

Geoffrey Craig Porges: Total revenue was $56.8 million in the quarter, an increase of 23%, which was driven by both software and discovery revenue growth. Moving now to expenses, the gross margin on our software revenue was 83%. We have seen improvements in our gross margin on software due to changes in our royalty obligations this year, as well as the positive impact of accelerated purchases by existing customers during the quarter.

Speaker 4: Q4 were 9.4 million compared to 6 million in Q4 2021. The increase was mainly due to higher staffing and increases in associated expenses as travel resumed compared to 2021.

Speaker 4: Compared to Q3, sales and marketing expense increased by 31% based on headcount and year-end incentive compensation allowances. G&A expense for Q4 was $23.3 million compared to $17.8 million in Q4 2021. The increase was mainly due to high headcount as well as increases in professional services, software and facilities. G&A expense was flat between Q3 and Q4 2022.

Geoffrey Craig Porges: The cost of delivering our drug discovery revenue was 10 million in Q4, 2022, and declined compared to the 11.5 million in Q4 2021. The loss ratio for our discovery revenue was 11%, which was significantly lower than the 51% loss ratio in Q4 2021. The improving cost ratio of discovery revenue mainly reflects the shift of our activities and staff to proprietary programs from collaborations, the progress and percentage completion during the period of existing collaborations, and the timing during the quarter for the initiation of new collaboration programs.

Speaker 4: For Q4, total operating expense was $67.2 million compared to $48.9 million in Q4 2021. The increase was due to increases in R&D and to a lesser extent, increase in sales and marketing in G&I. Our operating loss for Q4 was $28.5 million compared to $22.5 million in Q4 2021. Other income and expenses were $1.2 million in Q4 2022 compared to an expense of $7.9 million in Q4 2021. Our reported net loss was $27.2 million in Q4 2022 compared to a loss of $30.7 million in Q4 2021. Our net loss per share in Q4 was $0.38 compared to a net loss of $0.43.

Geoffrey Craig Porges: While the profitability of our discovery revenue is likely to fluctuate from quarter to quarter, we do expect the profitability of our discovery revenue to continue to improve as more programs advance to later stages of development, the milestones increase in size, and our ongoing research and development obligations to such programs climb in cost.

Speaker 4: was $45.4 million compared to $24.7 million in 2021. This 84% increase was driven by the progress we are making in existing collaborations and the initial revenue recognized for new collaborations during the year.

Geoffrey Craig Porges: Overall, GOS margin was 68% compared to 57% in Q4, 2021, based on improved profitability for software and a reduced loss ratio in the drug discovery business. R&D expenses were 34.5 million in Q4, 2020, compared to 25.1 million in Q4, 2021. The main drivers of the increase were increased headcount, increased CRO expenses, and increased technology investment. Compared to Q3, our energy expenses were 5% higher based on increased headcount and increased technology investments.

Speaker 4: In 2022, drug discovery revenue associated with our collaboration with BMS was just under half of our drug discovery revenue, compared to slightly more than half in 2021. Going forward, revenue from this collaboration will transition from the amortization of the upfront milestones to the recognition of revenue associated with downstream development milestones. Total revenue for the year was $180.9 million compared to $137.9 million in 2020.

Geoffrey Craig Porges: Sales and marketing expenses for Q4 were 9.4 million compared to 6 million in Q4 2021. The increase was mainly due to higher staffing and increases in associated expenses as travel resumed compared to Q2021. Compared to Q3, sales and marketing expense increased by 31% based on headcount and year-end incentive compensation allowance. G&A expense for Q4 was $23.3 million compared to $17.8 million in Q4 2021. The increase was mainly due to high headcount, as well as increases in professional services, software, and facilities. However, GNA expense was flat between Q3 and Q4 2020.

Speaker 4: 2022 compared to 85% in 2021 as collaboration revenue increased faster than the cost of delivery. Our overall gross margin for 2022 was 56% compared to 48% in 2021.

Speaker 4: The increase was due to the improvement in software gross margin and lower losses on our drug discovery revenue. For the full year, R&D expenses $126.4 million, an increase of 39% compared to $91 million reported in 2021. The increase was mainly driven by high headcount and increases in CRO expenses and technology. As in recent years, R&D investment is approximately balanced between our technology platform and our proprietary drug portfolio.

Speaker 4: For the full year sales and marketing expense was $30.6 million compared to $22.1 million in 2021. This increase of 38% was driven by high headcount and associated costs. For 2022, G&A expense was $91 million compared to $64 million in 2021. The increase was largely due to increased headcount and associated costs, higher professional services costs, and increases in lease costs associated with new facilities in the US and certain international locations.

Geoffrey Craig Porges: For Q4, total operating expense was $67.2 million compared to $48.9 million in Q4, 2021. The increase was due to increased R&D, and to a lesser extent, increased sales and marketing and GN. Our operating loss for Q4 was $28.5 million, compared to $22.5 million in Q4. Other income and expenses were $1.2 million in Q4, 2022, compared to an expense of $7.9 million in Q4. Our reported net loss was $27.2 million in Q4, 2022, compared to a loss of $30.7 million in Q4 2021.

Speaker 4: Travel costs have also increased compared to 2021. For the year, total operating expenses increased to $248 million compared to $177 million in 2021. The increase was driven by increases in R&D, sales and marketing, and G&A, and was mostly associated with increased headcount and higher professional services costs, including CRO expenses. For the full year, our net loss was $149 million compared to a net loss of $100 million in 2021.

Speaker 4: For the full year-end, net loss per share was $2.10 compared to $1.42 for 2021. For the year, our operating cash use was $120 million and our cash and short-term investments declined by $123 million to $456 million at year-end. We expect our cash position to be significantly increased by the distributions from Nimbus in the first half of 2023. And given the trajectory of our cash burn and our available resources, we believe that our cash reserves are sufficient to fund our operations for the foreseeable future. I'll now share our initial financial guidance for the full year and Q1 of 2023. We expect software revenue growth for 2023 to be in the range of 13 to 17%.

Geoffrey Craig Porges: The net loss per share in Q4 was $0.38, compared to a net loss of $0.43 per share in Q4, 2021, and a loss of 56 cents per share in Q3, 2022. During Q4, our operating cash use was $25 million, and our cash and cash resources declined by $23 million during the quarter.

Speaker 4: As in 2022, we expect this growth to be skewed towards Q4 and to come predominantly from existing customers, where we continue to see strong demand for increased adoption of our technology. We are very confident about the long-term growth outlook and opportunities for our software business, which is why we are providing annual growth rate guidance going forward. While our largest customers are now purchasing over $5 million of software each year, this high level of adoption has only been reached by a handful of global biopharmaceutical companies that have embraced digital technologies in their discovery efforts. Most of the industry is still deploying our technology at only modest scale.

Geoffrey Craig Porges: Our share count for the purposes of reporting was $71.3 million. I'll now summarize our full year financial results. For the four-year software revenue was 135.6 million, an increase of 20% compared to the prior year. The increase was driven by Sydney and increases in sales to our existing customers, including but not exclusively our big pharmacocrine customers. For the full-year drug discovery revenue was $45.4 million compared to $24.7 million in 2021. This 84% increase was driven by the progress we were making in existing collaborations and the initial revenue recognized for new collaborations during the year.

Speaker 4: Biotech companies are still among our leading customers and although there are very few such companies joining their ranks through IPOs, and some are being acquired and thus disappearing, our biotech customers are generally maintaining or increasing their purchases. Given the timing of renewals and the strength of our contracting in Q4, our best estimate today is that software revenue in Q1 2023 will be in the range of $31 to $35 million. We expect drug discovery revenue to be in the range of $70 to $90 million for 2023. We continue to have the goal of achieving discovery revenue of $100 million or greater in 2023. However, our guidance reflects uncertainty about the timing of achieving major milestones in existing collaborations and caution about counting on new deals and collaborations and the revenue they can generate at this stage in the future.

Geoffrey Craig Porges: In 2022, drug discovery revenue associated with our collaboration with BMS was just under half of our drug discovery revenue, compared to slightly more than half in 2021. Going forward, revenue from this collaboration will transition from the amortization of the upfront milestones, so the recognition of revenue associated with downstream development milestones. Total revenue for the year was $180.9 million, compared to $137.9 million in 2021. The 31% increase in total revenue was driven by both software and discovery revenue growth. For the full year, our software gross margin was 78% compared to 76% for 2021. Our software gross margin for the year improved due to lower royalty obligations and favorable operating leverage on our fixed costs.

Speaker 4: and the outlook for other events, we anticipate that our cash position at the end of 2023 will be more favorable than our cash position at the end of 2022. We expect to report a gap profit in Q1 2023 based on the positive contributions to other income during the period from the Nimbus distributions. We expect our current balance of tax credits and NOLs to be sufficient to cover the tax liabilities for this period.

Geoffrey Craig Porges: I'm drug discovery loss ratio is 11% for 2022 compared to 85% in 2021, as collaboration revenue increased faster than the cost of delivery. Our overall gross margin for 2022 was 56% compared to 48% in 2021. The increase was due to the improvement in the software gross margin and lower losses on drug discovery revenue. For the full year, R&D expenses were $126.4 million, an increase of 39% compared to $91 million reported in 2021.

Speaker 4: and do not anticipate having cash tax obligations this year. We also anticipate that while we may report a positive net profit in 2023, our current forecast reverts to operating losses in 2024. Our goal is to substantially reduce our operating losses between 2022 and 2025, and we believe this goal is achievable, even as we continue to invest in our platform and our portfolio of proprietary and collaborative programs. I'll now turn the call over to Karen for an update on our drug discovery programs. Karen Fassbrenner Thank you, Geoff, and good afternoon, everyone.

Geoffrey Craig Porges: The increase was mainly driven by higher headcount and increases in CRO expenses and technology. As in recent years, R&D investment is approximately balanced between our technology platform and our proprietary drug portfolio. For the full year, sales and marketing expense was $30.6 million compared to $22.1 million in 2021. This increase of 38% was driven by a high headcount and associated costs. For 2022, GNA's expenses were 91 million compared to 64 million in 2021.

Speaker 5: We continued to make important progress across our pipeline throughout the year. We ended 2022 with 15 ongoing programmes eligible for royalties, up from 13 the previous year. The number of collaborators since 2018 has increased to 17, up from 15 the prior year. Our strategy is to have a mix of collaborative projects and proprietary programmes.

Speaker 5: some of which are wholly owned and some of which are partnered, to create a balanced portfolio and help manage R&D risk across the pipeline. I'll start with an update on our most advanced wholly owned programs beginning with SGR 1505 our MORT1 inhibitor. A phase 1 dose escalation study is open to patient enrollment across multiple sites in the US and the team expects to open additional sites globally in the coming months. This study is designed to evaluate the safety pharmacokinetics, pharmacodynamics, and early signs of clinical activity of SGR 1505 of the monotherapy in patients with relapsed or refractory B cell malignancies.

Geoffrey Craig Porges: The increase was largely due to increased headcount and associated costs, higher professional services costs, and increases in lease costs associated with new facilities in the US and certain international locations. Travel costs have also increased compared to 2021.

Geoffrey Craig Porges: For the year, total operating expenses increased to $248 million compared to $177 million in 2021. The increase was driven by increases in R&D, sales, and marketing in GNA and was mostly associated with increased headcount and higher professional services costs, including CRO. For the full year, our net loss was $149 million compared to a net loss of $100 million in 2021, for the full year on net loss per share was $2.10 compared to $1.42 in 2021. For the year, our operating cash use was 120 million, and our cash in short-term investments declined by 123 million to 456 million at year end.

Speaker 5: Once the recommended dose is determined, an expansion cohort is planned to evaluate SGR 1505 in combination with other therapies such as BTK and BCL-2 inhibitors. As a result of the significant number of investigational drugs for advanced B-cell malignancies, recruiting relapsed refractory patients into our phase one trial is challenging. Our sites are working hard on screening patients and we are looking forward to the initiation of dosing. Our team is actively evaluating opportunities to accelerate gathering safety and pharmacology data for SGR 1505. Moving to our CDC 7 program, a target in the DNA repair pathway, SGR 1505.

Geoffrey Craig Porges: We expect our cash position to be significantly increased by the distributions from Nimbus in the first half of 2023. And given the trajectory of our cash burn and our available resources, we believe that our cash reserves are sufficient to fund our operations for the foreseeable future. I'll now share our initial financial guidance for the full year in Q1 of 2023. We expect software revenue growth for 2023 to be in the range of 13 to 17%.

Speaker 5: we have selected SGR3515 as our development candidate. SGR3515 demonstrates strong anti-tumor activity with limited off-target effects in preclinical models. We look forward to further characterizing SGR3515 as we move through IND-enabling studies. Clinical data from other companies, WeWON programs has provided evidence of clinical activity in several forms of cancer with high-end metanate.

Geoffrey Craig Porges: As in 2022, we expect this growth to be skewed towards Q4 and to come predominantly from existing customers, where we continue to see strong demand for increased adoption of our technology. We are very confident about the long-term growth outlook and opportunities for our software business, which is why we are providing annual growth rate guidance going forward. While our largest customers are now purchasing another $5 million of software each year, this high level of adoption has only been reached by a handful of global biopharmaceutical companies that have embraced digital technologies in their discovery. Most of the industry is still deploying our technology at only a modest scale.

Speaker 5: provide a significant competitive advantage. Our scientists are making important computational advances in the ability to make accurate predictions about key properties required for successful drug development in this area, such as the ability to penetrate the blood-brain barrier. This new method is now being leveraged internally as we expand our portfolio in neurology and integrated drugs in our!

Geoffrey Craig Porges: Biotech companies are still among our leading customers, and although there are very few such companies joining their ranks through IPOs, and some are being acquired and thus disappearing, our biotech customers are generally maintaining or increasing their purchases.

Geoffrey Craig Porges: Given the timing of renewals and the strength of our contracting in Q4, our best estimate today is that software revenue in Q1, 2023 will be in the range of 31 to 35 million. We expect drug discovery revenue to be in the range of 70 to 90 million in 2023. We continue to have the goal of achieving discovery revenue of 100 million or greater in 2023. However, our guidance reflects uncertainty about the timing of achieving major milestones in existing collaborations and caution about counting on new deals and collaborations and the revenue they can generate at this stage in the year.

Speaker 5: validated with biomarker proof of thumb search achieved by others in the clinic. We have generated multiple proprietary cryo-EM structures of LRK2 that are providing insight into overcoming drug design challenges. Our structural biology insights provide an opportunity to improve on the profiles of other LRK2 inhibitors by enhancing selectivity and minimizing drug-drug interactions. We also recently announced a multi-component agreement with Otsuka Pharmaceutical that includes a collaboration to discover small molecules for an emerging CNS disease target, as well as knowledge transfer and an expanded licensing agreement.

Speaker 5: For the CNS program, Schrodinger will be responsible for drug design through lead optimization, and Otsuka will be responsible for all other drug discovery and clinical development activities. And finally, on the neuroscience front, we recently added a new program in neurology to our existing collaboration with BMS. Our multi-target collaboration with BMS is proceeding very well. We expect our first program within this partnership to advance to development candidates' data soon, which is included in the first quarter of 2023 drug discovery guidance Jeff provided. We are proud to be delivering a development candidate.

Geoffrey Craig Porges: For Q1, we expect discovery revenue to be in the range of 30 to 34 million, based on the expected achievement of development milestones in our existing collaboration. We expect our software gross margin to be similar to our reported gross margin in 2022 and believe that this outlook is likely to be sustainable beyond 2023. Our improved gross margin outlook is based on favorable trends in our royalty obligations and operating leverage as we increase the scale of our technology deployment.

Speaker 5: approximately two years after beginning our partnership together. We continue to focus on initiating new programs that we may elect to partner or advance independently to key inflection points. We have several undisclosed programs at various discovery stages up through lead optimization in the areas of oncology, immunology, and neurology. We expect to share more details about these programs later this year. In summary, we are pleased with the progress we have made over the past year and expect continued advancements in 2023 across our pipeline of collaborative and proprietary programs. We are excited about the work we are doing to bring new medicines to patients more efficiently, and we look forward to updating you on our R&D activities throughout the year. I will now turn it back over to Rami. Thanks, Karen.

Geoffrey Craig Porges: Operating expense growth in 2023 is likely to be significantly lower than the 40% growth in 2022 and similar to expected revenue growth in 2023. Based on the expected timing and amount of cash distributions from Nimbus and the outlook for other events, we anticipate that our cash position at the end of 2023 will be more favorable than our cash position at the end of 2022. We expect to report a gap profit in Q1, 2023, based on the positive contributions to other income during the period from the Nimbus distribution.

Speaker 3: As you can hear, we are very excited about the year ahead, and at this time, we'd be happy to take your questions. As a reminder, to ask a question, please press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Dokim with Piper Sandler. Great. Good afternoon, and thanks for taking my questions. First, on the fourth quarter software sales and 2023 guidance...

Geoffrey Craig Porges: We expect our current balance of tax credits and NOLs to be sufficient to cover the tax liabilities for this period and do not anticipate having cash tax obligations this year. We also anticipate that while we may report a positive net profit in 2023, our current forecast reverts to operating losses in 2024. Our goal is to substantially reduce our operating losses between 2022 and 2025, and we believe this goal is achievable, even as we continue to invest in our platform and our portfolio of proprietary and collaborative programs. I'll now turn the call over to Karen for an update on our drug discovery programs.

Speaker 3: Looking at the renewals and the multiyear agreements that drove fourth quarter upside, how should we think about the range of years for these multiyear agreements and the dynamics of those renewals? Was the interest driven by the customer in renewing early? And should we assume that the renewals for next year would be lower? Hi, Joe, this is Rami. Thanks for the question.

Karen Akinsanya: Thank you, Jeff, and good afternoon, everyone. We have continued to make important progress across our pipeline throughout the year. We ended 2022 with 15 ongoing programs eligible for royalties, up from 13 the previous year. The number of collaborators since 2018 has increased to 17, up from 15 the previous year. Our strategy is to have a mix of collaborative projects and proprietary programs, some of which are wholly owned and some of which are partnered, to create a balanced portfolio and help manage R&D risk across the pipeline.

Karen Akinsanya: I'll start with an update on our most advanced wholly owned programs, beginning with SGR 1505, our Mort-1 inhibitor. A phase 1 dose escalation study is open to patient enrollment across multiple sites in the US, and the team expects to open additional sites globally in the coming months.

Speaker 6: And we think that the strength of the business, the strength of the technology sort of allowed us to close a number of deals before the end of the year that...

Karen Akinsanya: This study is designed to evaluate the safety, pharmacokinetics, pharmacodynamics, and early signs of clinical activity of SGR 1505 as monotherapy in patients with relaxed or refractory B-cell malignancies. Once the recommended dose is determined, an expansion cohort is planned to evaluate SGR 1505 in combination with other therapies such as BTK and BCL2 inhibitors. As a result of the significant number of investigative or drugs for advanced B-cell malignancies, recruiting relapsed refractory patients into our phase one trial is challenging.

