Q2 2024 Schrödinger Inc Earnings Call
Thank you for standing by.
Madison: Welcome to Schrodinger's conference call to review our second quarter 2024 financial results. My name is Madison, and I will be your operator for today's call. You may register to ask a question at any time by pressing the star and one on your telephone keypad. You may withdraw yourself from the queue by pressing star and two.
Speaker Change: Welcome to Schrodinger's conference call to review our second quarter 2024 financial results.
Madison: My name is Madison and I will be your operator for today's call.
Speaker Change: You may register to ask a question at any time by pressing the star and 1 on your telephone keypad.
Speaker Change: You may withdraw yourself from the queue by pressing star and 2.
Jaren Irene Madden: Please be advised that this call is being recorded at the company's request. Now, I would like to introduce your host for today's conference, Mr. Jaren Madden, Senior Vice President of Investor Relations and Corporate Affairs. Thank you, and good afternoon, everyone.
Jaren Irene Madden: Please be advised that this call is being recorded at the company's request. Now I would like to introduce your host for today's conference, Mr. Jaren Madden, Senior Vice President of Investor Relations and Corporate Affairs. Please go ahead.
Jaren Irene Madden: Welcome to today's call, during which we will provide an update on the company and review our second quarter 2024 financial results. Earlier today, we issued a press release summarizing our financial results and progress across the company, which is available on our website at schrodinger.com. Here with me on our call today are Ramy Farid, Chief Executive Officer, Geoff Porges, Chief Financial Officer, and Karen Akinsanya, President of R&D Therapy. Following our prepared remarks, we'll open the call for Q&A.
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 second quarter 2024 financial results.
Speaker Change: Earlier today, we issued a press release summarizing our financial results and progress across the company, which is available on our website at www.schrodinger.com.
Speaker Change: Here with me on our call today are Ramy Farid, Chief Executive Officer, Geoff Porges, Chief Financial Officer, and Karen Akinsanya, President of R&D Therapeutics.
Jaren Irene Madden: During today's call, management will make statements 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 third quarter and full year 2024, our plans to accelerate the growth of our software business and advance our collaborative and proprietary drug discovery programs, the timing of the initiation of and readouts from our clinical trials, the clinical potential and properties of our compounds, These forward-looking statements reflect our current views about our plans, intentions, expectations, strategies, and processes, which are based on the information currently available to us and on assumptions we have made.
Speaker Change: Following our prepared remarks, we'll open the call for Q&A.
Jaren Irene Madden: Actual results may differ materially 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-Q for the quarter ended June 30, 2021. These forward-looking statements represent our views only as of today, and we caution you that, except as required by law, we may not update them in the future, whether as a result of new information, future events, or otherwise.
Speaker Change: During today's call, management will make statements that are forward-looking and made pursuant to the safe harbor provisions of the Private Security Litigation Reform Act of 1995.
Speaker Change: including without limitation.
Speaker Change: Statements related to our outlook for the third quarter and full year 2024, our plans to accelerate the growth of our software business and advance our collaborative and proprietary drug discovery programs,
Speaker Change: The timing of initiation of and readouts from our clinical trials, the clinical potential and properties of our compounds, the use of our cash resources, and our future expenses.
Jaren Irene Madden: Also included in today's call are certain non-GAAP financial measures. These non-GAAP financial measures are not prepared in accordance with generally accepted accounting principles and should be considered only in addition to and not as a substitute for or superior to GAAP measures.
Speaker Change: These forward-looking statements reflect our current views about our plans, intentions, expectations, strategies, and prospects.
Speaker Change: which are based on the information currently available to us and on assumptions we have made.
Speaker Change: Actual results may differ materially 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-Q for the quarter ended June 30, 2024.
Jaren Irene Madden: Please refer to the tables at the end of our press release, which is available on our website, for reconciliations of these non-GAAP measures to the most directly comparable GAAP measures. With that, I'd like to turn the call over to you. Thanks, Jaren, and thank you, everyone, for joining us today. We are very pleased with our progress during the quarter, delivering excellent revenue growth and continuing to advance our proprietary pipeline. As you will hear from Karen shortly, our first two clinical programs are progressing well in phase one clinical studies, and I'm happy to report that we have initiated dosing in a phase one solid tumor study for SDR3515, our WE1-MIT1 co-inhibitor. Total revenue for the second quarter was $47.3 million, and software revenue was $35.4 million.
Speaker Change: These forward-looking statements represent our views only as of today, and we caution you that, except as required by law, we may not update them in the future, whether as a result of new information, future events, or otherwise. Also included in today's call are certain non-GAAP financial measures.
Speaker Change: These non-GAAP financial measures are not prepared in accordance with generally accepted accounting principles and should be considered only in addition to, and not a substitute for, or superior to, GAAP measures.
Speaker Change: Please refer to the tables at the end of our press release, which is available on our website for reconciliations of these non-GAAP measures to the most directly comparable GAAP measures. With that, I'd like to turn the call over to Ramy.
Ramy Farid: Thanks, Jaren, and thank you, everyone, for joining us today. We are very pleased with our progress during the quarter, delivering excellent revenue growth and continuing to advance our proprietary pipeline.
Ramy Farid: As you will hear from Karen shortly, our first two clinical programs are progressing well in Phase I clinical studies, and I'm happy to report that we have initiated dosing in a Phase I solid tumor study for SGR3515, our WE1MIT1 co-inhibitor.
Speaker Change: Total revenue for the second quarter was $47.3 million and software revenue was $35.4 million. We are confident about our revenue outlook for the full year and are reiterating our full year software and drug discovery revenue guidance.
Ramy Farid: We are confident about our revenue outlook for the full year and are reiterating our full year software and drug discovery revenue guidance. We continue to engage in very productive discussions with customers at large global companies about significant scale-ups and expanded use of our software. These discussions are maturing in line with our expectations and have been facilitated by discussions at the highest levels of these companies about the impact of large-scale deployment of computation on drug discovery. It's clear that interest in deploying advanced computational methods remains high.
Speaker Change: We continue to engage in very productive discussions with customers at large global companies about significant scale-ups and expanded use of our software.
Speaker Change: These discussions are maturing in line with our expectations and have been facilitated by discussions at the highest levels of these companies about the impact of large-scale deployment of computation in drug discovery. It's clear that interest in deploying advanced computational methods remains high.
Ramy Farid: Collaborations are continuing to be an important element of our business, and our progress across several partner programs contributed meaningfully to drug discovery revenue in the second quarter. Our co-founded companies are also an important part of our overall strategy, and their success provides further validation for our platform and is an additional source of capital. We would like to extend our congratulations to our partner Morphic Therapeutics on their planned acquisition by Lilly for $3.2 billion. We are proud to have worked side-by-side with Morphic scientists on several programs, including Morph 057.
Speaker Change: Collaborations are continuing to be an important element of our business, and our progress across several partner programs contributed meaningfully to drug discovery revenue in the second quarter.
Speaker Change: Our co-founded companies are also an important part of our overall strategy, and their success provides further validation for our platform and is an additional source of capital.
Speaker Change: We would like to extend our congratulations to our partner Morphic Therapeutic on their planned acquisition by Lilly for $3.2 billion. We are proud to have worked side-by-side with Morphic scientists on several programs including Morph 057.
Ramy Farid: We would also like to congratulate our partners Structure on the presentation of their Phase 2 obesity data, and Ajax Therapeutics on their recent Series C financing and IND clearance for their JAK2 inhibitor. These achievements at our co-founded partner companies demonstrate the power of our platform to serve as a catalyst for innovation in drug discovery. We have developed and deployed powerful physics-based methods amplified with advanced machine learning and AI, and we will continue to advance our platform to unlock the full potential of computation to drive efficiency across the R&D continuum.