Speaker 6: took quite a bit of work. So let me emphasize also, these multi-year deals have been going on, we've been doing them for a while, we do them for strategic reasons. It's often something of mutual interest for us and the customer, but we still feel very confident that despite the lumpiness that the multi-year deals cause, we still feel very good about the guidance that we're giving the,

Karen Akinsanya: Our sites are working hard on screening patients, and we are looking forward to initiating dosing. Our team is actively evaluating opportunities to accelerate gathering safety and pharmacology data for SGR 1505. Moving to our CDC 7 program, a target in the DNA repair pathway, we presented new preclinical data at the American Society of Hematology.

Speaker 6: 13 to 17% growth for the year. You know, despite some of the lumpiness, maybe you can call it headwinds, that some of the multi-year deals give. And the reason is because we've been doing them for a while, right? So they, as some multi-year deals, maybe happening in 22, there were some in 2021 that of course now come up for renewal in 23. Hope that makes sense. Yeah, that's helpful. Sorry, don't. First thing is, we signal that that multi-year deals were something of a headwind coming into the fourth quarter compared to the fourth quarter of 2021. And I think you can see that we more than overcome, overcome those that particular headwinds indeed, some of the others who flagged up at the start of the quarter.

Karen Akinsanya: The data demonstrated that SGR 2921 exhibits strong antitumor activity in vivo across multiple preclinical tumor models, including cell-derived xenograph models as a monotherapy and in combination with standard of care. We are advancing SGR 2921 through I&D enabling studies and are on track for an I&D submission to the FDA this year. Now, we turn to our V1 program.

Karen Akinsanya: We are pleased to announce that we have selected SGR 3515 as our development candidate. SGR 3515 demonstrates strong anti-tumor activity with limited off-target effects in preclinical models. We look forward to further characterizing SGR 3515 as we move through I&D enabling studies. Clinical data from other companies with which we have won programs has provided evidence of clinical activity in several forms of cancer with high unmet need, including proof of concept and in multiple

Speaker 4: As Rami pointed out, we did sign some multi-year deals in the fourth quarter of 2022, but I've indicated more or less very broad boundaries offset the multi-year deal contribution in the fourth quarter of 2021. But obviously there was significantly more growth than that in what we reported in the fourth quarter. And that was very much from existing customers and those customers believe that they were eyed by Sah TEY's growth.

Speaker 4: indicated interest in stepping up their deployment of our software. And this is very important. They, in all cases, went from being significant customers to being, I would say, significantly larger customers. And I don't want to specifically identify them, but we've indicated for the first time that we have four customers with annual contract value over five million dollars in 2020. So that trend is happening in the right direction.

Karen Akinsanya: Our pipeline extends beyond oncology and includes programs in immunology and neurology. The development of neuroscience therapeutics has been incredibly challenging and has therefore lagged behind oncology for many years. We believe this is an area where our platform can provide a significant competitive advantage.

Karen Akinsanya: Our scientists are making important computational advances in the ability to make accurate predictions about key properties required for successful drug development in this area, such as the ability to penetrate the blood-brain barrier. This new method is now being leveraged internally as we expand our portfolio in neurology, and has resulted in the addition of both collaborative and wholly-owned programs in neuroscience. We recently announced that we are advancing a LAR2 program, which is a promising target with disease-modifying potential in Parkinson's disease.

Speaker 4: and is consistent with what I was alluded to in the fourth quarter, which is existing customers having positive experiences with the technology and stepping up their purchases. Now, in a fraction of those cases, they elected to implement multi-year agreements, but the biggest driver of the step up in the fourth quarter was customers saying, we want to step up purchase of software, the scale of the point of the technology. So I hope that gives you a little bit more color. And then quickly for a commentary on 2023, clearly we are going to have to once more overcome the effects of the multi-year contracts in 2022 when we get to the end of 2023. And indeed, we have some multi-year contracts from 2021, obviously given what Ron has said about two years and eight years ago. I hope that contribute for a mix of further development of the project. Thank you all very much.

Karen Akinsanya: This program meets all the criteria we use for target selection. It is genetically validated with biomarker proof of concept achieved by others in the clinic. We have generated multiple proprietary cryoEM structures of LAR2 that are providing insight into overcoming drug design challenges. Our structural biology insights provide an opportunity to improve on the profiles of other LARC2 inhibitors by enhancing selectivity and minimizing drug-drug interactions.

Karen Akinsanya: We also recently announced a multi-component agreement with Otsuka Pharmaceutical that includes a collaboration to discover small molecules for an emerging CNS disease target, as well as knowledge transfer and an expanded licensing agreement. For the CNS program, Schrodinger will be responsible for drug design through lead optimization, and Otsuka will be responsible for all other drug discovery and clinical development activities. And finally, on the neuroscience front, we recently added a new program in neurology to our existing collaboration with BMS.

Karen Akinsanya: Our multi-target collaboration with BMS is proceeding very well. We expect our first program within this partnership to advance to development candidate status soon, which is included in the first quarter of 2023 Drug Discovery Guidance Jeff provided. We are proud to be delivering a development candidate, approximately two years after beginning our partnership together. We continue to focus on initiating new programs that we may elect to partner with or advance independently to key and inflection points.

Speaker 7: a probability adjusted range and

Speaker 4: the goal remains at 100 million. Does that, unadjusted, if you hit on all these milestones, come to 100 million or more? Yeah, that's probably an important question. So there are multiple paths to the greater than 100 million. And we knew that at the start of 2022, and those paths still exist now in 2023. And so if we are successful.

Karen Akinsanya: We have several undisclosed programs at various stages of discovery up through lead optimization in the areas of oncology, immunology, and neurology. We expect to share more details about these programs later this year. In summary, we are pleased with the progress we have made over the past year and expect continued advancements in 2023 across our pipeline of collaborative and proprietary programs. We are excited about the work we are doing to bring new medicines. to patients more efficiently, and we look forward to updating you on our R&D activities throughout the year. I will now turn it back over to Rami. Thanks, Karen.

Speaker 4: with both the execution of projects within our control and if our partners complete projects in their control and we're successful with business development initiatives, then yes, we would achieve that objective. But at this stage of the year, we think it's sensible to be giving guidance about what we really know and have a high degree of certainty about, and that's the basis for the guidance that we've provided today. Great, perfect. Congrats on all the progress and thanks for taking my questions. Thanks, Dale. Our next question comes from the line of David Leibowitz with Citi. Thank you very much for taking my question. I guess first, on the Tech2Asset, those licensed and you receiving the equity payments and gains for, how would the guidance for drug discovery have been different, if at all, had that deal not occurred? Hi, David. The Tech2 distribution doesn't have any effect on the drug discovery revenue. So, a cash outlook would be quite different, if it had the Tech2 distribution not occurred. But that is not reported through our discovery revenue line. As I indicated in my prepared remarks, it'll be reported through our other income line. So, you know.

Ramy Farid: Thanks, Karen. As you can hear, we are very excited about the year ahead, and at this time, we'd be happy to take your questions.

Operator: As a reminder, to ask a question, please press Star 1-1 at your time.

Operator: Please press Star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press Star

Operator: Question, please press star 1-1 again. Please stand by while we compile the Q&A roster.

Doe Kim: Our first question comes from the line of Doe Kim with Piper Sandler. Great, good afternoon, and thanks for taking my questions. First on the fourth quarter software sales and 2023 guidance. Looking at the renewals and the multi-year agreements that drove fourth quarter upside, how should we think about the range of years for these multi-year agreements and the dynamics of those renewals? Was the interest driven by the customer in renewing early? Should we assume that the renewals for next year would be lower? Hi Joe, this is Rami.

What I meant to say was, had it been kept by Nimbus and the deal never occurred, would the guidance for drug discovery have been potentially different? No. No. Yeah. Sorry. Yeah. I mean, yes, it's no. Yeah. Okay. But now we understand your question. Yeah, yeah. Yeah. And then back on the multiyear partnerships, I know the dynamic of a lot of these partnerships tend to be a larger upfront payment, and over time, it's more steady beyond that. Is it the same dynamic with the multiyear versus the single year? Is there a mechanism for the customers to, I guess, upsize mid-contract, if so? I'm just trying to figure out how to look at this and impact going forward. Yeah. Absolutely. I'm trying to figure out the answer to your question, because it may not seem obvious that if you sign a multiyear deal, let's say it's a three-year deal, that there's no more interaction with the customer for three years. That's absolutely not the case, and we have many, many examples of customers in the middle of that term recognizing what essentially every customer is recognizing.

Ramy Farid: Thanks for the question. So first, the beginning part of your question: typical multi-year deals are two to three years. And while it is the case that some of the growth in Q4, the sort of extraordinary growth that we saw in Q4, came from some multi-year deals, it's important to understand that actually that wasn't all of them, all of the sources of the growth. We had a number of opportunities, and believe me, it was hard work, it wasn't easy, and we think that the strength of the business, the strength of the technology sort of allowed us to close a number of deals at the end, you know, before the end of the year, which you know, took quite a bit of work.

Ramy Farid: So let me emphasize also these multi-year deals have been going on, you know; we've been doing them for a while. We do them for strategic reasons. It's often something of mutual interest for us and the customer, but we still feel very confident that despite the lumpiness that the multi-year deals cause, we still feel very good about the guidance that we're giving, the 13 to 17% growth for the year, you know, despite some of the lumpiness, maybe you can call it headwinds that some of the multi-year deals give.

Ramy Farid: And the reason is that we've been doing them for a while, right? So, as some multi-year deals, maybe happening in 22, there were some in 20 and 21, that, of course, now come up for renewal in 23.

Geoffrey Craig Porges: Something, sorry. Yep. Yeah, sorry, Joe.

Geoffrey Craig Porges: First thing is, we signaled that multi-year deals were something of a headwind coming into the fourth quarter compared to the fourth quarter of 2021, and I think you can see that we more than overcome that particular headwind and indeed some of the others we flagged up at the start of the quarter. As Rami pointed out, we did sign multi-year deals in the fourth quarter of 2022, but I've indicated more or less very broad boundaries to offset the multi-year deal contribution in the fourth quarter of 2021.

Geoffrey Craig Porges: But obviously, there was significantly more growth than that in what we reported in the fourth quarter, and that was very much from existing customers, and those customers believe that they have indicated an interest in stepping up their deployment of our software. And this is very important.

Geoffrey Craig Porges: They went from being significant customers to being, I would say, significantly larger customers. And I don't want to specifically identify them, but we've indicated for the first time that we will have four customers with annual contract values over $5 million in 2022 and had two in 2021. So that trend is headed in the right direction and is consistent with what I've alluded to in the fourth quarter, which is existing customers having positive experiences with the technology and stepping up their purchases.

hard with their sites and investigators.

to

bring in patients and gather the data that we've described, safety, pharmacology, and preliminary efficacy data. I suspect that by the end of this year into next year, we'll be in a position to talk more about the data that's available to us, but we'll be able to describe in more detail with you and others. So we're working on it and yeah, we look forward to sharing updates in the future. Thank you for taking the question. Thanks a lot David. Our next question comes from the line of Michael Yee with Jefferies. Hey guys, thanks for taking my question and congrats on the quarter. This is Yee Chian for Mike. One I wanna ask on the pipeline assets, two related questions. I guess does the new guidance for drug discovery include, is it consistent with the previous 100 million? You know, you said that doesn't include our licensing, the three lead oncology assets. Is that still the case here with the new drug discovery guidance? And on the, on MALT one, it'd be really nice if you could talk about ultimately how you think about development of the drug moving forward. Are you expecting single agent activity or is this more of a combination with existing drugs sort of play you guys are going for? Thank you.

Geoffrey Craig Porges: Now, in a fraction of those cases, they elected to implement multi-year agreements, but the biggest driver of the step up in the fourth quarter was customers saying, we want to step up our purchase of software at that scale of deployment of the technology. So I hope that gives you a little bit more color. And then quickly for a commentary on 2023. Clearly, we are going to have to once more overcome the effect of the multi-year contracts in 2022 when we get to the end of 2023.

Geoffrey Craig Porges: And indeed, we have some multi-year contracts from 2021, obviously given what Rami said about two years and even from 2020, given three years. But I think you can see that the trends in the business are sufficiently strong that we're confident that we can meet those contracts. In many cases, to be, you know, candid, our expectation is that those customers will renew their multi-year agreements, and we're optimistic that they'll renew their multi-year agreements at a higher level because, clearly, once they've been using our technology for three years on a pretty extensive basis, it will be quite disruptive for them to stop using the technology at the end of the calendar year. So I hope that gives you more color.

Doe Kim: Yeah, that's definitely helpful to make things a lot more clear. I just want to follow up on the drug discovery side of the guidance. It sounds like the guidance is more of a probability-adjusted range, and... The goal remains at 100 million. Does that, unadjusted, if you hit on all these milestones, come to 100 million or more?

Geoffrey Craig Porges: Yeah, that's clearly an important question. So we have multiple paths to greater than 100 million, and we knew that at the start of 2022, and those paths still exist now in 2023. And so if we are successful with both the execution of projects within our control and if our partners complete projects under their control and if our partners complete projects under their control and if we're successful with business development initiatives, then yes, we would achieve that objective.

Geoffrey Craig Porges: But at this stage of the year, we think it's sensible to be giving guidance about what we really know and have a high degree of certainty about, and that's the basis for the guidance that we've provided to Great, perfect.

Doe Kim: Great, perfect. That's all the progress, and thanks for taking my questions.

David Neil Lebowitz: Our next question comes from the line of David Lieberwitz with City.

David Neil Lebowitz: Thank you very much for taking my question. I guess first, had the TIC2 asset been licensed and you received the equity payments and gains for it, how would the guidance for the guidance for drug discovery have been different? if at all, had that deal not been?

licensing the mature assets changed at all? Or are you still thinking about licensing after obtaining some initial human data?

So as we've shared in the past, we think this is very asset and landscape dependent. I think in general we view ourselves as very capable of generating early clinical data. We also believe that some of our assets will do very well in partnership with other companies who have combination agents. However, I do want to emphasize that on an asset by asset basis we will continue to evaluate whether it makes sense for Schrodinger to continue investing in these programs through development or whether it makes sense to partner them. I think we'll obviously have an opportunity to review that as these assets continue to progress in the clinic. Understood. Thank you. Our next question comes from the line of Gary Nackman with BMO Capital Markets. Hi guys. Good afternoon. So first, just following up on the multiyear deals, I just want to be clear. Is that pulling forward some revenue and weighing a little bit on the 2023? Absolutely.

Geoffrey Craig Porges: Hi David. The tick two distribution doesn't have any effect on drug discovery revenues. So, you know, a cash outlook would be quite different had the tick two distribution not occurred, but that is, you know, not reported through our discovery revenue line. As I indicated in my prepared remarks, it will be reported through our other income line. So, you know. What I meant to say was, had it been kept by Nimbus and the deal never occurred, would the guidance for drug discovery have been potentially different?

David Neil Lebowitz: discovery would have been potentially different.

David Neil Lebowitz: Okay. But now we understand your question. Yeah, yeah.

David Neil Lebowitz: Yeah, and then back on the multi-year partnerships, I know the dynamic of Baudi's partnerships tend to be a larger upfront payment, and over time, it's more steady beyond that. Is that the same dynamic with the multi-year versus the single year? Is there a mechanism for the customers to, I guess, upsize mid-contract, if so?

software growth of 13 to 17%. And did you offer any discounts in rebates to encourage closing those agreements maybe in a lot of part of the year? And with respect to the 13 to 70% growth, Jeff, he said most of that is expected to be from existing customers. But could you potentially have some new customers as well that would help drive some of that growth? Just comment how much is out there in terms of some of the new customers potentially. Thanks. Okay, so let me start off with a question about the multi-year deals. So in a certain way, a multi-year deal does pull revenue forward compared to annual deals because it's depending on the nature of the deal. But in most of cases, you do get more than one third, let's say, with three years deal, it gets to be recognized in the period in which you sign the deal. And so there's a greater than one third contribution in the first year or a greater than a protolata contribution in the first year. So I mentioned that a proportion of the...

Ramy Farid: I'm just trying to figure out how to look at this and its impact going forward. Yeah, absolutely. That's a great question because it may not seem obvious that if you sign a multi-year deal, let's say it's a three-year deal, that, you know, we're sort of, there's no more interaction with a customer for three years. That's absolutely not the case, and we have many, many examples of customers in the middle of that term recognizing what essentially every customer is recognized.

Ramy Farid: at some point, which is that they don't have access to enough licenses. This is what's happening. This is where the growth is coming from. Remember, this is what Jeff said in his prepared statement in March: the majority of our customers are underutilizing the software. They all, once they start using it at a sufficient scale, and they're trying to get the kind of results that they're seeing some of their colleagues that are using it at a high enough level, but, you know, their peer companies and us, then there's a need to increase the number of licenses to the software so they get access to more of the technology.

revenue upside in the fourth quarter, but by no means the majority of it came from multi-ideal. The majority of the revenue upside came from existing customers and there in mind that we've said, we continue to say that all of the top 20 pharmaceutical companies are our customers. We've confirmed the very high level of customer retention. Our total customer number went from 1600 to 1750 that's customers with over more than a thousand dollars a year and annual contract value. So, you know, the universe of biopharma is our customer base. So mathematically, if we, all the big farmers are our customers. So if we have 20 more customers and there's more customers, it's really not going to move the needle. So moving the needle has to be increasing our the adoption of that technology in those large customers and that's why it's wiped up that there are a handful who are at that 5 million plus annual contract value, but that is a relatively small minority of the global formal landscape. So we see opportunities for those largest customers to still increase their use, but also to move their peers towards that range. Really the principal drive. So, it's sort of summarized long with answer. It's a small contribution to Q4 from revenue that might otherwise have been reported in future periods, had they been annual contract. And lots of opportunities continue to grow. That's encompassed within our guidance. And we are very confident that we'll be able to overcome the effects of the multi-ideal that we've been able to get. So, we're going to be able to decide in 2022. The last part of your question about sort of rebates and discounts and all that sort of thing. We don't want to be commenting publicly about our commercial strategies, but surprise to say that we are very excited about the interest in our customers in wrapping up the scale of deployment of that technology. We think they'll see advantages to that. And we think that that's beneficial for us as well.

Ramy Farid: And those discussions are happening continuously. It's not, and that can happen in the middle of the term, even if it's a multi-year term, and we have examples of that actually happening. Got it. Yeah. And the last question on enrollment in your study. Do you have any thoughts on when we might actually be able to see data based on what you've seen thus far?

Karen Akinsanya: Hi David. As we've described in our remarks, the enrollment is ongoing, sites are being activated, and we are working hard with our sites and investigators to bring in patients and gather the data that we've described, safety, pharmacology, and preliminary efficacy data. I suspect that by the end of this year and into next year, we'll be in a position to talk more about the data that's available to us, which we'll be able to describe in more detail with you and others. So we're working on it, and yeah, we look forward to sharing updates in the future.

Michael Jonathan Yee: Our next question comes from the line of Michael Yee with Jeffreys. Hey guys, thanks for taking my question and congrats on the quarter. This is EGON for Mike.

Michael Jonathan Yee: I want to ask about the pipeline assets, two related questions. I guess what does the new guidance for drug discovery include? Is it consistent with the previous 100 million? You know, you said that doesn't include out licensing the three lead oncology assets? Is that still the case here with the new drug discovery guidance? And on Mount 1, it would be really nice if you could talk about how you think about the development of the drug moving forward. Are you expecting single agent activity, or is this more of a combination with existing drugs sort of play you guys are going forward?

Karen Akinsanya: Thank you. Thanks a lot.

Karen Akinsanya: So, as you pointed out, the guidance that we've given to drug discovery does not include revenue from out licensing any of our mature assets. Instead, as Jeff described, it comes from a range of ongoing discovery collaborations, as well as completed collaborations where we're eligible for future milestones. On your second question with regard to Malt 1, as you know, we're pretty excited about this target. We believe, based on our preclinical data, as well as what we understand is occurring in the clinic in other programs, we do expect to see some monotherapy activity from WOT1.

Karen Akinsanya: However, based on data in the public domain and work that we're doing, we do also believe that there is a substantial opportunity for Malt 1 in combination with BTCK inhibitors, with BCL2 inhibitors, and potentially other agents that are being improved for the treatment of B-cell malignancies. So we remain very enthusiastic about Mort-1 and look forward to sharing more about our program in the future.

Karen Akinsanya: Got it, got it, thank you. And just one quick follow-up. Has the thinking around the strategy of out-licensing, the mattress, changed at all, or are you still thinking of out-licensing after obtaining some initial human data? So, as we've shared in the past, you know, we think this is very asset and land-executive.

Karen Akinsanya: So, as we've shared in the past, you know, we think this is very asset and landscape dependent. I think, in general, we view ourselves as very capable of generating early clinical data.

Karen Akinsanya: We also believe that some of our assets will do very well in partnership with other companies who have combination agents. However, I do want to emphasize that on an asset by asset basis, we will continue to evaluate whether it might make sense for Schrodinger to continue investing in these programs through development or whether it makes sense to partner them. So I think we'll obviously have an opportunity to review that as these assets continue to progress in the clinic. Our next question comes from the line of Gary Nachman with BMO Capital Markets.

Gary Jay Nachman: Hi guys, good afternoon. First, just following up on the multi-year deals, I just want to be clear: is that pulling forward some revenue and weighing a little bit on the 20-23 software growth of 13 to 17 percent? And did you offer any discounts and rebates to encourage closing those agreements, maybe in the latter part of the year? And with respect to the 13 to 70 percent growth, Jeff, you said most of that is expected to be from existing customers.

Gary Jay Nachman: But could you potentially have some new customers as well that would help, you know, drive some of that growth? Just comment on how much there is in terms of some of the new customers. Thanks.

to convince customers that they have to scale up. Now the other strategy involves making sure that our customers, once they get access to it, remember this is somewhat of a transformation of the way drug discovery is done. That's what this is about.

Geoffrey Craig Porges: Okay, so let me start off with the question about the multi-year deals. So, you know, in a certain way, a multi-year deal does pull revenue forward compared to annual deals because it's a penny on the nature of the deal, but in most cases, you do get more than one-third of, let's say, a three-year deal gets to be recognized in the period in which you sign the deal. And so there's a greater than one-third contribution in the first year or a greater than pro rata contribution in the first year.

This is about shifting chemistry resources to relying more on computation. It's making it so that smaller teams can work on more programs because so many more calculations are running. Where are they going to learn all of that? That's by us engaging with them and a little bit and transferring that know-how in how we do things. We're very successful in doing that, so all that validation, that training. But I have to tell you that what we're seeing, and Jeff talked about this, is we don't think this requires very significant extra resources. A customer scaling up their usage of the software by a factor of 10 doesn't require us to spend anywhere near that amount of increase in effort, if that makes sense. So we continue to be able to see this kind of operational leverage.

Geoffrey Craig Porges: So I mentioned that a proportion of the revenue upside in the fourth quarter, but by no means the majority of it came from multi-year deals. The majority of the revenue upside came from existing customers. And bear in mind that we said, and we continue to say, that all of the top 20 pharmaceutical companies are our customers. We've confirmed a very high level of customer retention. Our total customer number went from 1,600 to 1750. That's customers with over more than $1,000 a year in annual contract value. So, you know, the universe.

And we're coming up with pretty clever ways, we think, of breaking into that sort of chicken and egg problem, which is clearly working, as you heard from some of the new KPIs that we've reported. Yep, that's great. Thank you. Good. Our next question comes from the line of Vikram Parohit with Morgan Stanley . Hey, guys. This is Will on for Vikram. Thanks for taking our question, and congrats on the quarter. Just one from us, the new development candidate, 3515. Can you walk us through how you believe the candidate is differentiated at all, or what aspects, in particular, of the molecule you've been working to optimize? Yes, happy to. So STR3515 is a very potent WEE1 inhibitor, so it has similar characteristics to other WEE1 inhibitors. But we believe, and this is what we've been working on for the past few years, is that it has an optimized selectivity profile. So as you're well aware, the previous WEE1 inhibitors had off-target kinase activities. We believe we've optimized that kinase profile.

Geoffrey Craig Porges: of biofama is our customer base. So mathematically, if we, all the big farmers are our customers. So if we have 20 more customers and they're small customers, it's really not going to move the needle. So moving the needle has to be increasing the adoption of that technology in those large customers, and that's why it's so exciting that there are a handful who are at that $5 million plus annual contract value, but that is a relatively small minority of the global farmer landscape. We see opportunities for those largest customers to still increase their use, but also So to sort of summarize long with an answer, a small contribution to Q4 from revenue that might otherwise have been reported in future periods, had they been annual contracts?

Geoffrey Craig Porges: and lots of opportunity to continue to grow that's encompassed within our guidance. And we are very confident that we'll be able to overcome the effects of the multi-year deals that were signed in 2022. The last part of your question about rebates and discounts and all that sort of thing, we don't want to be commenting publicly about our commercial strategies.

and that correlates very nicely with the in vivo data that we're seeing that really, I think, validates the profile and replicates what's been seen all the way through phase two in terms of the activity and efficacy of WeWAN inhibitors in the clinic. Furthermore, we believe that WeWAN inhibition is going to be used in the clinic and on the marketplace eventually in combination with other agents. As a result of that, we think the drug-like properties, including things like drug-drug interactions, other physical chemical properties, are really important to maximize the potential opportunities of WeWAN inhibitors. We've been working on all of those aspects using the platform, and we're very happy with the profile of this compound. So we look forward to moving this forward and studying its profile in the clinic. Okay, that's great. Thanks very much, and congrats again. Thanks. Thanks. Our next question comes from the line of Chris Shibutani with Goldman Sachs. Hi, everyone. This is Charlie. I'm for Chris. Thank you so much for taking our questions, and congrats on the great quarter in here. Just regarding the guidance, we have one quick one. Regarding the expected reduction in year-over-year operating expenses, just wondering what the drivers are there and where you see yourself saving on the spend during the course of the year there. Yeah, Charlie, let me be clear. What we've said is the growth rate will be significantly lower. We reported 40% of its growth in 2022, 42% in 2021. We think in 2023 it will be significantly lower than that 40%, and we expect it to be in line with revenue growth. We do think that we have opportunities to continue to deliver more operating leverage going forward.

Geoffrey Craig Porges: But, surprise to say that we are very excited about the interest from our customers in wrapping up the scale of the deployment of that technology. We think they'll see advantages to that, and we think that's beneficial for us as well. So, of course, we're going to be working pretty diligently to try and facilitate that. And we think that it's in everybody's interest to be getting the benefit of the large-scale deployment of the technology.

Ramy Farid: And I'll just add that that's perfect, and I'll just add one extra thing just to remind you, and we talked a lot about this before. Of course, we have the material science business, and there, the growth really does come mostly, of course, given that it's a, you know, a younger business, from adding new customers. And we continue to see that happen; we continue to expect, you know, we expect that to continue to happen this year and beyond. Okay, great. That's helpful. And then just one follow-up question, Rami.

Gary Jay Nachman: So just talk a little bit more about the initiatives that have been progressing to accelerate software utilization and adoption among your existing customers and just how much more that's going to continue in 2023. And, you know, how much spend is associated with that, if that's going to be ramping up as well in order to push some of those initiatives forward. Here's the challenge we have, which we've talked about before.

Gary Jay Nachman: So our customers, of course, will scale up when they see the impact it has on their programs. But in order to see the impact, you have to use the software at a high scale. So we have this kind of chicken and egg cycle, right, that we have to break into. And what we have found is incredibly effective. There are two things.

Ramy Farid: One is, they're starting to become really overwhelming validation or data to show that using the software at this really high scale has a profound impact on the timelines of projects, on the likelihood of their success, and on the quality of the molecules. That's happening in our own programs. You heard Karen talk about speed.

So, it's not an absolute reduction, it's a reduction in growth. But let me then just address your question about where that reduction in growth is. I think the greatest reduction in growth will be in the G&A line. The least reduction in growth, i.e. the most growth, will continue to be in R&D as we support the platform and the portfolio that town has described. And then somewhere in between will be the sales and marketing expense, growth, and of course that's going to be most closely tied to the revenue growth result. Got it. That's really helpful. Thank you so much for the clarification there. And then, I guess, regarding the R&D spend and moving forward with the WeWON inhibitors, happy and excited to hear about the progress there. Just wondering and piggybacking off of the last question, just curious how you're thinking about the indications that you might pursue, whether you think the proof of concept that we've seen from competitors in the WeWON space is kind of the way to think about it in terms of indications like Peter and Carcinoma, or should we expect to be pressing into maybe some newer indications? And then regarding the potency of WeWON just on a relative basis, should we be thinking about it in terms of a higher potency versus the competitors that are out there, or is it really more of a comparable potency but it's more selective so that you might be able to achieve higher doses and not be limited by toxicity? Thank you so much for taking our questions. Yeah. So, on 3515 and WeWON inhibition, you're quite correct that there has been really impressive data in nutrients that are Carcinoma and ovarian cancer, as well as a number of other solid tumors. We've been working with MD Anderson over the last two years, and we've basically launched that collaboration to understand more about the potential for sensitive populations, sensitive tumor type.

Ramy Farid: We talk a lot about quality molecules. You see the success of Nimbus and Morphic and Structure and other companies we've been involved in. It's becoming sort of overwhelming and a little hard to ignore, right? I mean, the validation is very clear.

Ramy Farid: So that's become a very, very effective way to convince customers that they have to scale up. Now, the other strategy involves making sure that our customers, once they get access to it, Remember, this is somewhat of a transformation of the way drug discovery is done. That's what this is about. This is about shifting chemistry resources to relying more on computation. It's making it so that smaller teams can work on more programs because so many more calculations are running. And where are they going to learn all of that?

Ramy Farid: That's by us engaging with them for a little bit and transferring that know-how and how we do things. And we've been very successful in doing that. So all that validation, that training. But I have to tell you that what we're seeing, and Jeff talked about this, is that we don't think this requires very significant extra resources. A customer scaling up their usage of the software by a factor of 10 doesn't require us to spend that, you know, anywhere near that, that amount of increase in effort, if that makes sense.

Ramy Farid: So we continue to be able to see this kind of operational leverage, and we're coming up with pretty clever ways we think of breaking into that sort of chicken and egg problem, which is clearly working, as you heard from some of the new KPIs that we've. Yeah, that's great. Thank you. Our next question comes from the line of Vikram Perohit with Morgan Stam.

Vikram Purohit: Hey guys, this is Will on behalf of Vikram. Thanks for taking our question and congrats on the quarter. Just one from us on the new development candidate 3515. Could you walk us through how you believe the candidate is differentiated at all or what aspects in particular of the molecule you've been working to optimize?

Karen Akinsanya: Yes, happy to. SDR 3515 is a very potent Wii inhibitor, so it has similar characteristics to other we-1 inhibitors. But we believe, and this is what we've been working on for the past few years, is that it has an optimized selectivity profile. So, as you know, the previous WE-1 inhibitors had off-target kinase activities. We believe we've optimized that Kainan profile, and that correlates very nicely with the in vivo data that we're seeing that really, I think, validates the profile and replicates what's been seen all the way through phase two in terms of the activity and efficacy of we-1 inhibitors in the clinic.

Karen Akinsanya: Furthermore, we believe that inhibitions are going to be used in the clinic and on the marketplace eventually in combination with other agents. And as a result of that, we think the drug-like properties, including things like drug-drug interactions, and other physical chemical properties, are really important to maximize the potential opportunity for V-1 inhibitors. We've been working on all of those aspects using the platform, and we're very happy with the profile of this compound. So we look forward to moving this forward and studying its profile in the clinic. Okay, that's great. Thanks, Ryan.

Vikram Purohit: Okay, that's great. Thanks very much, and congratulations again.

Chris Shibutani: Our next question comes from the line of Chris Shibutani with Golden Sacks. Hi, everyone, this is Charlie. I'm on behalf of Chris.

Chris Shibutani: Thank you so much for taking our questions, and congratulations on the great quarter here. Just regarding the guidance, we have one quick one regarding the expected reduction in year-over-year operating expenses. I just wonder what the drivers are there and where you see yourself saving on the spend during the course of the year there.

I think we've been clear in the commentary and in the prepared remarks that

Existing customers really stepped up their purchases and froze the revenue offside in the fourth quarter. And the continuation of those trends is captured in our guidance. Now I also indicated that they are mostly but not exclusively pharmaceutical companies, but of course there are significant biotech companies in that universe as well. And the reason that I like to point that out to be honest is because companies that are really committed to using our technology even with the...

Geoffrey Craig Porges: Yeah, Charlie, let me be clear. What we've said is that the growth rate will be significantly lower. We reported 40% of X growth in 2022, 42% in 2021. We think in 2023 it will be significantly lower than that 40%, and we expect it to be in line with revenue growth. We do think that we have an opportunity.

Geoffrey Craig Porges: to continue to level more operating leverage going forward. So it's not an absolute reduction; it's a reduction in growth. But let me then just address your question about where that reduction in growth is. I think the greatest reduction in growth will be in the G&A line. The least reduction in growth, the most growth, will be, continue to be in R&D as we support the platform and the portfolio that Town has described. And then somewhere in between will be the sales and marketing expense growth, and of course, that's going to be most closely tied to the revenue growth results.

Chris Shibutani: Got it, that's really helpful. Thank you so much for the clarification there.

I think there's some color there, mostly farmer, some biotech. Now to go back to your question about the issues that we saw. We flagged up three issues going into the beginning of the quarter. One was international, the sort of temporary effects of exchange, and I think you see that if you look in our case, the contribution from international markets was slightly less in 2022 than it has been in 2021, we think that that is at least trying to stabilize if not start to reverse itself in 2022 because those customers in those locations won't place the headwind of our technology to come to a chilly price, more expensive, higher price as a result of exchange. So we've said before we don't think that's going to be an issue and we think that we should be in good shape there. Secondly we flagged up the lack of emerging biotech companies and that continues to be the case. We're not seeing new customers but they are purchasing at a relatively small level.

Karen Akinsanya: And then, I guess, regarding the R&D spend and, you know, moving forward with the Wii inhibitors, happy and excited to hear about the progress there, just wondering and piggybacking off of the last question. Just curious, how are you thinking about the indications that you might pursue, whether you think, you know, the proof of concept that we've seen from competitors in the B1 space is kind of the way to think about it in terms of indications like uterus and carcinoma, or should we expect to be pressing into maybe some newer indications?

Karen Akinsanya: And then regarding the post, of whether we won just on a relative basis, is 3515 kind of, should we be thinking of it in terms of like a higher potency versus the competitors that are out there, or is it really more of like a comparable potency, but it's more selective so that you might be able to achieve higher doses and not be limited by toxicity? Thank you so much for taking our question. Yeah, so on 3515 and we won inhibition. You're quite correct that there

Particularly in the back half of 2022. So clearly our number went from 1600 to 1750, so by definition new customers, but not new very large customers. Not brand new, but very large customers. So I think that the thesis about challenging capital markets for biotech companies and limited number of new companies being created, caution about the use of capital, I think that that's flying out and that continues to be the case. The last thing that identifies as being the recorder in my own eyes then was the issue, the uncertainty in big pharma companies. And there have been some interesting things that have occurred across pharma coming to the end of the year, the beginning of the year. They've signaled some caution about pricing, about their portfolios, some changes in their hiring etc. That didn't really materialize at the end of the quarter. At the end of the quarter those customers stepped up and indicated that our technology was a high priority for them and for a number of them stepped up materially in terms of the scale of their deployment and even the pre-purchasing. So they indicated with that purchase that we are a quarter of their drug discovery enterprises for a number of years in the case of the multi-year contract and a quarter of their drug discovery activity by virtue of the scale of deployment of technology. So the uncertainty that we had about the pharma purchases I think clarified itself as we went through the quarter and got to the very end of the quarter and I think that's behind the optimism we have and you hear from us about the outlook for 2023. I hope that answers your question. It does and just on a related note I was wondering if you've seen any shift in client behavior spending tied to the Inflation Reduction Act. Has it changed year longer term internal pipeline strategy? I know you've spoken about this a bit but we've heard some mixed messaging from across the industry recently. Yes, look again if you look at the 10K that we filed today we definitely flagged this up as something that we hear as well. But

Karen Akinsanya: Yeah, so on 3515, and we won inhibition, you're quite correct, but there have been really impressive data in nutrients, cirrhaccarcinoma, and ovarian cancer, as well as a number of other solid tumors. We've been working with Andy Anderson over the last two years, and we basically launched that collaboration to understand more about the potential for sensitive populations, sensitive tumor types. That collaboration is going very well, and while we do believe that there is enough data in the public domain to enrich our phase one trial with patients that we know respond based on existing clinical data, we're also excited to test some of the opportunities coming out of that collaboration.

Karen Akinsanya: Regarding potency, we do believe our compound is more potent, but more importantly, we think the combination of the on-target binding, as well as some of the optimized selectivity, is leading to the profile that we actually presented at ACR, where we are seeing an ability to dose this compound intermittently and maintain efficacy while being able to stop dosing. So we think that this dosing regimen, as well as the characteristics of this molecule, have the potential to be quite interesting in the clinic.

Karen Akinsanya: And, of course, we need to test this in the clinic to see if that's the case, but it does have a differentiated profile relative to existing compounds, as well as being able to replicate what's already been seen in the clinic.

Karen Akinsanya: Yeah, so I think we're going on to the next question, right? Our next question comes from Michael Raskin with Bank of America.

Michael Raskin: This is Wolf Chen off on from.

Michael Raskin: Mike, thanks for taking the questions. I wanted to ask more of a higher level market one.

Geoffrey Craig Porges: I know that you signaled recently that you've seen trends with large pharma customers stabilize a bit.

Geoffrey Craig Porges: bit. Well, biotechs remain under pressure due to the capital market environment. I'm wondering if you can provide a little more color on each cohort and how they trended both in 4Q and how you expect them to perform throughout 2023. Then I have a quick follow-up.