Speaker Change: We would also like to congratulate our partners Struxure on the presentation of their Phase 2 obesity data and Ajax Therapeutics on their recent Series C financing and IND clearance for their JAK2 inhibitor.
Speaker Change: These achievements at our co-founded partner companies demonstrate the power of our platform to serve as a catalyst for innovation in drug discovery.
Speaker Change: We have developed and deployed powerful physics-based methods, amplified with advanced machine learning and AI, and we will continue to advance our platform to unlock the full potential of computation to drive efficiency across the R&D continuum.
Ramy Farid: We recently launched an exciting new initiative to develop a computational solution designed to reduce the risk of development failure associated with binding to off-target proteins, which can be associated with serious side effects. We have already built accurate models for a handful of key off-target proteins and have begun using this technology in our partnered and proprietary programs. In the coming years, we aim to build predictive models for many of the most well-known off-target proteins.
Speaker Change: We recently launched an exciting new initiative to develop a computational solution designed to reduce the risk of development failure associated with binding to off-target proteins, which can be associated with serious side effects.
Speaker Change: We have already built accurate models for a handful of key off-target proteins, and have begun using this technology in our partnered and proprietary programs. In the coming years, we aim to build predictive models for many of the most well-known off-target proteins.
Ramy Farid: We expect these predictive toxicity assays to contribute to future software growth, given the demand for solutions that can help screen and optimize drug molecules to enhance the likelihood of success in clinical trials. We are delighted that this effort is being funded initially by a $10 million grant from the Bill and Melinda Gates Foundation. We have made considerable progress in the first half of the year, and we are executing on our strategic priorities for the remainder of the year, including driving software scale-up and adoption, advancing the science that underlies our platform, and advancing our partnered and proprietary programs. I greatly appreciate the dedication of our employees, whose hard work and collaboration are critical to achieving our mission. I will now turn the call over to Geoff. Thank you, Ramy, and good afternoon, everyone.
Speaker Change: We expect these predictive toxicity assays to contribute to future software growth given the demand for solutions that can help screen and optimize drug molecules to enhance the likelihood of success in clinical trials.
Speaker Change: We are delighted that this effort is being funded initially by a $10 million grant from the Bill and Melinda Gates Foundation.
Speaker Change: We have made considerable progress in the first half of the year, and we are executing on our strategic priorities for the remainder of the year, including driving software scale-up and adoption, advancing the science that underlies our platform, and progressing our partnered and proprietary programs.
Speaker Change: I greatly appreciate the dedication of our employees whose hard work and collaboration are critical to achieving our mission. I will now turn the call over to Geoff.
Geoffrey Craig Porges: Schrodinger had an excellent quarter in Q2, with software revenue growing strongly, drug discovery revenue elevated by the recognition of milestones associated with the progress of several collaboration projects, significant progress achieved in our proprietary therapeutics portfolio, and validation for our technology and business strategy from the planned morphic acquisition. Our business showed its resilience as revenue growth in our global accounts offset challenges in certain geographies and market segments. We are maintaining our previously provided revenue guidance for the full year and are increasingly confident that opportunities, such as the recently announced Predictive Toxicology Project, position us for sustained growth in the coming year. Software revenue in Q2 was $35.4 million compared to $29.4 million in Q2 2023.
Geoffrey Craig Porges: Thank you, Ramy, and good afternoon, everyone. Schrodinger had an excellent quarter in Q2, with software revenue growing strongly, drug discovery revenue elevated by the recognition of milestones associated with the progress of several collaboration projects.
Geoffrey Craig Porges: Significant progress achieved in our proprietary therapeutics portfolio and validation for our technology and business strategy from the planned morphic acquisition.
Speaker Change: Our business showed its resilience as revenue growth in our global accounts offset challenges in certain geographies and market segments.
Speaker Change: We are maintaining our previously provided revenue guidance for the full year and are increasingly confident that opportunities, such as the recently announced Predictive Toxicology Project, position us for sustained growth in the coming years.
Speaker Change: Software revenue in Q2 was $35.4 million compared to $29.4 million in Q2 2023. The 21% increase was due to increased revenue from global accounts, as well as revenue recognized from our combined software drug discovery collaboration customers.
Geoffrey Craig Porges: The 21% increase was due to increased revenue from global accounts, as well as revenue recognized from our combined software drug discovery collaboration customers. As we indicated previously, our customers are progressively converting to rateable software contracts, and this conversion is reflected in the increase in our hosted software revenue this quarter. The customers making this conversion are both global pharmaceutical companies and established biotech companies. It is noteworthy that our total software revenue grew strongly, even with a significant increase in the actual percentage of hosted revenue compared to the same period in 2020. On-premise software grew by 11.5% to $18.8 million in Q2, and hosted software grew by 82% to $8 million. Maintenance revenue was flat year over year at $5.8 million, and professional services increased by $23.3 million.
Speaker Change: As we indicated previously, our customers are progressively converting to rateable software contracts and this conversion is reflected in the increase in our hosted software revenue this quarter. The customers making this conversion are both global pharmaceutical companies and established biotech companies.
Speaker Change: It is noteworthy that our total software revenue grew strongly, even with a significant increase in the actual percentage of hosted revenue, compared to the same period in 2023.
Speaker Change: On-premise software grew by 11.5% to 18.8 million in Q2, and hosted software grew by 82% to 8 million. Maintenance revenue was flat year-over-year at 5.8 million, and professional services increased by 23%.
Geoffrey Craig Porges: As a percentage of our total software revenue, hosted revenue was 22.6% in Q2, compared to 15.4% in the same period a year ago, and compared to 21.5% in Q1 this year. I'd like to make a few comments on the dynamics we're seeing in our software business at the midpoint of the year. First, our strategy has been to focus on increasing the scale of adoption of our technology by our established customers, and this strategy is working.
Speaker Change: As a percentage of our total software revenue, hosted revenue was 22.6% in Q2, compared to 15.4% in the same period a year ago, and compared to 21.5% in Q1 this year.
Geoffrey Craig Porges: We're seeing more and more customers adopting our suite of software solutions as foundational to their drug discovery efforts and recognizing that increased scale of utilization results in better outcomes. The benefits of that strategy are reflected in this quarter's results and in our reiterated guidance for the year. Second, we continue to see volatility around renewals and scalar purchasing among emerging and small biotech customers. In some cases, these customers are dealing with balance sheet and strategic concerns by reducing or halting drug discovery efforts and concentrating on one or two of their most advanced programs.
Speaker Change: I'd like to make a few comments on the dynamics we're seeing in our software business at the midpoint of the year.
Speaker Change: First, our strategy has been to focus on increasing the scale of adoption of our technology at our established customers, and this strategy is working.
Speaker Change: We are seeing more and more customers adopting our suite of software solutions as foundational to their drug discovery efforts.
Speaker Change: and recognizing that increased scale of utilization results in better outcomes.
Speaker Change: The benefits of that strategy are reflected in this quarter's results and in our reiterated guidance for the year.
Speaker Change: Second, we continue to see volatility around renewals and scalar purchasing among emerging and small biotech customers.
Speaker Change: In some cases, these customers are dealing with balance sheet and strategic concerns by reducing or halting drug discovery efforts and concentrating on one or two of their most advanced programs.