It's not something that we hear in our direct discussions with our customers. It's something we hear through the same channels that you hear. Conference calls like this, investor events, press releases, things coming out of trade groups, etc. But it's not something that we are seeing to a significant degree from our customers. Now I will add that adapting our technology and expanding its capabilities to biologics is a strategic priority for us. And as you've heard from Robin and maybe you can comment on this now, we've made a lot of progress there. And there's no doubt that companies are adding to the biologics component of their portfolios. But there aren't companies that are saying no small molecules. So we think that our technology has a lot of utility there. Robin, do you want to add to that? Yeah, no, I think you said it perfectly. And we're looking forward to continuing to report on progress we're making on extending the technology to biologics. We've been in that space for a long time. We continue to invest in it. These physics-based methods are agnostic to the modality. And we're starting to leverage that fact. I think you'll be hearing from us in the coming years on pretty significant progress in the ability to use the software to design better biologics. Great. Thank you, guys. Yeah. As a reminder, to ask a question, please press star 1-1 on your telephone. Our next question comes from the line of Jack Sito with Craig Hallam. Hi, this is Jack on for Matt. Thanks for taking our question. I was curious, last quarter you discussed your cash burn moderating a bit as revenues continue to grow. And at that time, you had probably about four years of cash on the balance sheet. The infusion you were receiving from the TIC 2 sale puts you closer to five years of cash on hand.

Geoffrey Craig Porges: Sure. So I think we've been clear in the commentary and in the prepared remarks, but existing customers really stepped up their purchases and drove the revenue upside in the fourth corner, and the continuation of those trends is captured in our guidance. Now, I also indicated that they are mostly, but not exclusively, pharmaceutical companies, but, of course, there are significant biotech companies in that universe as well. And the reason that I like to point that out, to be honest, is because companies that are really committed to using our technology, even with a relatively small number of projects, can achieve annual contract value or purchase annual use that is in the same range as very large companies that have dozens, if not a hundred or more development projects.

in our direct discussions with our customers. It's something we hear through the same channels that you hear. Conference calls like this, investor events, press releases, things coming out of trade groups, et cetera. But it's not something that we are seeing to a significant degree from our customers. Now, I will add that adapting our technology and expanding its capabilities to biologics is a strategic priority for us. And as you've heard from Robin, and maybe you can comment on this now, we've made a lot of progress there. And there's no doubt that companies are adding to the biologics component of their portfolios. But there aren't companies that are saying no small molecules. So we think that our technology has a lot of utility there. Rami, do you want to add to that? Yeah, no, I think you said it perfectly. And we're looking forward to continuing to report on progress we're making on extending the technology to biologics. We've been in that space for a long time. We continue to invest in it. These physics-based methods are agnostic to the modality. And we're starting to leverage that fact. And I think you'll be hearing from us in the coming years on pretty significant progress in the ability to use the software to design better biologics. Great, thank you, guys. Yeah. As a reminder, to ask a question, please press star one one on your telephone. Our next question comes from the line of Jack Sita with Craig Hallam. Hi, this is Jack on for Matt. Thanks for taking our question. I was curious, last quarter you discussed your cash burn moderating a bit as revenues continue to grow. And at that time you had probably about four years of cash on the balance sheet. With the infusion you're receiving from the TIC 2 sale, it puts you closer to five years of cash on hand. Does that increase your?

Geoffrey Craig Porges: So that's what gives us the conviction that many, that is, most large companies still have a long way to go in terms of the step up in the deployment of our technology as they attempt to become increasingly digital in their approach to go discover. So I don't want to, I think there's some color there, mostly pharma, some biotech.

Geoffrey Craig Porges: Now we go back to a question about the issues that we saw. We flagged up three issues going into the beginning of the corner. One was international, the sort of temporary effect of exchange. And I think you see that if you look at our K, the contribution from international markets was slightly less in 2022 than it was in 2021. We think that that is at least going to stabilize, if not start to reverse itself in 2022 because those customers in those locations won't face the headwind that our technology is becoming in Chile.

Geoffrey Craig Porges: The price is more expensive, a high price, as a result of exchange, which we said before we don't think that's going to be an issue, and we think that we should be in good shape there. Secondly, we flagged up the lack of emerging biotech companies. And that continues to be the case.

Geoffrey Craig Porges: We are seeing new customers, but they are purchasing at a relatively small level, particularly in the back half of 2022. So clearly, our number went from 1,600 to 1750, so by definition, new customers, but not new very large customers. who, you know, not brand new, Genova, very large customers.

Geoffrey Craig Porges: So I think that the thesis about, you know, challenging capital markets for biotech companies and a limited number of new companies being created, caution about the use of capital, I think that that's playing out, and that continues to be the case. The last thing that I identified at the beginning of the quarter, in my mark then was the issue, the uncertainty in big farmer companies. And there have been some interesting things that have occurred across farmers coming to the end of the year and the beginning of the year.

Geoffrey Craig Porges: You know, they've signaled some part about pricing, about their portfolios, some changes in their hiring, etc. That didn't really materialize at the end of the quarter, At the end of the quarter, those customers stepped up and indicated that our technology was a high priority for them, and for a number of them, they stepped up materially in terms of the scale of their deployment and even pre-purchasing. So they indicated with that purchase that we would be a quarter of their drug discovery enterprises for a number of years, in the case of the multi-year contract, and a core of their drug discovery activity by virtue of the scale of deployment.

Geoffrey Craig Porges: technology. So the uncertainty that we had about farmer purchases, I think, you know, clarified itself as we went through the quarter and got to the very end of the corner, and I think that's behind the optimism we have, and you hear from us about the outlook for 2023. I hope that answers the question.

Geoffrey Craig Porges: It does, and just on a related note. I was wondering if you've seen any shifts in behavior spending tied to the Inflation Reduction Act. Has it changed your longer-term internal pipeline strategy? I know you've spoken about this a bit, but we've heard some mixed messaging from across the industry recently.

Geoffrey Craig Porges: Yes, look, again, if you look at the 10K that we filed today, we definitely slide this up as something that we hear as well. But it's not something that we hear in our direct discussions with our customers. It's something we hear through the same channels that you hear.

I.

Ramy Farid: Conference codes like this, your investor events, press releases, things coming out of trade groups, etc., but it's not something that we are seeing to a significant degree from our customers. Now, I will add that adapting our technology and expanding its capabilities to biologics is a strategic priority for us. And as you've heard from Ramin, and maybe you can comment on this now, we've made a lot of progress there. And there's no doubt that companies will.

Ramy Farid: are adding to the biologics component of their portfolios, but there aren't companies that are saying no to small molecules. So we think that our technology has a lot of utility there. Rami, do you want to add to that?

Ramy Farid: Yeah, no, I think you said it perfectly, perfectly, and, you know, we're looking forward to continuing to report on progress we're making on extending the technology to biologics. We've been in that space for a long time. We continue to invest in it. These physics-based methods are agnostic to the modality, and we're starting to leverage that fact. And I think you'll be hearing from us in the coming years about pretty significant progress in the ability to use the software to design better biologically.

Operator: As a reminder to ask a question, please press Star 1-1 on your telephone. Our next question comes from the line, Jack Seto, with Craig Hallam.

Jack Siedow: Hi, this is Jack on from Matt. Thanks for taking our question. I was curious, what did you discuss last quarter?

Jack Siedow: I was curious, last quarter you discussed your cash burn moderating a bit as revenues continue to grow, and at that time, you had probably about four years of cash on the balance sheet. With the infusion you were receiving from the tick two sale, it puts you closer to five years of cash on hand. So that increased your interest in M&A opportunities, funding additional internal candidates to replace your plans for the new infusion of cash.

Jack Siedow: I apologize, Jack, I didn't hear you terribly well, but I think what you were asking is whether our capital allocation priorities are changing as a result of the additional capital that we're receiving from members. Is that the...

Geoffrey Craig Porges: In particular, M&A. Yeah, is that the right thing to do? Yeah, that's correct. Great. So, Look, I think that we're very happy about the cash distribution. I think that with both our cash burn moderating and with the additional distribution, you know, we think I think your math is not incorrect, but at a certain point, We're up five years, we've got six years, it's a long time. And a lot of things are going to happen between now and then.

Geoffrey Craig Porges: So our highest priorities for our capital allocation are continuing to innovate in the platform. Add to the capabilities of that technology, which we think, highly proprietary and highly differentiated and value creating. And secondly, to continue to invest in the opportunities that emerge from the deployment of the technology, both in our own portfolio and in the portfolios of companies that we have partnered with or being co-founders of in the case of, for example, So those are the highest priorities.

Geoffrey Craig Porges: Now, we're certainly going to be curious and open-minded and opportunistic if opportunities emerge that bring us a technology that we think is highly complementary to our current technologies or accelerate our path forward as a clinical development organization or add very exciting targets that we can deploy our technology again. But that's not the primary direction of our capital allocation strategy.

Geoffrey Craig Porges: That's very helpful. I'm showing no further questions at this time. That concludes today's call. You may now disconnect. The conference will begin shortly. To raise and lower your hand during TUNA, you can dial star 1-1.

Operator: Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you, Theeer Thank you.

Operator: I'm showing no further questions at this time. That concludes today's call. You may now disconnect. The conference will begin shortly. To raise and lower your hand during TUNA, you can dial star 1-1.

Operator: Thank you, and I'm gonna go. Thank you. Thank you. Thank you. Thank you Thank you Thank you and and Thank you Thank you Thank you Thank you Thank you, Thank you, and I'm going to be able to be.

Operator: Thank you. Thank you. Thank you, and so on.

Operator: Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you for standing by. Welcome to Schrodinger's conference call to discuss

Operator: to review its fourth quarter and full year 2022 financial results.

Operator: My name is Liz, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session.

Operator: At this time, all participants are in a listen-only mode.

Operator: To withdraw your question, please press Star 1-1 again.

Operator: Please be advised that this call is being recorded at the company's request. I would now like to introduce you

Operator: being recorded at the company's request. I would now like to introduce your host for today's conference, Jaron Madden, Senior Vice President of Investor Relations and Corporate Affairs. Please go ahead.

Jaren Irene Madden: Thank you and good afternoon, everyone. Welcome to today's call, during which we will provide an update on the company and review our fourth quarter and full year 2022 financial results. Earlier today, we issued a press release summarizing our financial results in progress across the company, which is available on our website at Shredinger.com. Here with me on our call today are Rami Farid, Chief Executive Officer; Jeff Porges, Chief Financial Officer; and Karen Akinzania, President of R&D Therapeutics. Following our prepared remarks, we'll open the call for Q&A.

Jaren Irene Madden: I'd like to remind you that during today's call, management will make statements related to our business that are forward-looking and made pursuant to the Safe Harbor provisions of the Private Security Litigation Reform Act of 1995, including without limitation, statements related to our outlook for the full year, 2023, and for the first quarter ending March 31, 2021, and 2023, are strategic plans to accelerate the growth of our software business and advance our collaborative and proprietary drug discovery programs programs, the clinical potential and favorable properties of our compounds, our expectations related to the use of cash resources, as well as our future operating expenses.

Jaren Irene Madden: These forward-looking statements reflect our views about our plans, intentions, expectations, strategies, and prospects, which are based on the information currently available to us and on assumptions we have made. Actual results may differ materially from what we project today due to a number of important factors, including the considerations described in the risk factors section and elsewhere in the filings we make with the SEC, including our Form 10K for the year ended December 31, 2022.

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Jaren Irene Madden: These forward-looking statements represent our views only as of today, and we caution you that we may not update them in the future, whether as a result of new information, future events, or otherwise. With that, I'd like to turn the call over to Rami.

Ramy Farid: Thanks, Sharon, and thank you, everyone, for joining us today. Our strong fourth quarter performance exceeded our revenue expectations and kept a tremendous year at Schrodinger. In 2022, we continued to expand and enhance the capabilities of our computational platform, made strong progress in our existing collaborations, entered into new collaborations, and advanced our first internal development candidate, SGR-1505, to the clinic. Total revenue for the year was $181 million, a 31% increase over

Ramy Farid: Software revenue grew by 20% year over year as we successfully implemented a number of commercial initiatives for facilitating broader adoption and scale-up of our platform. We are also seeing an inflection in drug discovery revenue, with drug discovery revenue of $45.4 million in 2022, which is nearly double that of the prior year. Progress at collaborator companies in which we hold equity stakes further validates our platform and underscores the strength of our business model. Earlier this month, we received a cash distribution from Nimbus following Takeda's acquisition of NIMS's TIC2 inhibitor following positive results from the Phase 2B trial and psoriasis.

Ramy Farid: We began working with NIMB in 2009, and we are delighted to see this program partner with Takeda and advance toward pivotal trials. We are also co-founders of Structure Therapeutics, a clinical stage company that successfully completed an IPO earlier this month. As you'll hear from Karen, our pipeline continues to progress and has expanded into neurology. We now have 15 collaborative projects and 18 proprietary programs. We expect to provide additional details on some of our undisclosed programs later this year.

Ramy Farid: Our computational platform is the foundation of our company and a key driver for continued success. We have world-class computational chemistry, computer science, and machine learning development teams that continue to push the boundaries of molecular design to advance our platform. This includes advances to increase hit rates and hit discovery, to enhance the predictive accuracy of a wide range of key drug-like properties, and to broaden our exploration of available chemical space. We are also advancing technology to further enable the discovery of novel biologicals.

Thank you and good afternoon, everyone welcome to today's call during which we will provide an update on the company and review our fourth quarter and full year 2022 financial results earlier today, we issued a press release summarizing our financial results and progress across the company.

Which is available on our website at shredding or dot com.

With me on our call today are Rami <unk>, Chief Executive Officer, Jeff <unk>, Chief Financial Officer, and Karen Daniel President of R&D Therapeutics. Following our prepared remarks, we'll open the call for Q&A I would like to remind you that during today's call management will make statements related to our business that are forward looking and made pursuant to the safe Harbor provisions of the private securities.

Ramy Farid: Looking ahead, we are very excited about the opportunities we have this year. We believe we can continue to grow our software business by increasing adoption among the largest companies in the pharmaceutical and materials industries, as well as increasing adoption by emerging biotech companies. We also have a growing number of both collaborative and proprietary programs and expect continued progress across the pipeline this year. Before turning the call over to Jeff to review our fourth quarter and full year 2022 financial results, I'd like to take the opportunity to express my deep gratitude to our exceptionally talented and dedicated employees who are absolutely critical to our overall success. Jeff?

<unk> thousand 995, including without limitation statements related to our outlook for the full year 2023 and for the first quarter ending March 31, 2023, our strategic plan to accelerate the growth of our software business and advance our collaborative and proprietary drug discovery programs, the timing of potential A&D submissions and the initiation of clinical trials for our <unk>.

Terry Doug discovery programs, the clinical potential and favorable properties of our compounds are expectations related to the use of cash resources as well as our future operating expenses. These forward looking statements reflect our views about our plans intentions expectations strategies and prospects, which are based on the information currently available to us and on assumptions we had.

Actual results may differ materially from what we project today due to a number of important factors, including the considerations described in the risk factors section and elsewhere in the filings, we make with the SEC, including our Form 10-K for the year ended December 31, 2022. These forward looking statements represent our views only as of today and we caution you that we may not update them in.

Geoffrey Craig Porges: Thanks, Rami, and good afternoon, everyone. As Rami explained, we had a great fourth quarter and an excellent year in 2022. Revenue growth was strong and ultimately exceeded our expectations. Software profitability increased. Drug discovery revenue almost doubled. Our portfolio expanded and advanced, and we added two new collaborations. Our operating expense growth was lower than we forecast at the start of the year, and our cash burn was towards the low end of the range of our expectations for the year.

The future whether as a result of new information future events or otherwise with that I'd like to turn the call over to Ronny. Thanks, Sharon and thank you everyone for joining us today, our strong fourth quarter performance exceeded our revenue expectations and capped a tremendous year at Schrodinger in 2022, we continued to expand and enhance.

Hence the capabilities of our computational platform made strong progress in our existing collaborations entered into new collaborations and advanced our first internal development candidate STR <unk> five to the clinic.

Geoffrey Craig Porges: Our balance sheet remains strong, and with the addition of the cash distributions from Nimbus and our expectations for declining cash burn in the future, we believe that we have sufficient capital to fund our operations for the foreseeable future.

Total revenue for the year was $181 million at 31% increase over 2021 software revenue grew by 20% year over year as we successfully implemented a number of commercial initiatives for facilitating broader adoption and scale up of our platform. We are also seeing an inflection in <unk>.

Geoffrey Craig Porges: I'll start off by outlining our Q4 results and will then take you through the highlights of our full year 2022 results and conclude with our initial financial guidance for 2023. Software revenue for Q4 was $47.8 million, an increase of 24% compared to Q4 2021. This increase reflects significant step-ups in adoption of the technology by existing customers, as well as the effect of combined collaboration software agreements and other new commercial strategies implemented during the quarter. Increases in adoption and multi-year contract renewals late in the quarter were significantly above our expectations at the start of the period and more than offset the previously expected headwind to revenue growth from multi-year contracts signed in Q4 2021.

Discovery of revenue with drug discovery revenue of $45 4 million in 2022, which is nearly double that of the prior year progress at collaborator companies in which we hold equity Stakes further validates our platform and underscores the strength of our business model earlier. This month, we received $111 three.

Cash distributions from Nimbus falling to <unk> acquisition of <unk> inhibitor. Following positive results from phase II B trial in psoriasis, we began working with Nimbus in 2009, we are delighted to see this program partnered with Takeda and advancing to a pivotal trials. We are also co founders of structure therapeutic.

Geoffrey Craig Porges: The drug discovery revenue for the quarter was 9 million compared to 7.6 million in the same quarter of 2021. Revenue increased in the quarter compared to the prior year due to the progress of projects and recognition of revenue for new collaborations signed in the period.

A clinical stage company that successfully completed an IPO earlier this month.

Youll hear from Karen our pipeline continues to progress and has expanded into neurology. We now have 15 collaborative projects and 18 proprietary programs. We expect to provide additional details around some of our undisclosed programs. Later this year are.

Geoffrey Craig Porges: Total revenue was $56.8 million in the quarter, an increase of 23%, which is driven by both software and discovery revenue growth. Moving now to expenses during the quarter, our gross margin on software was 83%. We have seen improvements in our gross margin on software due to changes in our royalty obligations this year, as well as the positive impact of accelerated purchases by existing customers during the quarter.

Our computational platform as the foundation of our company and a key driver for continued success, we have world class computational chemistry, computer science and machine learning development teams that continue to push the boundaries of molecular design to advance our platform. This includes advances to increase hit rates and hit discovery.

Geoffrey Craig Porges: The cost of delivering our drug discovery revenue was 10 million in Q4, 2022, and declined compared to the 11.5 million in Q4 2021. The loss ratio for our discovery revenue was 11%, which was significantly lower than the 51% loss ratio in Q4 of 2021. The improving cost ratio of discovery revenue mainly reflects the shift of our activities and staff to proprietary programs from collaborations, the progress and percentage completion during the period of existing collaborations, and the timing during the quarter for the initiation of new collaboration programs.

To enhance the predictive accuracy of a wide range of key drug like properties and to broaden our exploration of available chemical space. We are also advancing technology to further enable the discovery of novel Biologics.

Looking ahead, we are very excited about the opportunities. We have this year. We believe we can continue to grow our software business by increasing adoption among the largest companies in the pharmaceutical and materials industries as well as increasing the adoption by emerging biotech companies. We also have a growing number of both collaborative and proprietary.

Programs and expect continued progress across the pipeline this year.

Before turning the call over to Jeff to review, our fourth quarter and full year of 2022 financial results I'd like to take the opportunity to express my deep gratitude to our exceptionally talented and dedicated employees who are absolutely critical to our overall success.

Geoffrey Craig Porges: While the profitability of our discovery revenue is likely to fluctuate from quarter to quarter, we do expect the profitability of our discovery revenue to continue to improve as more programs advance to later stages of development, the milestones increase in size, and our ongoing research and development obligations to such programs decline in cost.

Jeff.

Thanks, Rami and good afternoon, everyone.

As Roger explained we had a great fourth quarter, an excellent year in 2022.

Revenue growth was strong and ultimately exceeded our expectations software profitability increased drug discovery revenue almost doubled our portfolio expanded in advanced and we added two new collaborations.

Geoffrey Craig Porges: Overall, Guards margin was 68% compared to 57% in Q4, 2021, based on improved profitability for software, and to reduce loss ratio in the drug discovery business. R&D expenses were $34.5 million in Q4, 2020, compared to $25.1 million in Q4, 2021. The main drivers of the increase were increased headcount, increased CRO expenses, and increased technology investors. Compared to Q3, our energy expenses are 5% higher based on increased headcount and increases in technology expenses.

Our operating expense growth was lower than we forecast at the start of the year and our cash burn was towards the low end of the range of our expectations for the year.

Our balance sheet remains strong and with the addition of the cash distributions from members and our expectations for decline in cash burn in the future. We believe that we have sufficient capital to fund our operations for the foreseeable future.

I'll start off by outlining our Q4 results and will then take you through the highlights of our full year 2022 results and conclude with our initial financial guidance for 2023.

Software revenue for Q4 was $47 8 million, an increase of 24% compared to Q4 2021. This increase reflects significant step ups in adoption about technology by existing customers.

Geoffrey Craig Porges: Sales and marketing expenses for Q4 were 9.4 million compared to 6 million in Q4, 2021. The increase was mainly due to higher staffing and increases in associated expenses as travel resumed compared to Q221. Compared to Q3, sales and marketing expense increased by 31% based on headcount and year-end incentive compensation allowance. G&A expense for Q4 was $23.3 million compared to $17.8 million in Q4 2021. The increase was due to high headcount, as well as increases in professional services, software, and facilities. G&A expense was flat between Q3 and Q4 2020.

As well as the effect of combined collaboration software agreements and all the new commercial strategies implemented during the quarter.

Increases in adoption of multi year contract renewals late in the quarter were significantly above our expectations at the start of the period and more than offset the previously expected headwind to revenue growth for multi year contracts signed in Q4 2021.

I tried to discovery revenue for the quarter was $9 million compared to $7 6 million in the second quarter of 2021 Rep.

Revenue increased in the quarter compared to the prior year due to the progress of project and recognition of revenue from new collaborations signed in the period.

Total revenue was $56 8 million in the quarter, an increase of 23%, which is driven by both software and discovery revenue growth.

Moving now to expenses during the quarter the gross margin of our software revenue was 83%.

Geoffrey Craig Porges: For Q4, total operating expense was $67.2 million compared to $48.9 million in Q4, 2021. The increase was due to increased R&D expenditure, and to a lesser extent, increased sales and marketing in GN. Our operating loss for Q4 was $28.5 million, compared to $22.2.5 million in Q4. Other income and expenses were $1.2 million in Q4, 2022, compared to an expense of $7.9 million in Q4. Our reported net loss was $27.2 million in Q4, 2020, compared to a loss of $30.7 million in Q4, 2021.

We have seen improvements in our gross margin on software due to changes in our royalty obligations. This year as well as the positive impact of accelerated purchases by existing customers during the quarter.

The cost of delivering a drug discovery revenue was $10 million in Q4, 2022 and decline compared to the $11 5 million in Q4 2021.

Loss ratio for our discovery revenue was 11%, which was significantly lower than the 51% loss ratio in Q4 of 2021.

The improving cost ratio of discovery revenue, mainly reflects the shift of our activities and staff two proprietary programs from collaborations the progress in percentage completion during the period of existing collaborations on the timing during the quarter for the initiation of new collaboration programs.

While the profitability of our discovery revenue was likely to fluctuate from quarter to quarter. We do expect the profitability of our discovery revenue to continue to improve as more programs advance to later stages of development the milestones increase in size and our ongoing research and development obligations to such programs declining costs.

Overall gross margin was 68% compared to 57% in Q4 2021 based on improved profitability to software and to reduce loss ratio in the drug discovery business.

Geoffrey Craig Porges: The net loss per share in Q4 was $0.38, compared to a net loss of $0.43 per share in Q4, 2021, and a loss of 56 cents per share in Q3, 2022. During Q4, our operating cash use was $25 million, and our cash and cash resources declined by $23 million during the quarter.

R&D expenses were $34 $5 million in Q4, 2023 compared to $25 1 million in Q4 2021.

The main drivers of the increase were increased head count increased <unk> expenses and increased technology investments compared to Q3, R&D expenses were 5% higher based on increased head count and increases in technology expenses.

Sales and marketing expenses for Q4 was $9 4 million compared to $6 million in Q4 2021.

Geoffrey Craig Porges: Our share count for the purposes of reporting was $71.3 million. I'll now summarize our full year financial results. For the four-year software revenue was 135.6 million, an increase of 20% compared to the prior year. The increase was driven by Sydney increases in sales to our existing customers, including but not exclusively our big farmer. For the full-year drug discovery revenue was 45.4 million compared to 24.7 million in 2021. This 84% increase was driven by the progress we were making in existing collaborations and the initial revenue recognized for new collaborations during the year.

This was mainly due to higher staffing and increases in associated expenses as travel resume compared to 2021.

Compared to Q3 sales and marketing expense increased by 31% based on head count and year end incentive compensation allowances.

G&A expense for Q4 was $23 3 million compared to $17 8 million in Q4 2021. The increase was mainly due to higher head count as well as increases in professional services software and facilities G&A expense was flat between Q3 and Q4 2022.

Q4, total operating expense of $67 2 million compared to $48 9 million in Q4 2021. The increase was due to increases in R&D and to a lesser extent increases in sales and marketing and G&A.

Geoffrey Craig Porges: In 2022, drug discovery revenue associated with our collaboration with BMS was just under half of that drug discovery revenue compared to slightly more than half in 2021. Going forward, revenue from this collaboration will transition from the amort milestone to the recognition of revenue associated with downstream development milestones. Total revenue for the year was $180.9 million, compared to $137.9 million in 2021. The 31% increase in total revenue was driven by both software and discovery revenue growth.

Our operating loss for Q4 was $28 5 million compared to $22 5 million in Q4 2021, other income and expenses were $1 $2 million in Q4, 2022 compared to an expense of $7 9 million in Q4 2021 our.

Our reported net loss was $27 $2 million in Q4, 2022 compared to a loss of $30 7 million in Q4, 2021, and net loss per share in Q4 with 38 cents compared to a net loss of <unk> 43.

Per share in Q4, 2021, and net loss of 56 per share in Q3 2022.

During Q4, our operating cash use was $25 million in cash and cash resources declined by $23 million during the quarter.

Geoffrey Craig Porges: For the full year, our software gross margin was 78% compared to 76% for 2021. Our software gross margin for the year improved due to lower royalty obligations and favorable operating leverage on our fixed costs, and our drug discovery loss ratio was 11% for 2022 compared to 85% in 2021, as collaboration revenue increased faster than the cost of delivery. Our overall gross margin for 22 was 56% compared to 48% in 2021. The increase was due to the improvement in the software gross margin and lower losses on drug discovery revenue.

Share count for the purposes of reporting was $71 3 million I'll now summarize our full year financial results for the full year software revenue was $135 6 million, an increase of 20% compared to the prior year. The increase was driven by significant increases in sales to our existing customers, including but not exclusively our big pharma clients for the full year drug discovery revenue was.

$45 4 million compared to $24 7 million in 2021.

The 4% increase was driven by the progress we're making in existing collaborations and the initial revenue recognized from new collaborations during the year in.

In 2022 drug discovery revenue associated with our collaboration with BMS was just under half of that drug discovery revenue compared to slightly more than half in 2021 going forward revenue from this collaboration will transition from the amortization of the upfront milestones. So the recognition of revenue associated with downstream development milestones.

Geoffrey Craig Porges: For the full year, R&D expenses were $126.4 million, an increase of 39% compared to $91 million reported in 2021. The increase was mainly driven by higher headcount and increases in CRO expenses and technology. As in recent years, the R&D investment is approximately balanced between our technology platform and our proprietary drug portfolio. For the full year, sales and marketing expenses were $30.6 million compared to $22.1 million in 2021. This increase of 38% was driven by a high headcount and associated costs.

Total revenue for the year was $180 9 million compared to $137 9 million in 2021, the 31% increase in total revenue was driven by both software and discovery revenue growth.

For the full year, our software gross margin was 78% compared to 76% for 2021.

Software gross margin for the year improved to low royalty obligations and favorable operating leverage on our fixed costs.

Our drug discovery loss ratio was 11% for 2022 compared to 85% in 2021 as collaboration revenue increased faster than the cost of delivering our overall gross margin for 2022 was 56% compared to 48% in 2021.

The increase was due to the improvement in software gross margin and lower losses on our drug discovery revenue.

For the full year R&D expense was $126 4 million, an increase of 39% compared to $91 million reported in 2021.

The increase was mainly driven by higher head count and increases in <unk> expenses and technology.

Geoffrey Craig Porges: For 2022, GNA expense was 91 million compared to 64 million in 2021. The increase was largely due to increased headcount and associated costs, higher professional services costs, and increases in lease costs associated with new facilities in the US and certain international locations. Travel costs have also increased compared to 2021.

As in recent years R&D investment is approximately balanced between our technology platform and our proprietary drug portfolio.

For the full year sales and marketing expense was $30 6 million compared to $22 1 million in 2021. This increase of 38% was driven by higher head count and associated costs for.

For 2022, G&A expense was $91 million compared to $64 million in 2021 the.

The increase was largely due to increased head count and associated costs higher professional services costs and increases in lease costs associated with new facilities in the U S and certain international locations travel costs have also increased compared to 2021.

Geoffrey Craig Porges: For the year, total operating expenses increased to $248 million compared to $177 million in 2021. The increase was driven by increases in R&D, sales, and marketing in GNA and was mostly associated with increased headcount and higher professional services costs, including CRO. For the full year, our net loss was $149 million compared to a net loss of $100 million in 2021; for the full year, our net loss per share was $2.10 compared to $1.42 in 2021. For the year, our operating cash use was 120 million, and our cash in short-term investments declined by 123 million to 456 million at year end.

For the year total operating expenses increased to $248 million compared to $177 million in 2021. The increase was driven by increases in R&D sales and marketing and G&A as mostly associated with increased head count and higher professional services costs, including <unk> expenses.

For the full year, our net loss was $149 million compared to a net loss of $100 million in 2021.

For the full year, our net loss per share was $2 10, compared $2 42 for 2021.

For the year, our operating cash use was $120 million and our cash and short term investments declined by 123 million to $456 million at year end, we expect that cash position to be significantly increased by the distributions to members in the first half of 2023 and given the trajectory of our cash burn and our available resources, we believe that our cash was.

Geoffrey Craig Porges: We expect our cash position to be significantly increased by the distributions from Nimbus in the first half of 2023. And given the trajectory of our cash burn and our available resources, we believe that our cash reserves are sufficient to fund our operations for the foreseeable future. I'll now share our initial financial guidance for the full year in Q1 of 2023. We expect software revenue growth for 2023 to be in the range of 13 to 17%.

So sufficient to fund our operations for the foreseeable future.

I'll now share our initial financial guidance for the full year and Q1 of 2023.

We expect software revenue growth for 2023 to be in the range of 13% to 17% as.

Geoffrey Craig Porges: As in 2022, we expect this growth to be skewed towards Q4 and to come predominantly from existing customers, where we continue to see strong demand for increased adoption of our technology. We are very confident about the long-term growth outlook and opportunities for our software business, which is why we are providing annual growth rate guidance going forward. While our largest customers are now purchasing over $5 million of software each year, this high level of adoption has only been reached by a handful of global biopharmaceutical companies that have embraced digital technologies in their discovery. Most of the industry is still deploying our technology at only a modest scale.

As in 2022, we expect this growth to be skewed towards Q4, that's a comfort eminently from existing customers, where we continue to see strong demand for increased adoption of our technology.

We are very confident about the long term growth outlook and opportunities for our software business, which is why we are providing annual growth rate guidance going forward.

Our largest customers in our purchasing of the $5 million of software each year. This high level of adoption has only been reached by a handful of global biopharmaceutical companies that have embraced digital technologies in the discovery efforts most of the industry is still deploying our technology early modest scale.

Geoffrey Craig Porges: Biotech companies are still among our leading customers, and although there are very few such companies joining their ranks through IPOs, and some are being acquired and thus disappearing, our biotech customers are generally maintaining or increasing their purchases.

Hi Tech companies are still among our leading customers and although there are very few such companies joining their ranks through ipos and some are being acquired and loss disappearing. Our biotech customers are generally maintaining or increasing their purchases given the timing of renewals on the strength of our contracting in Q4, our best estimate today is that software revenue in Q1.

Geoffrey Craig Porges: Given the timing of renewals and the strength of our contracting in Q4, our best estimate today is that software revenue in Q1, 2023, will be in the range of 31 to 35 million. We expect drug discovery revenue to be in the range of 70 to 90 million in 2023. We continue to have the goal of achieving discovery revenue of 100 million or greater in 2023. However, our guidance reflects uncertainty about the timing of achieving major milestones in existing collaborations and caution about counting on new deals and collaborations and the revenue they can generate at this stage in the year.

2023 will be in the range of 31% to $35 million.

We expect drug discovery revenue to be in the range of $70 million to $90 million for 2023.

We continue to have the goal of achieving discovery revenue of $100 million or greater in 2023. However, our times reflects uncertainty about the timing of achieving major milestones in existing collaborations and caution about counting on new deals and collaborations on the revenue they can generate at this stage in the year.

Geoffrey Craig Porges: For Q1, we expect discovery revenue to be in the range of 30 to 34 million, based on the expected achievement of development milestones in our existing collaboration. We expect our software gross margin to be similar to our reported gross margin in 2022 and believe that this outlook is likely to be sustainable beyond 2023. Our improved gross margin outlook is based on favorable trends in our royalty obligations and operating leverage as we increase the scale of our technology deployment.

For Q1, we expect discovery revenue to be in the range of 30% to $34 million based on the expected achievement of development milestones in our existing collaborations.

We expect our software gross margin to be similar to our reported gross margin in 2022, I believe that this outlook is likely to be sustainable beyond 2023.

Our improved gross margin outlook is based on favorable trends in our royalty obligations and operating leverage as we increase the scale of our technology deployments.

Geoffrey Craig Porges: Operating expense growth in 2023 is likely to be significantly lower than the 40% growth in 2022 and similar to expected revenue growth in 2023. Based on the expected timing and amount of cash distributions from Nimbus and the outlook for other events, we anticipate that our cash position at the end of 2023 will be more favorable than our cash position at the end of 2022. We expect to report a gap profit in Q1, 2023, based on the positive contributions to other income during the period from the Nimbus distribution.

Operating expense growth in 2023 is likely to be significantly lower than the 40% growth in 2022 and similar to expected revenue growth in 2023.

Based on the expected timing and amount of cash distributions for members.

Look for other events, we anticipate that our cash position at the end of 2023 will be more favorable than our cash position at the end of 2022.

We expect to report a GAAP profit in Q1 2023 based on the positive contributions to other income during the period from the Nimbus distributions.

Geoffrey Craig Porges: We expect our current balance of tax credits and NOLs to be sufficient to cover the tax liabilities for this period and do not anticipate having cash tax obligations this year. We also anticipate that while we may report a positive net profit in 2023, our current forecast reverts to operating losses in 2024. Our goal is to substantially reduce our operating losses between 2022 and 2025, and we believe this goal is achievable, even as we continue to invest in our platform and our portfolio of proprietary and collaborative programs. I'll now turn the call over to Karen for an update on our drug discovery programs.

We expect that current balance of tax credits and Nols to be sufficient to cover the tax liabilities for this period and do not anticipate having cash tax obligations. This year.

We also anticipate that while we May report a positive net profit in 2023, our current forecast reverts to operating losses in 2024.

Our goal is to substantially reduce our operating losses between 2022 and 2025 and we believe this goal is achievable even as we continue to invest in our platform and our portfolio of proprietary and collaborating programs.

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

Karen Akinsanya: Thank you, Jeff, and good afternoon, everyone. We have continued to make important progress across our pipeline throughout the year. We ended 2022 with 15 ongoing programs eligible for royalties, up from 13 the previous year. The number of collaborators since 2018 has increased to 17, up from 15 the previous year. Our strategy is to have a mix of collaborative projects and proprietary programs, some of which are wholly owned and some of which are partnered, to create a balanced portfolio and help manage R&D risk across the pipeline.

Thank you, Jeff and good afternoon, everyone. We continued to make important progress across our pipeline throughout the year. We ended 2022 was 15 ongoing programs eligible for royalties up from 13 the previous year.

The number of collaborators since 2018 has increased to 17 up from <unk> 50 in the prior year.

Our strategy is to have a mix of collaborative projects and proprietary programs some of which are wholly owned and some of which are partnered to create a balanced portfolio and help manage R&D risk across the pipeline.

Karen Akinsanya: I'll start with an update on our most advanced wholly owned programs, beginning with SGR 1505, our Mort-1 inhibitor. A phase 1 dose escalation study is open to patient enrollment across multiple sites in the US, and the team expects to open additional sites globally in the coming months.

Ill start with an update on our most advanced Tony owned programs, beginning with <unk> five <unk> one inhibitor.

Phase one dose escalation study is open to patient enrollment across multiple sites in the U S and the team expects to open additional sites globally in the coming months. This study is designed to evaluate the safety pharmacokinetics pharmacodynamics and early signs of clinical activity of <unk> five as a monotherapy in.

Karen Akinsanya: This study is designed to evaluate the safety, pharmacokinetics, pharmacodynamics, and early signs of clinical activity of SGR 1505 as monotherapy in patients with relapsed or refractory B-cell malignancies. Once the recommended dose is determined, an expansion cohort is planned to evaluate SGR 1505 in combination with other therapies such as BTK and BCL2 inhibitors. As a result of the significant number of investigational drugs or drugs for advanced B-cell malignancies, recruiting relapsed refractory patients into our phase 1 trial is challenging.