Geoffrey Craig Porges: However, we are also seeing green shoots in terms of new companies that are powering their drug discovery efforts with our software, and on balance, we are finding more new customers and increasing accounts than we are encountering in return. In the first half of the year, the bookings increase from growth accounts continued to outpace the booking decrease from decreasing accounts, and the contribution from new software customers is exceeding discontinuity. We are confident that the opportunities for large growth and new accounts are considerably greater than the challenges in the emerging companies segment.
Speaker Change: However, we are also seeing green shoots in terms of new companies that are powering their drug discovery efforts with our software, and on balance we are finding more new customers and increasing accounts than we are encountering in return streams.
Speaker Change: In the first half of the year, the bookings increased from growth accounts, continues to outpace the booking decrease from reducing accounts, and the contribution from new software customers is exceeding discontinuing customers.
Speaker Change: We are confident that the opportunities in large growth and new accounts are considerably greater than the issues in the emerging companies segment.
Geoffrey Craig Porges: Geographically, we are also bouncing risks and opportunities. A relatively small business in China has had challenges associated with reduced availability of capital for biopharma research there, and those challenges are exacerbated by geopolitical. Our other businesses in Asia are advancing, and we are very encouraged by the growth opportunities we're seeing in Europe and North America. Drug discovery revenue was $11.9 million this quarter, compared to $5.8 million in the same period a year ago.
Speaker Change: Third, geographically we are also balancing risks and opportunities. A relatively small business in China has had challenges associated with reduced availability of capital for biopharma research there, and those challenges are exacerbated by geopolitical issues.
Speaker Change: Our other businesses in Asia are advancing and we are very encouraged by the growth opportunities we are seeing in Europe and North America.
Speaker Change: Our drug discovery revenue was $11.9 million this quarter compared to $5.8 million in the same period a year ago. The increased revenue this quarter was due to recognition of revenue for the achievement of planned milestones in ongoing drug discovery collaboration projects.
Geoffrey Craig Porges: The increased revenue this quarter was due to recognition of revenue for the achievement of planned milestones in ongoing drug discovery collaboration projects. Total revenue for the quarter was $47.3 million, compared to $35.2 million in the same period a year ago and compared to $36.6 million in Q1 this year.
Speaker Change: Total revenue for the quarter was $47.3 million, compared to $35.2 million in the same period a year ago, and compared to $36.6 million in Q1 this year. The year-over-year increase was driven by contributions from software and drug discovery revenue.
Geoffrey Craig Porges: The year-over-year increase was driven by contributions from software and drug discovery revenue. Turning now to gross margins, our software gross margin was 80% in Q2 compared to 77% in the same period a year ago and compared to 76% in Q1 this year. The increase in gross margin was associated with increased scale of renewals at large customers during the period, and lower royalties and FDE efficiencies contributed to the sequential improvement. Our cost of drug discovery services decreased significantly to $8.8 million compared to $14.7 million in the same period in 2023 and also decreased compared to Q1 this year.
Speaker Change: Turning now to gross margins.
Speaker Change: Our software gross margin was 80% in Q2 compared to 77% in the same period a year ago and compared to 76% in Q1 this year. The increase in gross margin was associated with increased scale of renewals at large customers during the period and lower royalties and FDE efficiencies contributed to the sequential improvement.
Geoffrey Craig Porges: The decrease was driven by the shifting allocation of our drug discovery employees from collaboration projects to proprietary research, and also lower CRO and other project expenses associated with discontinued collaboration projects. In the absence of other collaborations or collaboration projects, these expenses are likely to be in the current range in future periods. Our overall gross module was 66% during the quarter compared to 39% in the same period a year ago. Compared to 52% in Q1, the increase in overall gross module was driven by higher revenue and lower cost. R&D expense was $51 million in Q2 this year, compared to $43 million in the same period a year ago, and compared to $51 million in Q1 this year.
Speaker Change: Our cost of drug discovery services decreased significantly to $8.8 million compared to $14.7 million in the same period in 2023, and also decreased compared to Q1 this year.
Speaker Change: The decrease was driven by the shifting allocation of our drug discovery employees from collaboration projects to proprietary research, and also lower CRO and other project expenses associated with discontinued collaboration projects.
Speaker Change: In the absence of other collaborations or collaboration projects, these expenses are likely to be in the current range in future periods.
Speaker Change: Our overall gross margin was 66% during the quarter compared to 39% in the same period a year ago, and compared to 52% in Q1. The increase in overall gross margin was driven by higher revenue and lower costs.
Speaker Change: R&D expense was $51 million in Q2 this year, compared to $43 million in the same period a year ago, and compared to $51 million in Q1 this year. The year-over-year increase in R&D expense was approximately two-thirds drug discovery and one-third non-drug discovery.
Geoffrey Craig Porges: The year-over-year increase in R&D expense was approximately two-thirds drug discovery and one-third non-drug discovery. The drug discovery increase was driven by the shift in allocation of staff from collaboration projects to proprietary programs, and by high headcount and increased CRO expenses for internal programs. The increase in non-drug discovery R&D expense was due to increased technology and cloud expenses in higher FDA. Compared to Q1, the total R&D expense was flat, but changes in allocation were offset by lower underlying FTE expenses for R&D. Sales and marketing expense was $9.7 million for the quarter and increased by 7.5% compared to the same period a year ago but decreased by 4.7% compared to Q1 this year.
Speaker Change: The drug discovery increase was driven by the shift in allocation of staff from collaboration projects to proprietary programs, and by high headcount and increased CRO expenses for internal programs.
Speaker Change: The increase in non-drug discovery R&D expense was due to increased technology in cloud expenses and higher FDE expenses.
Speaker Change: Compared to Q1, the total R&D expense was flat, but changes in allocation were offset by lower underlying FTE expenses for R&D.
Speaker Change: Sales and marketing expense was $9.7 million for the quarter and increased by 7.5% compared to the same period a year ago but decreased by 4.7% compared to Q1 this year. The year-over-year increase was mainly due to higher FTE expenses including commissions and increased marketing investment.
Geoffrey Craig Porges: The year-over-year increase was mainly due to higher FTE expenses, including commissions and increased marketing expenses. G&A expense of $23.5 million increased by 1.4% compared to the same period in 2023 and declined by 8% compared to Q1 this year. The decrease compared to Q1 would be due to lower FTE expenses, reduced severance, and lower royalties compared to prior acquisitions. Total gap operating expenses were $84.1 million for Q2 compared to $75 million in Q2 last year and $86.3 million for Q1.
Speaker Change: G&A expense of $23.5 million increased by 1.4% compared to the same period in 2023, and declined by 8% compared to Q1 this year. The decrease compared to Q1 would due to lower FTE expenses, reduced severance, and lower royalties compared to prior accruals.
Speaker Change: Total gap operating expenses were $84.1 million for Q2 compared to $75 million in Q2 last year and $86.3 million for Q1. The year-over-year increase was mainly due to R&D, while the decline compared to Q1 was due to G&A.
Geoffrey Craig Porges: The year-over-year increase was mainly due to R&D, while the decline compared to Q1 was due to GDP. Our operating loss for the quarter was $52.7 million, compared to a loss of $61.1 million in the same period a year ago and to a loss from operations of $67.4 million in Q1.
Speaker Change: Our operating loss for the quarter was $52.7 million compared to a loss of $61.1 million in the same period a year ago, and to a loss from operations of $67.4 million in Q1.
Geoffrey Craig Porges: During the quarter, the change in fair value of equity investments was an expense of $5.8 million as the value of our investments in structure and morphic declined during the period. Lillie's offer to acquire Morphic occurred after the close of Q2 and is not reflected in these results. Our income was $4.6 million compared to $4.3 million in the same period last year, mainly associated with interest on our cash reserves, and total other expenses was a loss of $1.2. I lost before taxes and net loss were both $54 million, as our tax expense was negligible, and our loss per share was $74.
Speaker Change: During the quarter, the change in fair value of equity investments was an expense of $5.8 million, as the value of our investments in structure and morphic declined during the period. Lilly's offer to acquire morphic occurred after the close of Q2 and is not reflected in these results.
Speaker Change: Our other income was $4.6 million compared to $4.3 million in the same period last year, mainly associated with interest on our cash reserves, and total other expenses was the loss of $1.2 million.
Speaker Change: Our loss before taxes and net loss were both $54 million. As our tax expense was negligible, our loss per share was $0.74.
Geoffrey Craig Porges: This compares to net income of $4.3 million in Q2 last year driven by the members' distribution and earnings per share of $6 million. Our average fully diluted share count in Q2 was 72.7 million compared to 75.1 million in Q2 last year. During the quarter, our operating cash use was $54 million, and our cash and marketable securities balance declined by $54 million compared to the end of Q1.
Speaker Change: This compares to net income of $4.3 million Q2 last year driven by the Nimbus distribution and earnings per share of $0.06.
Speaker Change: Our average fully diluted share count in Q2 was 72.7 million compared to 75.1 million in Q2 last year.
Speaker Change: During the quarter our operating cash use was $54 million and the cash and marketable securities balance declined by $54 million compared to the end of Q1. In Q3 we expect to receive $48 million from the sale of our holding in Morphic, which is expected to largely offset the cash used in operations in the period.
Geoffrey Craig Porges: In Q3, we expect to receive $48 million from the sale of our holding in Morphic, which is expected to largely offset the cash used in operations during the period. We remain eligible for low single-digit royalties on Morphix's leading clinical program and to variable royalties on other programs in their portfolio. We continue to own approximately 2.4% of the common shares outstanding at Structure Therapeutics, and during the quarter, we invested an additional $3 million into Ajax Therapeutics to maintain our ownership at 5.8%.
Speaker Change: We remain eligible for low single-digit royalties on Morphix's leading clinical program, and to variable royalties on other programs in our portfolio.
Speaker Change: We continue to own approximately 2.4% of the common shares outstanding at Structured Therapeutics. And during the quarter, we invested an additional $3 million into Ajax Therapeutics to maintain our ownership at 5.8%.
Geoffrey Craig Porges: Looking ahead, we are maintaining our previously provided software guidance for the year. We expect software revenue in Q3 to be in the range of $32 to $34 million. We expect the recently announced funding from the Gates Foundation to contribute some software revenue in the second half of the year, aligning with our expected commitment of existing and new resources to that project. We do expect this project to have a modest negative effect on our gross margins, primarily because the profitability of the grant, which is software contribution revenue, is lower than our software revenue from contracts with customers.
Speaker Change: Looking ahead, we are maintaining our previously provided software guidance for the year. We expect software revenue in Q3 to be in the range of $32 to $34 million.
Speaker Change: We expect the recently announced funding from the Gates Foundation to contribute some software revenue in the second half of the year, aligning with our expected commitment of existing and new resources to that project.
Speaker Change: We do expect this project to have a modest negative effect on our gross margins, primarily because the profitability of the grant, which is software contribution revenue, is lower than our software revenue from contracts with customers.
Geoffrey Craig Porges: As a result, we now expect our full-year reported software gross margin to be slightly lower than last year and in the range of 2022. The lower gross margin is likely to persist for the duration of the grant, but the profitability of our software revenue from contracts with customers is trending to the same range as last year. The expected dollar increase in our cost of goods associated with the grant is likely to be matched by a similar decrease in our expected R&D expense, which should moderate our expected overall expense growth for the year by approximately 1% a year. We now expect our full year operating expense growth to be in the range of 8-10% or at the low end of our previously provided range of 8-12%.
Speaker Change: As a result, we now expect our full year reported software gross margin to be slightly lower than last year and in the range of 2022.
Speaker Change: The lower gross margin is likely to persist for the duration of the grant, but the profitability of our software revenue from contracts with customers is trending to the same range as last year.
Speaker Change: The expected dollar increase in our cost of goods associated with the grant is likely to be matched by a similar decrease in our expected R&D expense.
Speaker Change: which should moderate our expected overall expense growth for the year by approximately one percentage point.
Speaker Change: We now expect our full year operating expense growth to be in the range of 8 to 10 percent, or at the low end of our previously provided range of 8 to 12 percent.
Speaker Change: At the conclusion of the grant, we expect the negative effect on our operating software gross margin to reverse.
Speaker Change: Our full year Drug Discovery Revenue Guidance is unchanged at $30 to $35 million, and we expect the balance of our realized revenue to be weighted towards Q4.
Speaker Change: Finally, we continue to forecast that our cash use this year will be greater than our cash use last year.
Karen Akinsanya: At the conclusion of the grant, we expect the negative effect on our operating software gross margin to reverse. Our full year Drug Discovery revenue guidance is unchanged at $30 to $35 million, and we expect the balance of our realized revenue to be weighted towards Q4. Finally, we continue to forecast that our cash use this year will be greater than our cash use last year. With that, I'll turn the call over to Karen to discuss our therapeutic options. Thank you, Geoff, and good afternoon, everyone.
Speaker Change: With that, I'll turn the call over to Karen to discuss our therapeutics updates.
Karen Akinsanya: We are continuing to advance our pipeline of collaborative and proprietary programs. We are very pleased to see the progress of compounds and clinical programs with companies we have partnered with and co-founded, including Ajax and Structure, which continue to demonstrate the power of our platform when deployed at scale. As Ramy mentioned, Morphic recently announced its planned acquisition by Lilly. We worked closely with the Morphic team on the discovery of several oral integrin inhibitors, including Morph 057, which is a highly selective alpha-4 beta-7 inhibitor. Our proprietary pipeline is progressing well, and we now have three programs in the clinic. Beginning with SGR1505, our MORT1 inhibitor, our phase one study in patients with relaxed refractory B-cell lymphomas is advancing.
Karen Akinsanya: Thank you Geoff and good afternoon everyone. We are continuing to advance our pipeline of collaborative and proprietary programs.
Karen Akinsanya: We are very pleased to see the progress of compounds and clinical programs at companies we have partnered with and co-founded, including Ajax and Structure, which continues to demonstrate the power of our platform when deployed at scale.
Speaker Change: As Ramy mentioned, Morphic recently announced its planned acquisition by Lilly. We worked closely with the Morphic team on the discovery of several oral integrin inhibitors, including Morph 057, which is a highly selective alpha-4 beta-7 inhibitor.
Speaker Change: Our proprietary pipeline is progressing well and we now have three programs in the clinic.
Speaker Change: Beginning with STR 1505, our MORT1 inhibitor, our Phase 1 study in patients with relapsed refractory B-cell lymphomas is advancing.
Karen Akinsanya: We are continuing to enroll patients in cohorts evaluating SGR1505, administered once daily, and we have initiated a twice daily dosing cohort. We now expect to present initial clinical data from this study in the first half of 2025. We plan to present safety pharmacokinetic and pharmacodynamic data, as well as preliminary efficacy data, in a peer-reviewed setting.
Speaker Change: We are continuing to enroll patients in cohorts evaluating SGL 1505, administered once daily, and we have initiated a twice daily dosing cohort.
Speaker Change: We now expect to present initial clinical data from this study in the first half of 2025. We plan to present safety pharmacokinetic and pharmacodynamic data, as well as preliminary efficacy data in a peer-reviewed setting.