Patients with relapsed or refractory b cell malignancies. Once the recommended dose is determined an expansion cohort is planned to evaluate <unk> five in combination with other therapies, such as <unk> and Bcl two inhibitors as a result of the significant number of investigational drugs, So advanced B cell.

Ts recruiting relapsed refractory patients into our phase one trial is challenging.

Karen Akinsanya: Our sites are working hard on screening patients, and we are looking forward to initiating dosing. Our team is actively evaluating opportunities to accelerate gathering safety and pharmacology data for SGR 1505. Moving to our CDC 7 program, a target in the DNA repair pathway, we presented new preclinical data at the American Society of Hematology, or Ash, annual meeting in December.

Our sites are working hard on screening patients and we're looking forward to the initiation of dosing. Our team is actively evaluating opportunities to accelerate gathering safety and pharmacology data for STL <unk> moving to a CDC seven per gram of targets in the DNA repair pathway, we presented new preclinical data.

At the American Society of Hematology or Ash annual meeting in December .

Karen Akinsanya: The data demonstrated that SGR 2921 exhibits strong antitumor activity in vivo across multiple preclinical tumor models, including cell-derived xenograph models as monotherapy and in combination with standard of care. We are advancing SGR 2921 through I&D enabling studies and are on track for an I&D submission to the FDA this year. Now, we turn to our V1 program.

Data demonstrated that Spi 2921 exhibit strong antitumor activity in vivo across multiple preclinical tumor models, including cell derived xenograft models as a monotherapy and in combination with standard of care. We are advancing STR 29, 21 through IND, enabling studies.

And are on track for 90 submission to the FDA. This year turning to our <unk> program. We are pleased to announce that we have selected STS $35 15, as our development candidate SPF $35 15 demonstrates strong antitumor activity with limited off target effects in preclinical models, we look forward to.

Karen Akinsanya: We are pleased to announce that we have selected SGR 3515, which demonstrates strong antitumor activity with limited off-target effects in preclinical models. We look forward to further characterizing SGR 3515 as we move through I&D enabling studies. Clinical data from other companies, win-win programs, has provided evidence of clinical activity in several forms of cancer with high unmet need, including proof of concept in mutual. and ovarian cancers.

Characterizing STL $35 15, as we move through IND, enabling studies clinical data from other companies. We won programs has provided evidence of clinical activity in several forms of cancer with high unmet need including proof of concept in uterine and ovarian cancers.

Karen Akinsanya: Our pipeline extends beyond oncology and includes programs in immunology and neurology. The development of neuroscience therapeutics has been incredibly challenging and has therefore lagged behind oncology for many years. We believe this is an area where our platform can provide a significant competitive advantage.

Our pipeline extends beyond oncology and includes programs in immunology engineer allergy.

The development of neuroscience therapeutics has been incredibly challenging and therefore have lagged behind oncology for many years. We believe this is an area where our platform can provide a significant competitive advantage. Our scientists are making important computational advances and the ability to make accurate predictions about key properties.

Karen Akinsanya: Our scientists are making important computational advances in the ability to make accurate predictions about key properties required for successful drug development in this area, such as the ability to penetrate the blood-brain barrier. This new method is now being leveraged internally as we expand our portfolio in neurology, and has resulted in the addition of both collaborative and wholly owned programs in neuroscience. We recently announced that we are advancing a LAR2 program, which is a promising target with disease-modifying potential in Parkinson's disease.

As required for successful drug development in this area such as the ability to penetrate the blood brain barrier.

The method is now being leveraged internally as we expand our portfolio in neurology and has resulted in the addition of both collaborative and wholly owned programs in neuroscience.

We recently announced that we are advancing a lot two program, which is a promising target with disease modifying potential in Parkinson's disease. This program meets all the criteria. We use for target selection. It is genetically validated with biomarker proof of concept achieved by others in the clinic.

Karen Akinsanya: This program meets all the criteria we use for target selection. It is genetically validated with biomarker proof of concept achieved by others in the clinic. We have generated multiple proprietary cryoen structures of LAR2 that are providing insight into overcoming drug design challenges. Our structural biology insights provide an opportunity to improve on the profiles of other LARC2 inhibitors by enhancing selectivity and minimizing drug-drug interactions.

We have generated multiple proprietary <unk> structures have lot to such as providing insight into overcoming drug design challenges, our structural biology insights provide an opportunity to improve on the profiles of other <unk> inhibitors by enhancing cell activity and minimizing drug drug interactions.

Karen Akinsanya: We also recently announced a multi-component agreement with Otsuka Pharmaceutical that includes a collaboration to discover small molecules for an emerging CNS disease target, as well as knowledge transfer and an expanded licensing agreement. For the CNS program, Schrodinger will be responsible for drug design through lead optimization, and Otsuka will be responsible for all other drug discovery and clinical development activities. And finally, on the neuroscience front, we recently added a new program in neurology to our existing collaboration with BMS.

Also recently announced a multicomponent agreement with Otsuka pharmaceutical that include the collaboration to discover small molecules for an emerging CNS disease targets as well as knowledge transfer and an expanded licensing agreement for the CNS program Shirting and will be responsible for drug design through lead optimization and otsuka will.

We'll be responsible for all other drug discovery and clinical development activities and finally on the neuroscience front. We recently added a new program in neurology to our existing collaboration with BMS.

Karen Akinsanya: Our multi-target collaboration with BMS is proceeding very well. We expect our first program within this partnership to advance to development candidate status soon, which is included in the first quarter of 2023 drug discovery guidance Jeff provided. We are proud to be delivering a development candidate, approximately two years after beginning our partnership together. We continue to focus on initiating new programs that we may elect to partner with or advance independently to key and inflection points.

Our multi target collaboration with BMS is proceeding very well, we expect <unk> program within this partnership to advance two development candidates data soon which is included in the first quarter 2023 drug discovery guidance, Jeff provided.

We are proud to be delivering a development candidate approximately two years after the beginning our partnership together.

We continue to focus on initiating new programs that we may elect to partner or advance independently to key inflection points. We have several undisclosed programs at various discovery stages up through lead optimization in the areas of oncology immunology and neurology, we expect to share more details about these programs.

Karen Akinsanya: We have several undisclosed programs at various stages of discovery up through lead optimization in the areas of oncology, immunology, and neurology. We expect to share more details about these programs later this year. In summary, we are pleased with the progress we have made over the past year and expect continued advancements in 23 across our pipeline of collaborative and proprietary programs. We are excited about the work we are doing to bring new medicine. to patients more efficiently, and we look forward to updating you on our R&D activities throughout the year. I will now turn it back over to Rami. Thanks, Karen.

Later this year.

In summary, we are pleased with the progress we have made over the past year and we expect continued advancement in 2023 across our pipeline of collaborative and proprietary programs. We are excited about the work we are doing to bring new medicines to patients more efficiently and we look forward to updating you on our R&D activities throughout.

Yes.

I will now turn it back over to Rami. Thanks, Karen as you can hear we are very excited about the year ahead and at this time, we'd be happy to take your questions.

Ramy Farid: Thanks, Karen. As you can hear, we are very excited about the year ahead, and at this time, we'd be happy to take your questions.

Operator: As a reminder, to ask a question, please press Star 1-1 on your telephone.

As a reminder to ask a question. Please press star one one on your telephone and wait.

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Our first question comes from the line of do Kim with Piper Sandler.

Doe Kim: Our first question comes from the line of Doe Kim with Piper Sandler.

Great Good afternoon, and thanks for taking my questions.

Ramy Farid: Great, good afternoon, and thanks for taking my questions. First, on the fourth quarter software sales and 2023 guidance. Looking at the renewals and the multi-year agreements that drove fourth quarter upside, how should we think about the range of years for these multi-year agreements and the dynamics of those renewals? Was the interest driven by the customer in renewing early? Should we assume that the renewals for next year would be lower? Hi Joe, this is Rami.

First on the fourth quarter software sales and 2023 guidance.

Looking at the.

Renewals and the multiyear agreements.

That drove fourth quarter upside.

How should we think about.

The range of years for these multiyear agreements and the Nymex of.

Those renewals.

Was the interest driven by the customer and renewing early.

<unk>.

But should we assume that the renewals for next year would be lower.

Hi, This is rami. Thanks. Thanks for the question. So first the beginning part of your question.

Geoffrey Craig Porges: Thanks for the question. So first, the beginning part of your question: typical multi-year deals are two to three years. And while it is the case that some of the growth in Q4, the sort of extraordinary growth that we saw in Q4, came from some multi-year deals, it's important to understand that actually that wasn't all of them, all of the sources of the growth. We had a number of opportunities, and believe me, it was hard work, it wasn't easy, and we think that the strength of the business, the strength of the technology sort of allowed us to close a number of deals at the end, you know, before the end of the year that, you know, took quite a bit of work.

Typical multiyear deals are two to three years.

Yeah.

And while it is the case that.

Some of the growth.

In Q4, the sort of extraordinary growth that we saw in Q4 came from some multiyear deals it's important to understand that actually that wasn't all of them all of the source of the growth we.

<unk> had a number of opportunities.

And believe me it was hard work it wasn't easy.

And we think that the strength of the business the strength of the technology sort of allowed us to close a number of deals.

At the end of <unk> before the end of the year that.

We're we're.

Geoffrey Craig Porges: So let me emphasize also these multi-year deals have been going on, you know; we've been doing them for a while. We do them for strategic reasons. It's often something of mutual interest for us and the customer, but we still feel very confident that despite the lumpiness that the multi-year deals cause, we still feel very good about the guidance that we're giving, the 13 to 17% growth for the year, you know, despite some of the lumpiness, maybe you can call it headwinds that some of the multi-year deals give.

Quite a bit of work so let me emphasize also.

These multiyear deals have been going on we've been doing them for awhile, we do them for strategic reasons.

It's often something of mutual interest for us.

And the customer.

But we still feel very confident that despite the lumpiness that the multiyear deals cause.

We still feel very good about the guidance that we're giving the.

13% to 17%.

Growth for the year.

Despite some of the.

Lumpiness, maybe you can call it headwinds that some of the multi year deals given the reason is because we've been doing them for a while right.

Geoffrey Craig Porges: And the reason is that we've been doing them for a while, right? So, as some multi-year deals, maybe happening in 22, there were some in 20 and 21, that, of course, now come up for renewal in 23. Hope that makes sense.

Some multi year deals.

Maybe happening in 'twenty two there were some in 2020 one that of course now come up for renewal in 2003 hope that makes sense.

Yes, that's helpful. Yes, Jeff can add something sorry, yes, yes, sorry.

Geoffrey Craig Porges: Something, sorry, yep. Yeah, sorry, Joe. First thing is, I signaled that multi-year deals were something of a headwind coming into the fourth quarter compared to the fourth quarter of 2021, and I think you can see that we more than overcome that particular headwind and indeed some of the others we flagged up at the start of the corner. As Romney pointed out, we did sign multi-year deals in the fourth quarter of 2022, but I've indicated more of less very broad boundaries to offset the multi-year deal contribution in the fourth quarter of 2021.

First thing is we signalled that multiyear deals were something of a headwind coming into the fourth quarter compared to the fourth quarter of 2021.

You can see that.

More than overcome overcame those that particular headwind and indeed some of the others, we flagged up at the start of the quarter.

As Rami pointed out.

We did sign some multi year deals in the fourth quarter of 2022.

But as indicated more or less very broad boundaries offset the multiyear deal contribution in the fourth quarter of trying to 'twenty, one, but obviously there was significantly more growth than that.

Geoffrey Craig Porges: But obviously, there was significantly more growth than that in what we reported in the fourth quarter, and that was very much from existing customers, and those customers believe that they have indicated an interest in stepping up their deployment of our software. And this is very important.

And what we reported in the fourth quarter.

And that was very much.

Our existing customers and those customers.

Ladies.

And because of the interest in stepping up their deployment of our software and this is very important.

Geoffrey Craig Porges: They went from being significant customers to being, I would say, significantly larger customers. And I don't want to specifically identify them, but we've indicated for the first time that we will have four customers with annual contract values over $5 million in 2022 and had two in 2021. So that trend is headed in the right direction and is consistent with what I've alluded to in the fourth quarter, which is existing customers.

In all cases went from being significant customers to be.

I would say significantly larger customers.

And I don't want to specifically identify them, but we've indicated for the first time that we have four customers with annual contract value over $5 million in 2022 and had to in 2021. So that trend is heading in the right direction.

It is consistent with what has alluded to in the fourth quarter, which is.

Geoffrey Craig Porges: having positive experiences with the technology and stepping up their purchases. Now, in a fraction of those cases, they elected to implement multi-year agreements, but the biggest driver of the step-up in the fourth quarter was customers saying, "We want to step up our purchase of software and the scale of the deployment of the technology." So I hope that gives you a little bit more color. And then, quickly, for some commentary on 2023, Clearly, we are going to have to once more overcome the effect of the multi-year contracts in 2022 when we get to the end of 2023.

Listing customers.

Having positive experiences with the technology and stepping up their purchases now in a fraction of those cases.

They elected to implement multiyear agreements, but the biggest driver of the step up in the fourth quarter with customers, saying, we want to step up our purchase of software the scale of deployment of the technology.

I hope that gives you a little bit more color and then quickly for a commentary on 2023.

Clearly we are going to have to once more.

<unk> the effects of the multi year contracts.

In 2022, when we get to the end of 2023.

Geoffrey Craig Porges: And indeed, we have some multi-year contracts from 2021, obviously given what Rami said about two years and even from 2020, given three years. But I think you can see that the trends in the business are sufficiently strong that we're confident that we can meet those contracts. And in many cases, to be standard, our expectation is that those customers will renew their multi-year agreements, and we're optimistic that they'll renew their multi-year agreements at a higher level because, clearly, once they've been using our technology for three years on a pretty extensive basis, it will be quite disruptive for them to stop using the technology at the end of the calendar year. So I hope that gives you more color.

We have some multiyear contracts from 2021, obviously, given what Rami said about two years and even through 2020, given three years.

But I think you could see that the trends in the business are sufficiently strong.

But we're confident that we can overcome those contracts and in many cases.

Yes samad.

Our expectation is that those customers will renew their multiyear agreements and we're optimistic that they'll renew the multiyear agreements at a higher level because currently once they've been using our technology for three years.

It's pretty expensive basis, it will be quite disruptive for them too.

Stop using the technology at the end of the calendar year. So I hope that gives you more color.

Yes, that's definitely helpful.

Doe Kim: Yeah, that's definitely helpful to make things a lot more clear. I just want to follow up on the drug discovery side of the guidance. It sounds like the guidance is more of a probability-adjusted range, and... The goal remains at 100 million. Does that, unadjusted, if you hit on all these milestones, come to 100 million or more?

A lot more clear I just wanted to follow up on on the drug discovery side of the guidance.

It sounded like.

The guidance is more of a probability adjusted range and.

The goal remains at $100 million does that unadjusted. If you hit on all of these milestones come to 100 million or more.

Geoffrey Craig Porges: Yeah, that's clearly an important question. So we, there are multiple paths to greater than 100 million. And we knew that at the start of 2022, and those paths still exist now in 2023. And so if we are successful with both the execution of projects within our control, and if our partners complete projects under their control, and if our partners complete projects under their control, and we're successful with business development initiatives, then yes, we would achieve that objective. But at this stage of the year, we think it's sensible to be giving guidance about what we Great, perfect. That's all the progress, and thanks for taking my questions.

Yes.

Clearly an important question.

There are multiple paths to the greater than $100 million.

New that at the start of 2022 and those pumps still exist now in 2023.

And so if we are successful with both the execution of.

Projects within our control and as our partners complete projects that control.

And we are successful with business development initiatives, then, yes, we would achieve that objective, but at this stage of the year. We think it's sensible to be giving guidance about what we really know and have a high degree of certainty about and thats the basis for the guidance that we've provided today.

Great perfect.

Congrats on all the progress and thanks for taking my questions.

Doe Kim: Great, perfect. Congratulations on all the progress, and thanks for taking my questions. Thanks, Del. Our next question comes from the line of David Lieberwitz with City. Thank you very much for taking my question. I guess first, if the TIC2 asset was licensed and you received the equity payments and gains for it, how would the guidance for drug discovery have been different? If at all, had that deal not been a

Thanks, Tom.

Our next question comes from the line of David Leibowitz with Citi.

Thank you very much for taking my question.

I guess first.

On the two asset.

Those licensed and you receiving of the equity payments and gains for.

How would the guidance for drug discovery has been different.

If at all.

Had that.

David Neil Lebowitz: Hi David. The tick two distribution doesn't have any effect on drug discovery revenue. So, you know, a cash outlook would be quite different had the tick two distribution not occurred, but that is, you know, not reported through our discovery revenue line. As I indicated in my prepared remarks, it will be reported through our other income line. So, you know. What I meant to say was, had it been kept by Nimbus and the deal never occurred, would the guidance for drug discovery have been potentially different?

That deal not occurred.

Okay.

Hi, David.

The tissue distribution doesn't have any effect on the drug discovery revenue so yes.

Our cash outlook will be quite different.

Particularly the distribution not occurred but that is.

Not reported throughout discovery revenue line.

As I indicated in my prepared remarks, it will be reported through our other income line.

No.

Yes.

What I meant to say was had it been kept by Nimbus deal never occurred.

The guidance for drug discovery had been potentially different.

No no yes, yes, yes.

Geoffrey Craig Porges: I mean, yeah, it's no. Okay. But now we understand your question. Yeah, yeah.

Yes.

I mean, yes, it's no.

Okay.

But now we understand your question yes.

David Neil Lebowitz: Yeah, and then back on the multi-year partnerships, I know the dynamic of Lottie's partnerships tends to be a larger upfront payment, and over time, it's more steady beyond that. Is it the same dynamic with the multi-year versus the single year? Is there a mechanism for the customers to, I guess, upsize? mid-contract, if so?

And then.

Back on the multiyear partnerships I know the dynamic of.

Bodies partnerships is tends to be a larger upfront payment.

And over time, it's more steady beyond that.

Is it the same dynamic.

What the multiyear versus the single year.

Is there a mechanism for the customers to I guess upsize mid contract.

David Neil Lebowitz: I am just trying to figure out how to look at this and its impact going forward. Yeah, absolutely. That's a great question because it may not seem obvious that if you sign a multi-year deal, let's say it's a three-year deal, that, you know, we're sort of, there's no more interaction with a customer for three years. That's absolutely not the case, and we have many, many examples of customers in the middle of that term, recognizing what essentially every customer realizes at some point, which is that they don't have access to enough licenses.

If so.

Just trying to figure out how to look at this and then back going forward, yes, absolutely Thats a great question because.

It may not seem obvious that there is that if you sign a multiyear deal, let's say, it's a three year deal that we're sort of there is no more interaction with the customer for three years, that's absolutely not the case and we have many many examples of customers.

In the middle of that term racking.

Recognizing what essentially every customer is recognizing at some point, which is that they are.

Don't have access to enough licenses. This is what's happening and this is where the growth is coming from that remember. This is what Jeff said in his prepared remarks. The majority of our customers are under utilizing the software. They all once they start using it at a sufficient scale and they're trying to get the kind of results that that theyre seeing some of their colleagues that are using it.

David Neil Lebowitz: This is what's happening. This is where the growth is coming from. That Remember, this is what Jeff said in his prepared statement in March: the majority of our customers are underutilizing the software. They all, once they start using it at a sufficient scale, and they're trying to get the kind of results that they're seeing some of their colleagues that are using it at a high level, not colleagues, but you know, they're peer companies and us, then there's a need to increase the number of licenses to the software so they get access to more of the technology.

Colleagues, but they're peer companies and us.

Then there is a need to increase the number of licenses to the software. So they get access to more of that technology and those discussions are happening continuously it's not.

David Neil Lebowitz: And those discussions are happening continuously. It's not, and that can happen in the middle of the year, in the middle of the term, even if it's a multi-year term, and we have examples of that actually happening. Got it. Yeah. And the last question on enrollment in your study. Do you have any thoughts on when we might actually be able to see data based on what you've seen thus far?

And that can happen in the middle of the year in the middle of the term.

Even if it's a multi year term and we have examples of that actually happening.

Got it.

And the.

Last question on.

Enrollment in your study.

Do you have any thoughts on when we might actually be able to see data based on what you've seen thus far.

Karen Akinsanya: Hi David. As we've described in our remarks, the enrollment is ongoing, sites are being activated, and we are working hard with our sites and investigators to bring in patients and gather the data that we've described, safety, pharmacology, and preliminary efficacy data. I suspect that by the end of this year and into next year, we'll be in a position to talk more about the data that's available to us, which we'll be able to describe in more detail with you and others. So we're working on it, and yeah, we look forward to sharing updates in the future.

Hi, David.

As we described in our remarks, the enrollment to the ongoing sites are being activated and we are working hard with sites and investigators to.

Bring in patient and gather the data that we've described safety pharmacology.

And preliminary efficacy data.

I suspect that by the end of this year into next year and we'll be in a position to talk more about the data available to us that we'll be able to describe in more detail.

With you and others.

We're working on it.

Yes, we look forward to sharing updates in the future.

Thank you for taking my questions.

Michael Jonathan Yee: Our next question comes from the line of Michael Yee with Jeffries. Hey guys, thanks for taking my question and congrats on the quarter. This is Eichi on behalf of Mike.

Thanks, a lot.

Our next question comes from the line of Michael Yee with Jefferies.

Hey, guys. Thanks for taking my question and congrats on the quarter. This is <unk> on for Mike.

Michael Jonathan Yee: When I want to ask about the pipeline assets, two related questions. I guess what does the new guidance for drug discovery include? Is it consistent with the previous 100 million? You know, you said that doesn't include out licensing the three lead oncology assets. Is that still the case here with the new drug discovery guidance? And on the, on the, on, on, um, it would be really nice if you could talk about, uh, ultimately how you think about, uh, the development of the drug moving forward. Are you expecting single agent activity, or is this more of a combination with its distinct drugs, sort of play, you guys are.

What I wanted to ask on the pipeline assets two related questions I guess does the new guidance for drug discovery include.

Is it tends to start with the previous $100 million you said that doesn't include out licensing the three.

Our lead oncology assets.

That is still the case here for with the new drug discovery guidance and on the on March one.

It'd be really nice if you could talk about ultimately how you think about development of that drug moving forward are you expecting single agent activity or is this more of a.

Combination with existing drugs.

You guys are going forward. Thank you.

Karen Akinsanya: What you guys are going for, thank you.

Got it thanks a lot.

Karen Akinsanya: Thank you. Thanks a lot.

No.

Karen Akinsanya: So, as you pointed out, the guidance that we've given for drug discovery does not include revenue from outlicensing any of our mature assets. Instead, as Jeff described, it comes from a range of ongoing discovery collaborations as well as completed collaborations where we're eligible for future milestones. On your second question with regard to Malt 1, as you know, we're pretty excited about this target. We believe, based on our preclinical data, as well as what we understand is occurring in the clinic in other programs, we do expect to see some monotherapy activity from WOT1.

As you pointed out.

Guidance that we've given suggest discovery does not include revenue from outlines in saying any material asset.

As Jeff described it from a range of <unk>.

Ongoing discovery collaboration as well as completed collaborations were eligible for ph amount then.

On your second question with regards to my one.

You know, we're pretty excited about this target.

We believe that based on our preclinical data.

As well as what we're understanding is occurring in the clinic and other programs. We do expect to see some monotherapy activity from one. However, we do also believe that based on data in the public domain.

Karen Akinsanya: However, based on data in the public domain and work that we're doing, we do also believe that there is a substantial opportunity for Malt 1 in combination with BTK inhibitors, with BCL2 inhibitors, and potentially other agents that are being improved for the treatment of B-cell malignancies. So we remain very enthusiastic about Mort-1 and look forward to sharing more about our program in the future.

And what we are doing there is a substantial opportunity to promote one in combination with basically inhibited with bcl two inhibitors and potentially other agents that are being improved for the treatment of b cell malignancy. So we remain very enthusiastic about <unk> one of the bullets.

To sharing more about our program in the future.

Karen Akinsanya: Got it, got it, thank you. And just one quick follow-up. Has the thinking around the strategy of out-licensing changed at all, or are you still thinking of out-licensing after obtaining some initial human data? So, as we've shared in the past, you know, we think this

Got it got it thank you and just one quick follow up.

That's the thinking around the strategy of out licensing the mature assets changed at all or are you still thinking of out licensing after obtaining some initial human data.

Karen Akinsanya: So, as we've shared in the past, you know, we think this is very asset and landscape dependent. I think, in general, we view ourselves as very capable of generating early clinical data.

So as we as we said in the past we think this is very asset and landscape dependent.

I think in general.

Is very capable of generating early clinical data.

Karen Akinsanya: We also believe that some of our assets will do very well in partnership with other companies who have combination agents. However, I do want to emphasize that on an asset by asset basis, we will continue to evaluate whether it makes sense for Schrodinger to continue investing in these programs through development or whether it makes sense to partner them. So I think we'll obviously have an opportunity to review that as these assets continue to progress in the clinic. Our next question comes from the line of Gary Nachman with BMO Capital Markets.

<unk> believes that some of our assets will be very well in partnership with other companies who have combination agent. However, I do want to emphasize that on an asset by asset basis.

We will continue to evaluate whether it makes sense the shredding as continue investing in the programs through development or whether it makes sense to partner them.

I think we will obviously have an opportunity to review that as these assets continue to progress in the clinic.

Understood. Thank you.

Yeah.

Our next question comes from the line of Gary Nachman with BMO capital markets.

Gary Jay Nachman: Hi guys, good afternoon. First, just following up on the multi-year deals, I just want to be clear: is that pulling forward some revenue and weighing a little bit on the 20-23 software growth of 13 to 17 percent? And did you offer any discounts and rebates to encourage closing those agreements, maybe in the latter part of the year? And with respect to the 13 to 70 percent growth, Jeff, you said most of that is expected to be from existing customers.

Hi, guys good afternoon.

So first just following up on the multiyear deals I just want to be clear is that pulling forward some revenue and weighing a little bit on the 'twenty to 'twenty three software growth of 13% to 17%.

And did you ask about any discounts and rebates to encourage closing those agreements may be in the latter part of the year.

And with respect to the 13% to 17% growth Jeff.

Most of that is expected to be from existing customers, but could you potentially.

Gary Jay Nachman: But could you potentially have some new customers as well that would help, you know, drive some of that growth? Just comment on how much there is in terms of some of the new customers. Thanks.

Have some new customers as well that would help drive some of that growth just comment.

How much is out there in terms of some of the new customers potentially.

Geoffrey Craig Porges: Okay, so let me start off with the question about the multi-year deals. So, you know, in a certain way, a multi-year deal does pull revenue forward compared to annual deals because it's a penny on the nature of the deal, but in most cases, you do get more than one-third of, let's say, the three-year deal gets to be recognized in the period in which you sign the deal. And so there's a greater than one-third contribution in the first year or a greater than pro rata contribution in the first year.

Yes.

Okay. So let me start off with your question about the multiyear deals.

No.

In a certain way a multiyear deal does pull revenue forward compared to annual deals because.

Depending on the nature of the deals with most of the cases.

You do get more than one third less soluble <unk> deal just to be recognized in the period in which you sign the deal and so there is a greater than one third contribution in the first year or greater than pro rata contribution the first year. So.

Geoffrey Craig Porges: So I mentioned that a proportion of the revenue upside in the fourth quarter, but by no means the majority of it came from multi-year deals. The majority of the revenue upside came from existing customers. And bear in mind that we said, and we continue to say, that all of the top 20 pharmaceutical companies are our customers. We've confirmed a very high level of customer retention. Our total customer number went from 1,600 to 1750. That's customers with over more than $1,000 a year in annual contract value. So, you know, the universe.

I mentioned that a proportion of the <unk>.

Our revenue upside in the fourth quarter, but by no means the majority of it.

For multiyear deals.

The majority of the revenue upside came from existing customers and bear in mind that we've said and we continue to say about all of the top 20 pharmaceutical companies are our customers.

Confirms a very high level of customer retention, our total customer number.

Went from <unk> hundred to $17 50 customers with over more than a thousand dollars a year.

On annual contract value so.

Geoffrey Craig Porges: of biofama is our customer base. So mathematically, if we, all the big farmers are our customers. So if we have 20 more customers and they're small customers, it's really not going to move the needle. So moving the needle has to be increasing the adoption of that technology in those large customers, and that's why it's flagged up that there are a handful who are at that five million plus annual contract value, but that is a relatively small minority of the global farmer landscape. We see opportunities for those largest customers to still increase their use, but So to sort of summarize long with an answer, a small contribution to Q4 from revenue that might otherwise have been reported in future periods, have they been annual contracts?

The universe of Biopharma is our customer base so mathematically.

All the big pharma as are our customers. So if we have a <unk>.

<unk> more customers in the small customers, it's really not going to move the needle so moving.

Moving the needle has to be increasing.

The adoption of that technology, and those large customers and that's why the slides up there are a handful who are.

$5 million plus annual contract value, but that is a relatively small minority of the global pharma landscape. So.

We see opportunities for those largest customers to still increase the use but also to move their peers towards that range.

Really the principal driver so up.

To summarize longer to ramp.

That's a small contribution to Q4.

From revenue that might otherwise have been reported in future periods have they been annual contracts and.

Geoffrey Craig Porges: and lots of opportunity to continue to grow. That's encompassed within our guidance. And we are very confident that we'll be able to overcome, you know, the effects of the multi-year deals that were signed in 2022. The last part of your question about sort of rebates and discounts and all that sort of thing.

Lots of opportunities to continue to grow.

Yes.

Encompassed within our guidance.

And Ah.

We're very confident that we'll be able to overcome.

Of the multiyear deals that were signed in 2022.

Last part of your question about.

So rebates and discounts and all that sort of thing.

Geoffrey Craig Porges: We don't want to be commenting publicly about our commercial strategies, but I would say that we are very excited about the interest from our customers in wrapping up the scale of the deployment of that technology. We think they'll see advantages to that, and we think that's beneficial for us as well. So, of course, we're going to be working pretty diligently to try and facilitate that, and we think that it's in everybody's interest to be getting the benefit of the large-scale deployment of the technology.

We don't want to be commenting publicly about our commercial strategies, but suffice to say that we are very excited about the interest in our customers in wrapping up the scale of deploying the best technology, We think they all see advantages to that we think that that's beneficial for us as well so of course, we're going to be <unk>.

Working pretty diligently to try and facilitate that.

We think that's in everybody's interest to be getting the benefit.

Large scale deployment of the technology.

Ramy Farid: And I'll just add that that's perfect, and I'll just add one extra thing just to remind you, and we talked a lot about this before. Of course, we have the material science business, and there, the growth really does come mostly, of course, given that it's a, you know, a younger business, from adding new customers. And we continue to see that happen. We continue to expect, you know, we expect that to continue to happen this year and beyond. Okay, great. That's helpful. And then just one of the follow-up questions, Rami.

I'll, just add Thats perfect and I will just add one extra thing just to remind you and we've talked a lot about this before of course, we have the material science business and there the growth really does come mostly of course given that.

A younger business from adding new customers and we continue to see that happening we continue to expect.

Expect that to continue to happen this year and beyond.

Okay great.

And then just one other follow up of Amit So just talk a little bit more about the initiatives.

Ramy Farid: So just talk a little bit more about the initiatives that have been progressing to accelerate software utilization and adoption among your existing customers and just how much more that's going to continue in 2023. And, you know, how much spend is associated with that, if that's going to be ramping up as well in order to push some of those initiatives forward. Here's the challenge we have, which we've talked about before.

That has been progressing to accelerate the software utilization and adoption.

With your existing customers and just how much more of Thats going to continue in 2023.

How much spend is associated with that if that's going to be ramping up as well.

In order to push some of those initiatives.

Here's what.

The challenge, we have which we've talked about before.

So.

Ramy Farid: So our customers, of course, will scale up when they see the impact it has on their programs. But in order to see the impact, you have to use the software at a high scale. So we have this kind of chicken and egg cycle, right, that we have to break into. And what we have found is incredibly effective. There are two things.

Our customers of course will scale up when they see impact it has on their programs.

But in order to see the impact you have to use the software to high scale. So we have this kind of chicken and egg cycle right that we have to break into and what we have found is incredibly effective there are two things.

Ramy Farid: One is, they're starting to become really overwhelming validation or data to show that using the software at this really high scale has a profound impact on the timelines of projects, on the likelihood of their success, and on the quality of molecules. That's happening in our own programs. You heard Karen talk about speed.

One is.

They are starting to become really overwhelming validation data to show that this.

Using the software that's really high scale has a profound impact on the timelines of projects on the likelihood of their success on the quality of the molecule that's happening from our own programs you heard Karen talk about <unk>.

Ramy Farid: We talk a lot about quality molecules. You see the success of Nimbus and Morphic and Structure and other companies we've been involved in. It's becoming sort of overwhelming and a little hard to ignore, right? I mean, the validation is very clear.

<unk>, we talk a lot about the call. The molecules you see the success of of Nimbus, and Morphic and structure and other companies, we have been involved and it's becoming sort of.

Overwhelming and a little hard to ignore right I mean, the validation is is very clear. So that's become a very very effective way to convince customers that they have to scale up now the other the other the other strategy involves <unk>.

Ramy Farid: So that's become a very, very effective way to convince customers that they have to scale up. Now, the other strategy involves making sure that our customers, once they get access to it, Remember, this is somewhat of a transformation of the way drug discovery is done. That's what this is about. This is about shifting chemistry resources to relying more on computation. It's making it so that smaller teams can work on more programs because so many more calculations are running. And where are they going to learn all of that?

Making sure that our customers.

Once they get access to it.

Remember this is this is.

Somewhat.

The transformation of the way drug discovery is done and Thats. What this is about this is about shifting chemistry resources.

Two.

To relying more on computation.

It's making it so that smaller teams can work on more programs because so many more calculations are running and where are they going to learn all of that thats by us engaging with them.

Ramy Farid: That's by us engaging with them for a little bit and transferring that know-how and how we do things. And we've been very successful in doing that. So all that validation, that training. But I have to tell you that what we're seeing, and Jeff talked about this, is that we don't think this requires very significant extra resources. A customer scaling up their usage of the software by a factor of 10 doesn't require us to spend that, you know, anywhere near that amount of an increase in effort, if that makes sense.

A little bit.

And transferring that Knowhow and.

And in how we how we do things and we've been very successful in doing that so all of that validation that training, but I have to tell you that what we're seeing and Jeff talked about this is we don't think this requires very significant extra resources.

Customers scaling up their usage of the software by factor of 10 doesn't doesn't require us to spend anywhere near that.

Amount of increase in <unk>.

An effort if that makes sense.

Ramy Farid: So we continue to be able to see this kind of operational leverage, and we're coming up with pretty clever ways we think of breaking into that sort of chicken and egg problem, which is clearly working, as you heard from some of the new KPIs that we've. Yeah, that's great. Thank you. Our next question comes from the line of Vikram Perohit with Morgan Stam.

So we continue to be able to see this kind of operational leverage and we are coming up with pretty clever ways, we think breaking into that sort of chicken and egg problem, which is clearly working as you heard from some of the new Kpis that we've reported.

Yes, that's great. Thank you guys okay.

Okay.

Our next question comes from the line of Vikram <unk> with Morgan Stanley .

Vikram Purohit: Hey guys, this is Will on behalf of Vikram. Thanks for taking our question and congrats on the quarter. Just one from us on the new development candidate 3515. Could you walk us through how you believe the candidate is differentiated at all or what aspects in particular of the molecule you've been working to optimize?

Hey, guys. This is will on for Vikram. Thanks for taking my question and congrats on the quarter.

Just one from us the new development candidate $35 15.

Could you walk us through how.

Do you believe the candidate is differentiated at all or.

What aspects in particular, the molecule <unk> been working to optimize.

Karen Akinsanya: Yes, happy to. SDR 3515 is a very potent Wii inhibitor, so it has similar characteristics to other Wii inhibitors. But we believe, and this is what we've been working on for the past few years, is that it has an optimized selectivity profile. So, as you know, the previous we one inhibitors had off-target kinase activities. We believe we've optimized that kind of profile, and that correlates very nicely with the Inveo data that we're seeing, that really, I think, validates the profile and replicates what's been seen all the way through phase two in terms of the activity and efficacy of we-1 inhibitors in the clinic.

Yes happy to.

Asking about Npls 35 15.

He is a very potent wee one inhibitor.

Similar characteristics to other <unk> inhibitors, but we believe and this is what we've been working on for the past few years is that it has a optimized selectivity profile, so as you're well aware of the previous.

<unk> inhibitors had off target kinase activity.

We believe we've optimized that timing profile and that correlates very nicely with the in vivo data that by saying that really.

<unk>.

Validate the profile.

And replicate what's been seen all the way through phase III in terms of the activity and efficacy one inhibitors in the clinic. Furthermore, we believe that we want inhibition.

Karen Akinsanya: Furthermore, we believe that inhibitions are going to be used in the clinic and on the marketplace eventually in combination with other agents. And as a result of that, we think the drug-like properties, including things like drug-drug interactions, and other physical chemical properties, are really important to maximize the potential opportunity for V-1 inhibitors. We've been working on all of those aspects using the platform, and we're very happy with the profile of this compound. So we look forward to moving this forward and studying its profile in the clinic. Okay, that's great. Thanks.

Is going to be used in the clinic and on the marketplace. Eventually in combination with other agents.

As a result of that we think the drug like properties, including things like drug drug interaction.

Physicochemical properties, but really important to maximize the potential opportunity to be one inhibitors. We've been working on all of those assets using the platform and we are.

Very happy with the profile of it comes down.