Karen Akinsanya: Turning to our CDC-7 inhibitor, SGR2921, enrollment is ongoing in our Phase 1 study in patients with acute myeloid leukemia or myelodysplastic syndrome. As a reminder, the primary objectives of the study are to evaluate safety, tolerability, and to determine the recommended Phase 2 dose. The study is progressing well, with multiple dose escalation steps completed. Based on the pace of dose escalation and the timing of abstract deadlines for medical meetings, we now expect to present initial clinical data from this study in the second half of 2025. SGR2921 was recently granted FDA Fast-Track designation for relapsed refractory AML, which underscores the unmet need and strength of our preclinical data.
Speaker Change: Turning to our CDC-7 inhibitor, SGR-2921, enrollment is ongoing in our Phase 1 study in patients with acute myeloid leukemia or myelodysplastic syndrome.
Speaker Change: As a reminder, the primary objectives of the study are to evaluate the safety, tolerability and to determine the recommended phase 2 dose.
Speaker Change: The study is progressing well with multiple dose escalation steps completed.
Speaker Change: Based on the pace of dose escalation and the timing of abstract deadlines for medical meetings, we now expect to present initial clinical data from this study in the second half of 2025.
Speaker Change: SDR 2921 was recently granted FDA Fast-Track designation in relapsed refractory AML, which underscores the unmet need and strength of our preclinical data.
Karen Akinsanya: Today, we also announce the initiation of dosing in our Phase 1 clinical study of SGR3515, our WE1-MIT1 co-inhibitor. The Phase 1 study is designed to evaluate the safety PKPD, preliminary anti-tumor activity, and recommended Phase 2 dose. The study population will include patients with advanced solid tumors predicted to be sensitive to WE1-MIT1 inhibition, including breast, ovarian, and uterine cancer, in addition to other solid tumors with elevated replication stress. SGR3515 inhibits both WE1 and MIT1, and concurrent loss of function of these two proteins confers amplified vulnerability in cancer cells, termed synthetic lethality.
Speaker Change: Today, we also announce the initiation of dosing in our Phase 1 clinical study of SGR3515, our WI-1-MIT1 co-inhibitor. The Phase 1 study is designed to evaluate the safety PKPD, preliminary anti-tumor activity, and recommended Phase 2 dose.
Speaker Change: The study population will include patients with advanced solid tumors predicted to be sensitive to WIH1-MIT1 inhibition, including breast, ovarian, and uterine cancer, in addition to other solid tumors with elevated replication stress.
Speaker Change: SGR3515 inhibits both WE1 and MIT1, and concurrent loss of function of these two proteins confers amplified vulnerability in cancer cells, termed synthetic lethality.
Karen Akinsanya: This profile allows us to implement an intermittent dosing schedule with the goal of maintaining efficacy while allowing recovery from any potential hematological mechanism-based side effect. Turning to our SOS-1 program, we are very pleased with the pre-clinical package for this IND-ready program. Given SOS-1 inhibition is expected to be used in combination with KRAS and other MAP-K pathway inhibitors, we will seek to advance this program through a partnership. In our BMS collaboration, we successfully advanced a neurology program into the later stages of discovery.
Speaker Change: This profile allows us to implement an intermittent dosing schedule with the goal of maintaining efficacy while allowing recovery from any potential haematological mechanism-based side effects.
Speaker Change: Turning to our SOS-1 program, we are very pleased with the pre-clinical package for this IMD-ready program. Given SOS-1 inhibition is expected to be used in combination with KRAS and other MAP-K pathway inhibitors, we will seek to advance this program through a partnership.
Speaker Change: Within our BMS collaboration, we successfully advanced a neurology program into the later stages of discovery. We also mutually aligned with BMS on discontinuing the immunology program on the basis of the project viability and competitive positioning of the initial target product profile.
Karen Akinsanya: We also mutually aligned with BMS on discontinuing the immunology program on the basis of the project viability and competitive positioning of the initial target product profile. Collaborations remain an important part of our strategy, and we continue to engage with existing and new partners about future collaboration opportunities. We are excited about the expansion of our predict-first approach with the launch of structure-based models for binding to off-target proteins. The ongoing structural biology revolution is expanding access to accurate three-dimensional structures of increasing numbers of proteins.
Speaker Change: Collaborations remain an important part of our strategy and we continue to engage with existing and new partners about future collaboration opportunities.
Speaker Change: We are excited about the expansion of our predict-first approach with the launch of structure-based models for binding to off-target proteins.
Speaker Change: The ongoing structural biology revolution is expanding access to accurate three-dimensional structures of increasing numbers of proteins. We are leveraging this expansion to pursue broad computational off-target binding models and have already begun to see the impact on our internal discovery projects.
Karen Akinsanya: We are leveraging this expansion to pursue broad computational off-target binding models and have already begun to see the impact on our internal discovery projects. Fully realizing the power of computational toxicology solutions is expected to further transform drug discovery.
Speaker Change: Fully realizing the power of computational toxicology solutions is expected to further transform drug discovery.
Karen Akinsanya: In summary, we are very pleased with the progress we are making across our collaborative and proprietary pipeline. We are looking forward to phase one data readouts from all three clinical programs next year, beginning in the first half of 2025. Behind these programs, we have discovery programs that represent both first-in-class and best-in-class opportunities that can generate value through partnerships or by advancing them independently. I will now turn the call back to Ramy.
Speaker Change: In summary, we are very pleased with the progress we are making across our collaborative and proprietary pipeline.
Speaker Change: We are looking forward to Phase 1 data readouts from all three clinical programs next year, beginning in the first half of 2025.
Ramy Farid: Behind these programs, we have discovery programs that represent both first-in-class and best-in-class opportunities that can generate value through partnerships or by advancing them independently. I will now turn the call back to Ramy.
Ramy Farid: Thank you, Karen. We have made a great deal of progress in the first half of the year. We witnessed continued scale-up and adoption of our software, launched an exciting new computational initiative to develop a predictive toxicology solution, and advanced our pipeline. We look forward to updating you on the opportunities that lie ahead in the second half of the year. At this time, we'd be happy to take your questions. Thank you. And at this time, if you would like to ask a question, please press the star and one on your telephone keypad. You may remove yourself from the queue at any time by pressing star and two.
Ramy Farid: Thank you, Karen.
Speaker Change: We have made a great deal of progress in the first half of the year.
Ramy Farid: We witnessed continued scale-up and adoption of our software, launched an exciting new computational initiative to develop a predictive toxicology solution, and advanced our pipeline. We look forward to updating you on the opportunities that lie ahead in the second half of the year. At this time, we'd be happy to take your questions.
Speaker Change: Thank you. And at this time, if you would like to ask a question, please press the star and 1 on your telephone keypad. You may remove yourself from the queue at any time by pressing star and 2. And we will pause for a moment to allow questions to queue.
Operator: And we will pause for a moment to allow questions to queue, and we will take our first question from Michael Yee with Jeffreys. Hey, guys, thanks for the question and congratulations on a good quarter. We had two questions.
Speaker Change: And we will take our first question from Michael Yee with Jeffreys.
Michael Jonathan Yee: Hey guys, thanks for the question and congrats on a good quarter. We had two questions.
Michael Jonathan Yee: I was thinking about the outlook for the rest of the year. Tell us about your thoughts around any dynamic changes in your end user customers. Obviously, you're essentially maintaining the guidance, and we always know it comes down to the fourth quarter. So maybe just talk a little bit about the dialogue and conversations you're having as it relates to confidence towards the end of the year. And our second question is more of an important financial question. I'm sure Geoff would have a good thought around this as it relates to your year in cash. We have our own estimate of about 366 or so.
Michael Jonathan Yee: One was thinking about the outlook for the rest of the year.
Michael Jonathan Yee: Tell us about your thoughts around
Michael Jonathan Yee: Any dynamic changes in your end-user customers? Obviously, you're essentially maintaining the guidance, and we always know it comes down to the fourth quarter. So maybe just tell us a little bit about the dialogue and conversations you're having as it relates to confidence towards the end of the year.
Ramy Farid: But the burn is, A couple hundred million for next year, leaving you perhaps less than a year of cash if you didn't have additional capital. Can you tell us about your thoughts around where there would be options for capital over the course of the next year or so, perhaps a partnership? Other options. Tell us about that. Thank you. Thanks, Mike. I'll take the first question and hand it over to Geoff to either add to the response to the first question or, obviously, answer your second question.
Michael Jonathan Yee: And our second question is more an important financial question, I'm sure Geoff would have a good thought around this, which relates to your year-end cash, we have our own estimate of about $366 or so, but the burn is
Speaker Change: couple hundred million for next year, leaving you perhaps less than a year of cash if you didn't have additional capital. Can you tell us about your thoughts around where there would be options for capital over the course of the next year or so, a partnership, other options? Tell us about that. Thank you.
Speaker Change: Thanks, Mike. I'll take the first question and hand it over to Geoff to either add to it.
Ramy Farid: So with regard to the nature of our discussions with our customers, a few things. One is that we're really pleased with the level of engagement, the clear level of interest in scaling up their usage of the software, and they're excited about the kinds of advancements that we're talking about, including this Predictive Talks project. Obviously, that won't have an impact this year, but still, excitement around the science and advancing the platform is very helpful in these engaged discussions. We also, I'll remind you that we have, and we continue to expect, as we have in previous years, to continue to have a very high, near 100% customer retention rate, so we have a lot of visibility into these discussions.
Geoffrey Craig Porges: The first question and obviously answer your second question. So with regard to the nature of our discussions with our customers.
Geoffrey Craig Porges: A few things. One is, we're really pleased with the level of engagement, the clear level of interest in scaling up their usage of the software, and they're excited about the kinds of advancements that we're talking about, including this predictive talks.
Geoffrey Craig Porges: Project. Obviously, that won't have an impact this year, but still excitement around the science and advancing the platform is very helpful in these engagements.
Geoffrey Craig Porges: We also I'll remind you that we have
Geoffrey Craig Porges: We continue to expect, as we have in previous years,
Geoffrey Craig Porges: to continue to have the very high, near 100% customer retention rate, so we have a lot of visibility.
Ramy Farid: We know customers will be renewing, and it's really just a matter of what the scale-up might be in the, as you pointed out, mostly in Q4. Geoff, do you want to add anything to that and then answer the question? Yeah, thanks, Ramy.
Geoffrey Craig Porges: into these discussions. We know customers will be renewing, and it's really just a matter of what the scale-up might be, as you pointed out, mostly in Q4.
Geoffrey Craig Porges: Geoff, do you want to add anything to that and then answer the cash flow?
Geoffrey Craig Porges: Yes, just to add to that. Q4, of course, Mike, is always our largest quarter, and that's when our big customers renew. And I think the guidance range does reflect that we don't know exactly how much those customers are going to scale up their use, and the exact nature of the contract, how much service there is or maintenance we're providing, and how much of the mix of the revenue is going to be rateable versus on-premise.
Geoffrey Craig Porges: Thanks, Ramy. Yes, just to add to that, Q4, of course, Mike, is our largest quarter always, and that's when our big customers renew. And I think the guidance range does reflect that we don't know exactly how much those customers are going to scale up their use.
Speaker Change: and the exact nature of the contract, how much service there is or maintenance we're providing, how much of the mix of the revenue is going to be rateable versus on-prem, and that's what contributes to the uncertainty in the guidance. But we have a very high degree of confidence that our customers are going to renew, and all of the experience that we've had, including the experience we've had in the first half of this year.
Geoffrey Craig Porges: And that's what contributes to the uncertainty and the guidance, but we have a very high degree of confidence that our customers are going to renew. And all of the experience that we've had, including the experience that we had in the first half of this year, is that they are likely to renew at increased scale. With respect to the cash position, as you saw, we clearly have the opportunity, and we'll receive the additional cash from Morphic, presuming that that closes in the immediate future.
Speaker Change: is that they are likely to renew at increased scale.
Speaker Change: With respect to the cash position, you saw us clearly have the opportunity and will receive the additional cash from Morphic, presuming that that closes in the immediate future.
Geoffrey Craig Porges: And then I highlighted the continued position that we have in structure and, of course, the opportunity to achieve that over time as well. And then lastly, as our programs move into the clinic, we have been pretty clear that our intention is not to continue to take all of our programs ahead independently. We may, under the right circumstances, advance one or maybe more programs, but obviously, given the number of programs that Karen's team is developing, we are expecting to transact on some of them.
Speaker Change: And then I highlighted the continued position that we have in structure and of course the opportunity to realize that over time as well. And then lastly, as our programs move into the clinic.
Speaker Change: We have been pretty clear that our intention is not to continue to take all of our programs ahead independently.
Speaker Change: We may, under the right circumstances, advance one or maybe more programs, but obviously given the number of programs that Karen's team is developing, we are expecting to transact on some of them.
Geoffrey Craig Porges: We believe we have a number of opportunities for partnering, and we also, as Karen alluded to, continue to be actively engaged in discussions about collaboration. So both of those are additional sources of capital to sort of more or less match what we expect to be the cash burn going forward. Okay, thank you guys.
Speaker Change: Now, we believe we have a number of opportunities for partnering, and we also, as Karen alluded to, continue to be actively engaged in discussions about collaboration. So both of those are additional sources of capital to sort of more or less match what we expect to be the cash burn going forward.
Manny Perujar: Thank you. And we will take our next question from Manny Perujar with Lerinc. Again, thanks for taking the call and congratulations on the quarter.
Speaker Change: Okay, thank you guys.
Speaker Change: Thank you and we will take our next question from Manny Faruhar with Lerinc.
Geoffrey Craig Porges: I want to drill down a little bit on growth in the software-based business. You've given some clarity around continuing investments and engagement with your large customers around deepening and expanding use, and that's one driver of growth. Can you give us a little bit of clarity on what you're seeing in end market use among smaller biotech companies, newly founded companies, venture-funded companies, etc. And to what extent are we seeing the state of biotech capital markets reflected in your new customer ads? Yeah, Geoff, you want to go?
Unknown Executive: Thanks for taking the call and congrats on the quarter. I want to drill down a little bit on growth in the software-based business. You've given some clarity around continuing investments and engagement with your large customers around deepening and expanding use, and that's one driver of growth.
Speaker Change: Can you give us a little bit of a clarity on what you're seeing in end market use amongst
Speaker Change: Smaller biotech companies, newly founded companies, venture funded companies, etc. And to what extent we're seeing the state of biotech capital markets reflected in your new customer ads?
Geoffrey Craig Porges: Sure. Thanks for the question, Marnie. Look, I tried to sort of allude to that in my prepared remarks. There's no doubt it's a turbulent environment for emerging biotech companies, but there are still new companies being formed. And the new companies formed tend to be looking for the most cost-effective way to come up with novel molecules against their favorite targets. And so, very frequently, they're reaching out to us about becoming a software customer.
Speaker Change: Yeah, Geoff, do you want to?