We look forward to moving forward.

And studying it personnel by the Senate.

Vikram Purohit: Okay, that's great. Thanks very much, and congratulations again. Thank you.

Okay. That's great. Thanks, very much and congrats again thanks.

Chris Shibutani: Our next question comes from the line of Chris Shibutani with Goldman Sachs. Hi, everyone, this is Charlie. I'm on behalf of Chris.

Alright.

Our next question comes from the line of Chris <unk> with Goldman Sachs.

Hi, everyone. This is Charlie on for Chris. Thank you so much for taking our questions and congrats on the great quarter and year.

Chris Shibutani: Thank you so much for taking our questions and congratulations on the great quarter here. Just regarding the guidance, we have one quick one regarding the expected reduction in year-over-year operating expenses. I just wonder what the drivers are there and where you see yourself saving on the spend during the course of the year there.

Just regarding the guidance we had one quick one regarding the <unk>.

<unk> reduction in year over year operating expenses, just wondering what the drivers are there and where are you.

You see yourself savings on the spend.

Geoffrey Craig Porges: Yeah, Charlie, let me be clear. What we've said is that the growth rate will be significantly lower. We reported 40% of X growth in 2022, 42% in 2021. We think in 2023 it will be significantly lower than that 40%, and we expect it to be in line with revenue growth. We do think that we have an opportunity.

Of course of the year there.

Yes, so let me be.

Clear.

While we've said, it's a growth rate will be significantly lower we reported 40% opex growth in 2020% to 42% in 2021.

We think in 2023, it will be significantly lower than that 40%.

We expect it to be in line.

With revenue growth.

We do think that we have opportunities to continue to deliver more operating leverage going forward.

Geoffrey Craig Porges: to continue to level more operating leverage going forward. So it's not an absolute reduction; it's a reduction in growth. But let me then just address your question about where that reduction in growth is. I think the greatest reduction in growth will be in the G&A line. The least reduction in growth, I mean, the most growth, will continue to be in R&D as we support the platform and the portfolio that Cown has described. And then somewhere in between will be the sales and marketing expense growth, and of course, that's going to be most closely tied to the revenue growth result.

So it's not an absolute reduction.

Auction and growth.

But let me then just address your question about where that reduction in growth is.

I think the greatest.

Reduction in growth will be in the G&A line.

The least reduction in growth the most growth will be continue to be in R&D as we support the platform and the portfolio.

Tom has described and then somewhere in between will be the sales and marketing.

Yes.

Growth.

Of course, that's going to be most closely tied to the revenue growth results.

Geoffrey Craig Porges: Got it, that's really helpful. Thank you so much for the clarification there. And then, I guess, regarding the R&D spend and, you know, moving forward with the Wii inhibitors, happy and excited to hear about the progress there, just wondering and piggybacking off of the last question. Just curious, how are you thinking about the indications that you might pursue, whether you think the proof of concept that we've seen from competitors in the B1 space is kind of the way to think about it in terms of indications like uterine carcinoma, or should we expect to be pressing into maybe some newer indications?

Got it that's really helpful. Thank you so much for the clarification, there and then I guess regarding the R&D spend.

Moving forward with that we want inhibitor happy and excited to hear about the progress there just wondering and picking off piggybacking off the last question.

Just curious how you're thinking about the indications that you might pursue whether you think the proof of concept that we've seen from competitors, maybe one space is kind of the way to think about it in terms of indications like uterine carcinoma or should we expect to be pressing into maybe some newer indications and then regarding the potency we want just on a relative basis.

Geoffrey Craig Porges: And then regarding the potentation, of which we won just on a relative basis, is the 3515 kind of thing we should be thinking about in terms of like a higher potency versus the competitors that are out there? Or is it really more of like a comparable potency, but it's more selective so that you might be able to achieve higher doses and not be limited by toxicity? Thank you so much for taking the time to answer our question. Yeah, so on 3515, and we won inhibition, you're quite correct that there has been really impressive.

It's $35 15 kind of.

Should we be thinking about in terms of if I could a higher potency versus the competitors that are out there or is it really more of a comparable potency, but it's more selective so that you might be able to achieve higher doses and not be limited by toxicity. Thank you so much for taking our questions.

Yes.

Turning to slide 15, and we won inhibition yield correct.

Karen Akinsanya: Yeah, so on 3515, and we won inhibition, you're quite correct, but there have been really impressive data in nutrients, cirrhic carcinoma, and ovarian cancer, as well as a number of other solid tumors. We've been working with N.D. Anderson over the last two years, and we basically launched that collaboration to understand more about the potential for sensitive populations, sensitive tumor types. That collaboration is going very well, and while we do believe that there is enough data in the public domain to enrich our phase one trial with patients that we know respond based on existing clinical data, we're also excited to test some of the opportunities coming out of that collaboration.

Correct.

That has been really impressive data in <unk> carcinoma.

As well as a number of other solid tumors.

We've been working with MD Anderson over the last two years.

Basically launched that collaboration to us.

Understand more about the potential sensitive population sensitive tumor type.

That collaboration is going very well and while we do believe that there is enough data in the public domain to enrich our phase one trial with patients that we know that bond based on existing clinical data. We're also excited to test some of the opportunities coming out of that collaboration.

Karen Akinsanya: Regarding potency, we do believe our compound is more potent, but more importantly, we think the combination of the on-target binding, as well as some of the optimized selectivity, is leading to the profile that we actually presented at ACR, where we are seeing an ability to dose this compound intermittently and maintain efficacy while being able to stop dosing. So we think that this dosing regimen, as well as the characteristics of this molecule, have the potential to be quite interesting in the clinic.

With respect to the potency.

We do believe that compounded doses.

But we think the combination of the <unk>.

Target binding as well as some of the optimized selectivity.

Is leading to the profile that we actually presented at ACR, where we are seeing an ability to dose it compounds.

<unk> mentioned Lee and maintain efficacy while.

Being able to stop dosing. So we think that actually this dosing regimen as well as the characteristics of this molecule has the potential to be quite interesting in the clinic and of course, we need to test. This in the clinic to see if that's the case, but it does have a differentiated profile relative to existing.

Karen Akinsanya: And of course, we need to test this in the clinic to see if that's the case, but it does have a differentiated profile relative to existing compounds, as well as being able to replicate what's already been seen in the clinic. I think he might have said thank you, but yeah, so I think we're going on to the next question, right?

Pounds.

Well as being able to replicate what's already been seen in the clinic.

That he might have had thank you.

Yes.

Right.

Our next question comes from Michael Rankin with Bank of America.

Michael Raskin: This is Wolf Chan Alphon from Mike. Thanks for taking the questions. So I wanted to ask more of a higher-level market question. I know that you signaled recently that you've seen trends with large pharma customers stabilize a bit,

Great.

Hi, This is wolf churn off on for Mike. Thanks for taking the question. So I wanted to ask more of a higher level market. One I know that you had signaled recently that you've seen trends with large pharma customers stabilize a bit low biotechs remained under pressure due to the capital market environment. I'm wondering if you can provide a little more color on each cohort and how they trended both.

Michael Raskin: stabilize a bit, while biotechs remain under pressure due to the capital market environment. I'm wondering if you can provide a little more color on each cohort and how they trended both in 4Q and how you expect them to perform throughout 2023. Then, I have a quick follow-up.

And <unk> and how you expect them to.

Performed throughout 2023.

Geoffrey Craig Porges: Sure. So I think we've been clear in the commentary and in the prepared remarks that existing customers really stepped up their purchases and drove the revenue upside in the fourth corner, and the continuation of those trends is captured in our guidance. Now, I also indicated that they are mostly, but not exclusively, pharmaceutical companies, but, of course, there are significant biotech companies in that universe as well. And the reason that I like to point that out, to be honest, is because companies that are really committed to using our technology, even with a relatively small number of projects, can achieve annual contract value or purchase annual use that is in the same range as very large companies that have dozens, if not a hundred or more development projects.

A quick follow up.

Sure.

So.

I think we've been.

And the commentary and the prepared remarks.

That.

Existing customers really.

Stepped up their purchases and drove the revenue upside in the fourth quarter.

And the continuation of those trends.

In that regard.

Now I also indicated that they are.

Mostly but not exclusively.

Pharmaceutical companies.

But of course there are.

Significant biotech companies in that view of us as well.

Reason, though I would like to point that out to be honest just because.

Companies that are really committed to using our technology, even with a relatively small number of <unk>.

Ken.

Achieve annual contract value or purchased and you'll use that is in the same range as very large companies that have dozens if not 100 or more development projects. So that's what gives us the conviction that.

Geoffrey Craig Porges: So that's what gives us the conviction that many, that is, most large companies still have a long way to go in terms of the step up in the deployment of our technology as they attempt to become increasingly digital in their approach to go discover. So I don't want to, I think there's some color there, mostly pharma, some biotech.

Many perhaps most large companies.

We'll have a long way to go in terms of the step up.

And the deployment of that technology.

Attempt to become increasingly digital and their approach to drug discovery.

So.

I don't want to.

I think there is some color there mostly pharma some biotech now if we go back to your question about the issues that we saw.

Geoffrey Craig Porges: Now, we go back to a question about the issues that we saw. We flagged up three issues going into the beginning of the corner. One was international, the sort of temporary effect of exchange. And I think you see that if you look at our K, the contribution from international markets was slightly less in 2022 than it was in 2021. We think that that is at least going to stabilize, if not start to reverse itself in 2022 because those customers in those locations won't face the headwind that our technology is becoming the Chile. The price is more expensive, a high price, as a result of exchange.

We plan to sell three issues starting at the beginning of the quarter.

One was international so temporary effects of exchange.

And I think you'd see that.

If you look at that.

The contribution from international markets was slightly less in 2022, then repeat in.

2021.

We think of.

That is at least starting to stabilize if not start to reverse itself in 2022, because those custom.

Customers in those locations workplace to headwinds in our technology becomes materially.

More expensive for us as a result of exchange.

Geoffrey Craig Porges: We've said before that we don't think that's going to be an issue, and we think that we should be the same. Secondly, we highlighted the lack of emerging biotech companies. And that continues to be the case. We are seeing new customers, but they are purchasing at a relatively small level, particularly in the back half of 2022. So clearly, our number went from 1,700 to 1750, so by definition, new customers, but not new, very large customers, who, you know, not brand new, Genoa, very large customers.

We've said before we don't think thats going to be an issue, which is that we should.

Secondly, we flagged up.

The lack of emerging biotech companies.

That continues to be the case, we are seeing new customers, but they are purchasing it is relatively small level.

Particularly in the backdrop of 2022, so clearly a number with an <unk> $117 50, so by definition, new customers, but not new very large customers.

Yes, no brand used in our of our very large customers. So I think that the thesis about.

Geoffrey Craig Porges: So I think that the thesis about, you know, challenging capital markets for biotech companies and a limited number of new companies being created, caution about the use of capital, I think that that's playing out and that continues to be the case. The last thing that identified the beginning of the quarter, in my mark then was the issue, the uncertainty in big farmer companies. And there have been some interesting things that have occurred across farmers coming to the end of the year and the beginning of the year.

Challenging capital market for biotech companies.

Limited number of new companies being created caution about the use of capital I think that that's playing out and that continues to be the case.

Awesome.

Identified within the quarter.

And the launch then was the issue the uncertainty in big pharma companies.

There have been some interesting things that have occurred across pharma coming to the end of the year and the beginning of the year.

Geoffrey Craig Porges: You know, they've signaled some part about pricing, about their portfolios, some changes in their hiring, etc. That didn't really materialize at the end of the quarter, At the end of the quarter, those customers stepped up and indicated that our technology was a high priority for them, and for a number of them, they stepped up materially in terms of the scale of their deployment and even pre-purchasing. So they indicated with that purchase that we are a quarter of their drug discovery enterprises for a number of years, in the case of the multi-year contract, and a quarter of their drug discovery activities by virtue of the scale of deployment.

Yes, they've signaled some caution about pricing about the portfolios.

So changes in the hiring et cetera.

That didn't really materialize at the end of the quarter at the end of the quarter those customers stepped up and indicated that our technology was a high priority for them and for a number of them stepped up materially in terms of the scale of the deployment and even the pre purchasing so.

<unk> indicated.

That purchase.

We are.

Quarterly of drug discovery enterprises for number of years, besides the multiyear contracts and the quarter their drug discovery activities by virtue of the scale of deployment of technology. So the uncertainty that we had about the pharma purchases I think.

Geoffrey Craig Porges: So the uncertainty that we had about farmer purchases, I think, you know, clarified itself as we went through the quarter and got to the very end of the corner, and I think that's behind the optimism we have, and you hear from us about the outlook for 2023. I hope that answers to these questions

You clarified it so as we went through the quarter industrial burden for the quarter.

Behind the optimism we have you.

A year from us about the outlook for 2023, I hope that answers your question.

Geoffrey Craig Porges: It does, and just on a related note. I was wondering if you've seen any shifts in behavior spending tied to the Inflation Reduction Act. Has it changed your longer term internal pipeline strategy? I know you've spoken about this a bit, but we've heard some mixed messaging from across the industry recently.

It does and just on a related note I was wondering if you've seen any shift in client behavior spending tied to the inflation reduction Act has it changed your longer term internal pipeline strategy I know you've spoken about this a bit but we've heard some mixed messaging from across the industry.

Geoffrey Craig Porges: Yes, look, again, if you look at the 10K that we filed today, we definitely pushed this up as something that we hear as well. But it's not something that we hear in our direct discussions with our customers. It's something we hear through the same channels that you hear, conference codes like this, your investor events, press releases, things coming out of trade groups, etc.

Yes look.

Again, if you look at the 10-K.

Well today, we definitely plagued this up is something that we hear as well.

Tom.

But.

It's not something that we hear in our direct discussions with our customers is something we hear through the same channels that you hear.

Conference calls like this.

Youre investor events.

Press releases.

Coming out of trade groups et cetera, but it's not something that we are seeing to a significant degree from our customers now.

Geoffrey Craig Porges: But it's not something that we are seeing to a significant degree from our customers. Now, I will add that adapting our technology and expanding its capabilities to biologics is a strategic priority for us. And as you've heard from Ramin, and maybe you can comment on this now, we've made a lot of progress there. And there's no doubt that companies

We'll add about adapting our technology stack.

Expanding its capabilities to biologics is a strategic priority for us and as you've heard from Robin maybe you can comment on this now we've made a lot of progress there and there is no doubt that companies are adding to the biologics component of their portfolios, but there are companies that decided no small molecules.

Ramy Farid: are adding to the biologics component of their portfolios, but there aren't any companies that are saying no to small molecules. So we think that our technology has a lot of utility there. Romney, do you want to add to that?

So we think that our technology has a lot of utilities are Rami do you want to add to that yes, no. I think you said it perfectly perfectly and we're looking forward to continue.

Ramy Farid: Yeah, no, I think you said it perfectly, perfectly, and, you know, we're looking forward to continuing to report on progress we're making on extending the technology to biologics. We've been in that space for a long time. We continue to invest. These physics-based methods are agnostic to the modality, and we're starting to leverage that fact. And I think you'll be hearing from us in the coming years about pretty significant progress in the ability to use the software to design better biologically. Thank you, guys.

Continuing to report on progress, we're making on extending the technology to biologics we've been in that space for a long time, we continue to invest in it.

<unk> based methods are agnostic to the modality and we're starting to leverage that that fact.

I think youll be hearing from us.

In the coming years on pretty significant progress.

And the ability to use the software to design better biologics.

Great. Thank you guys.

Operator: To ask a question, please press Star 1-1 on your telephone.

As a reminder to ask a question. Please press star one one on your telephone.

Jack Siedow: Hi, this is Jack on behalf of Matt. Thanks for taking our question. I was curious, last quarter you discussed your cash burn moderating a bit as revenues continue to grow. And at that time, you had probably about four years of cash on the balance sheet. With the infusion you were receiving from the tick two sale, it puts you closer to five years of cash on hand. So that increased your interest in M&A opportunities funding additional internal candidates for the new infusion of cash.

Our next question comes from the line.

Jack Szeto with Craig Hallum.

Hi, This is Jack on for Matt. Thanks.

Thanks for taking my question I was curious last quarter you discussed your cash burn moderating embed as revenues continue to grow and at that time, you had probably about four years of cash on the balance sheet with infusion you're receiving from the tick to sell it puts you closer to five years of cash on hand, So does that increase your interest in M&A opportunities.

The additional internal candidates some of your plans for the new infusion of cash.

Jack Siedow: I apologize, Jack, I didn't hear you terribly well, but I think what you were asking is whether our capital allocation priorities are changing as a result of the additional capital that we're receiving from members. Is that? In particular, M&A. Yeah, is that the right thing to do? Yeah, that's correct.

I apologize I didn't hear you.

Clearly well, but I think what you're asking is that.

Our capital allocation priorities changing as.

As a result of the additional capital that we're receiving from Nimbus.

Is that in particular M&A is that the.

Alright.

Geoffrey Craig Porges: Great. So, look, I think that we're very happy about the cash distribution. I think that with both our cash burn moderating and with the additional distribution, you know, we think, I think your math is not incorrect, but at a certain point, We're up five years, we've got six years, it's a long time, and a lot of things are going to happen between now and then. So our highest priorities for our capital allocation are continuing to innovate on the platform.

Yes, that's correct Greg.

So.

Look I think that we're very happy about the cash distribution.

I think the.

With both.

Cash burn moderating.

And with the additional distribution we think.

I think your math is not incorrect, but at a certain point.

<unk>.

Whereas five years ago, six shares a long time and.

A lot of things, we got to happen between now and then so our highest priorities for capital allocation.

Continuing to innovate in the platform.

Geoffrey Craig Porges: And add to the capabilities of that technology, which we think is highly proprietary and highly differentiated and value-creating. And secondly, to continue to invest in the opportunities that emerge from the deployment of the technology, both in our own portfolio and in the portfolios of companies that we have partnered with or are co-founders of, in the case of, for example, Now, we're certainly going to be curious and open-minded and opportunistic if opportunities emerge that bring us a technology that we think is highly complementary to our current technologies or accelerate our path forward as a clinical development organization or add very exciting targets that we can deploy our technology again. We're certainly going to be receptive to that. But that's not the primary direction of our capital allocation strategy.

And add to the capabilities of our technology, which we think is highly proprietary and highly differentiated and value, creating and secondly to continue to invest.

And the opportunities that emerge from the deployment of the technology both.

In our own portfolio and in the portfolios of companies, but we have partnered with or being cofounders of in the case of for example structure.

So those are the highest priorities now.

Yes.

Regarding to be curious and open minded and opportunistic.

Opportunities emerge.

But bring us technology that we think is highly complementary to our current technologies or accelerate our path forward.

As a clinical development organization or add very exciting targets that we can deploy our technology against.

We're certainly going to be receptive to that that's not the primary direction of our capital allocation strategy.

Operator: I'm showing no further questions at this time. That concludes today's call. You may now disconnect.

That's very helpful. Thank you.

I'm showing no further questions at this time.

That concludes today's call you may now disconnect.