Geoffrey Craig Porges: Thanks for the question, Monty. I tried to sort of allude to that in my prepared remarks.
Geoffrey Craig Porges: There's no doubt it's a turbulent environment for emerging biotech companies, but there are still new companies being formed, and the new companies formed tend to be looking at the most cost-effective way to come up with novel molecules against their favorite targets.
Geoffrey Craig Porges: and so very frequently.
Geoffrey Craig Porges: And so when I look at the sort of customers that are scaling back or stopping use of our software because they've said, we don't do drug discovery anymore, we're just advancing phase one or phase two programs. But when I look at that number of customers and that revenue effect compared to the opportunities that we're seeing, we're still seeing more new accounts than accounts that are not software customers. And we're seeing significantly more growth accounts than we are seeing reducing accounts. So I would say it's definitely an effect. It's a fairly modest effect.
Speaker Change: and they are reaching out to us about becoming a software customer.
Speaker Change: And so, when I look at...
Speaker Change: Customers that are scaling back or
Speaker Change: stopping use of our software because they've said we don't do drug discovery anymore we're just advancing our phase one or phase two program. When I look at that number of customers and that revenue effect compared to the opportunities that we're seeing we're still seeing more new accounts than
Speaker Change: accounts that are not soft software customers, and we're seeing significantly more growth accounts than we are seeing reducing accounts. So I would say it's definitely an effect. It's a
Geoffrey Craig Porges: Now, business is really being driven by large customers, but it's an effect that I don't think that it's increasing. I think that we're weathering it, and you're sort of seeing us absorb it in the results and the guidance that we're providing. And I think that there are some signs of optimism in the green shoots that I'm alluding to, and the company is reaching out to us and saying that they'd like to become customers.
Speaker Change: Fairly modest effect, now business is really being driven by the large customers.
Speaker Change: but it's an effect I don't think that it's increasing. I think that we're weathering it and you're sort of seeing us absorb it in the results and the guidance that we're providing.
Speaker Change: And I think that there's some signs of optimism in the green shoots that I'm alluding to and the company's reaching out to us and saying we'd like to become customers.
Geoffrey Craig Porges: But it's a little hard to say that that's going to sort of result in a real recovery in the growth contribution of that customer segment, which really has not been there in a large way since sort of 21 or early 22. Great. That's helpful.
Speaker Change: But it's a little hard to say that that's going to sort of result in a real recovery in the growth contribution of that customer segment, which really has not been there in a large way since sort of 21 or early 22.
Speaker Change: Great. That's helpful. Thank you.
Scott Anthony Schoenhaus: Thank you. Thank you. And we will take our next question from Scott Schoenhaus with KeyBank. Thanks, guys.
Speaker Change: Thank you. And we will take our next question from Scott Schoenhaus with KeyBank.
Ramy Farid: Geoff, I guess this is a question for you. You're following up on a new initiative to expand the application of computational tools for predictive toxicology. When exactly will this launch? When can you start taking orders?
Scott Anthony Schoenhaus: Thanks, guys. Geoff, I guess this is a question for you. You're following up on a new initiative to expand the application of computational tools.
Ramy Farid: When should we start seeing the incremental revenues flow through? I believe you said in your opening comments next year. And then I have a second follow-up on this one as well. Yeah, let me take that first.
Scott Anthony Schoenhaus: for Predictive Toxicology. When exactly will this launch? When can you start taking orders? When should we start seeing the incremental revenues flow through? I believe you said in your opening comments next year.
Ramy Farid: Thank you. Yeah, we're obviously extremely excited about this project. We've already gotten quite a bit of feedback from pharma companies that we've discussed it with, and it's been universally positive. And we've also, as we've indicated, started to use this technology internally in our collaborative programs, in our proprietary programs, and are getting some very nice results with it. Now, with regard to when it will be available to customers, that's something that we're building out now. We're obviously very excited to have it funded by the Gates Foundation with that $10 million grant.
Geoffrey Craig Porges: and then I have a second follow-up on this one as well. Yeah, let me take that first. Scott, thank you. Yeah, we're obviously extremely excited about this project. We've already gotten...
Speaker Change: Quite a bit of feedback from pharma companies that we've discussed it with and it's been universally positive.
Speaker Change: And we've also, as we've indicated, started to use this technology internally in our collaborative programs, in our proprietary programs.
Speaker Change: and getting some very nice results with it. Now, with regard to when it will be available to customers.
Speaker Change: That's something that we're building out now. We obviously are very excited to have it funded by the Gates Foundation with that $10 million grant.
Ramy Farid: We expect to sign up additional partners to help work with us on the project. That's what we've done in the past with new and novel technology. But we can't necessarily get into details about exactly when it's going to be released. We've never done that.
Speaker Change: sign up additional partners to help work with us on the project that's how that's what we've done in the past with sort of new and novel technology and we can't
Ramy Farid: That's not a smart thing for any software company to do, but I think you can tell from how we're talking about it that this is something that will be released in the near future. Let's put it that way.
Speaker Change: necessarily get into details about exactly when it's going to be released. We've never done that. That's not a smart thing for any software company to do but I think you can tell from how we're talking about it that this is something that will be released in the in the near future. Let's put it that way.
Ramy Farid: And we certainly expect it to contribute and continue to contribute to software revenue growth over the coming years as we add more and more off-targets to the handful that we've already got. That's really helpful, Kolar, Ramy. Thank you so much. I guess just to, I just guess to put a pin on the back half software revenue guidance, since it's been picked and poked at earlier with earlier questions, I guess, is there any change to the cadence of the back half from your, you know, from last quarter, even say, based on all that color that Jeff provided on the customer, the green shoots, and, you know, you're seeing more increasing scale of established customers. Has Thanks, but I don't think so.
Speaker Change: And we certainly expect it to continue to contribute to software revenue growth over the coming years as we add more and more off-targets to the handful that we've already done.
Speaker Change: Bye-bye.
Speaker Change: That's really helpful, Kolar, Ramy, thank you so much. I guess just to...
Speaker Change: I just guess to put a pin on the back half software revenue guidance since it's been picked and poked at earlier with earlier questions. I guess. Is there any change to the cadence of the back half?
Speaker Change: from your, you know, from last quarter even say, based on all that color that Geoff provided on the customer, the green shoots and...
Speaker Change: You know, you're seeing more increasing scale of established customers. Has anything changed over 90 days in terms of the cadence of the back half or the contribution of the back half in terms of software revenue guidance? Thanks.
Geoffrey Craig Porges: All I would say is I think the middle part of the year is proceeding a little better than we anticipated. We are seeing some encouraging signs in terms of, as I mentioned, both global accounts and established biotech customers scaling up their renewals. And that's helping us in the middle part of the year.
Speaker Change: I don't think so. All I would say is I think
Speaker Change: The middle part of the year...
Speaker Change: is proceeding a little better than we anticipated.
Speaker Change: We are seeing some encouraging signs in terms of, as I mentioned, both global accounts and established biotech customers scaling up their renewals.
Geoffrey Craig Porges: But the full-year result still is heavily dependent upon the fourth quarter. I've mentioned that we have a very high degree of confidence about the renewal opportunities that we have and the fact that they will renew. But of course, the range of the guidance, which you can see, is really influenced by the scale of the contract and the scale up in the contract, the length of the contract. Some customers will come to us and say, you know, we want to have a multi-year contract or we don't.
Speaker Change: and that's kind of helping us in the middle part of the year, but the full year results still is heavily dependent upon the fourth quarter. I've sort of mentioned that.
Speaker Change: We have a very high degree of confidence about the...
Speaker Change: the renewal opportunities that we have and the fact that they will renew, but of course the range of the guidance.
Speaker Change: which you can see.
Speaker Change: is really influenced by.
Speaker Change: The scale of the contract and the scale up in the contract, the length of the contract, some customers will come to us and say, you know, we want to have a multi-year contract or we don't.
Speaker Change: And then, of course, the nature of the contract, as I mentioned. So there are all those different elements that contribute to that variance in the guidance, but we're very confident that those renewals will happen.
Geoffrey Craig Porges: And then, of course, the nature of the contract, as I mentioned. So there are all those different elements that contribute to that variance in the guidance, but we're very confident that those renewals will happen. Thank you so much, guys. Thank you. Our next question comes from Evan Seigerman with BMO Capital Markets. Hi there, this is Connor McKay on behalf of Evan.
Speaker Change: Thank you so much, guys.
Speaker Change: Thank you. And our next question comes from Evan Seigerman with BMO Capital Markets.
Connor McKay: Thanks for taking our question. And congrats again on the quarter. Just one for me on the updated clinical timelines that we got today. Can you maybe just comment on how trial enrollment has been progressing for your key assets that are currently in clinic? And, you know, maybe just discuss a little bit what drove the change from the previous late 2024-2025 guidance to the newer, sort of more specific first half and second half 2025 guidance. Is this just a tightening of your prior range?
Speaker Change: Hi there, this is Connor McKay on for Evan. Thanks for taking our question and congrats again on the quarter.
Conor McKay: Just one from me on the updated clinical timelines that we got today. Can you maybe just comment on how trial enrollment has been progressing for your key assets that are currently in clinic?
Conor McKay: And, you know, maybe just discuss a little bit what drove the change from the previous late 24, 2025 guidance to the newer, sort of more specific first half and second half 25 guide. Is this just a tightening of your prior range? Thanks.
Karen Akinsanya: Thanks. Yeah, thanks very much for the question. Yes, indeed, it is a tightening of the range.
Karen Akinsanya: Enrollment is going well in both our most advanced programs, and as you've heard, we've just started dosing in our third program. We are very happy with the way things are going. And really, this is around our intention and our plan to share information at Medical Congress and understand the timing of abstract submission dates, we've been able to narrow that focus into the first half for Malt 1 and the second half for CDC 7, but overall, things are going really well. Studies, and the enrollment of the WebCM.
Speaker Change: Yeah, thanks very much for the question. Yes, indeed, it is tightening of the range. Enrollment is going well in both our most-deserved programs, and as you heard, we've just started dosing in our third program.
Speaker Change: We are very happy with the way things are going and really this is around our intention and our plan.
Speaker Change: to share information at the Medical Congress and understanding the timing of abstract submission dates.
Speaker Change: We've been able to narrow that focus into the first half of the mock one and the second half for CDC-7. But overall, things are going really well and I'm pleased with the studies and the enrollment that we're seeing.
Michael Leonidovich Ryskin: Thank you. And our next question will come from Michael Ryskin with Bank of America. Please go ahead, Michael. Your line is open.
Speaker Change: Thank you.
Speaker Change: Please go ahead, Michael. Your line is open.
Ramy Farid: Thank you. Thank you. Thank you.
Michael Leonidovich Ryskin: And once more, Michael Ryskin, your line is open, and we will take our next question and will come back to you. We will take the next question from David Lebowitz on SETI.
Ramy Farid: And once more, Michael Ryskin, your line is open.
Speaker Change: And we will take our next question.
Speaker Change: We will take the next question from David.
David Neil Lebowitz: Well, thank you very much for taking my question. At the beginning of the call, you referenced your talks with large-scale global companies about significant scale-ups and expanded use of the software. Is that something that's actually incorporated into the data? That's something we would see in the typical fourth quarter uptick? Or is that a more broad statement that talks about potential acceleration in the coming years? and Jeff.
David Neil Lebowitz: Lebowitz with SETI
David Neil Lebowitz: Well, thank you very much for taking my question.
Speaker Change: At the beginning of the call, you referenced your talks with the large-scale global companies about significant scale-ups and expanded use of the software.
David Neil Lebowitz: Is that something that's actually incorporated into the data, that's something we would see in the typical fourth quarter uptick, or is that a more...
Speaker Change: Broad statement that talks about potential acceleration in the coming years.
Geoffrey Craig Porges: Yeah, that's actually a really good question. Dave, I think it's both. I think that we recognize, as you know, that we had a large contribution from a large customer renewing a multi-year contract in the fourth quarter of last year. And so we're very focused on growing through that in the fourth quarter of this year and see a number of opportunities for doing that, which is what's in the guidance. But also, from our comments around predictive talk, and from our general comments, I think we think this is relatively early days in the cycle of the industry's adoption of this technology.
Speaker Change: Yeah, that's actually a really good question. Dave, I think it's both.
Dave: I think that we recognize, as you know, that we had a large contribution from a large customer renewing a multi-year contract in the fourth quarter of last year. And so we're very focused on growing through that in the fourth quarter of this year and see a number of opportunities for doing that.
Speaker Change: which is what's in the guidance but also I think from our comments around predictive talks
Speaker Change: And from our general comments, I think we think this is...
Geoffrey Craig Porges: And we had an opportunity in the quarter to talk to many of the larger customers about where they are in the journey of adopting our technology at scale, and I think they're starting to realize that it's still relatively early days, and they have a long way to go in terms of capturing the full benefit. Ramy, do you want to talk a little bit more about the long term and the discussions we've had? The long term, that's right.
Speaker Change: relatively early days in the cycle of the industry's adoption of this technology. And we have had an opportunity in the quarter to talk to many of the largest customers.
Speaker Change: about where they are in the journey of adopting our technology at scale. And I think they're starting to realize that it's still relatively early days, and they have a long way to go in terms of capturing the full benefit. Ramy, do you want to talk a little bit more about the long term and the discussions we've had?
Ramy Farid: The question was specifically about that, right, David, about this, about this year in the fourth quarter, correct, or, Did I miss something here? I basically meant to the extent that, are we talking about substantial upticks in the use of the software, that's something that's already incorporated into the numbers? Or are we talking on a broader scale about them actually increasing their overall adoption going forward? and how that might affect future years.
Ramy Farid: The long term, that's right. The question was specifically about, right David, about this year in the fourth quarter, correct?
Ramy Farid: Did I miss here?
David: I basically meant to the extent that, are we talking about substantial upticks in the use of the software that's just something that's already incorporated into the numbers, or are we talking on a broader scale of them actually increasing their overall adoption going forward?
Ramy Farid: Ah, yes. Okay. So yeah, I think Jeff covered it very well. But you're raising something very interesting, which is that as customers scale up, the usage of the song increases, and that fuels more growth. We've often talked about this sort of chicken and egg problem, that you have to have; you have to be using the software at some sort of critical level of usage to really see the impact.
Speaker Change: and how that might affect future years.
Speaker Change: Ah, yes. Okay. So, yeah, I think Geoff covered it very well, but you're raising something very interesting, which is...
Speaker Change: that as customers scale up the usage of the software,
Speaker Change: They see an acceleration in the impact that it has, and that fuels more growth.
Speaker Change: We've often talked about this sort of chicken and egg problem, that you have to be using the software at some sort of critical level of usage to really see the impact.
Ramy Farid: So that's what we're finding, is that as customers scale up, they finally get to the point where they see the sort of profound impact on their projects, the kind of thing that we're seeing internally and that our partners are seeing, and you can see the success of our partners and the impact that's having. And like I said, that continues to fuel further growth.
Speaker Change: So that's what we're finding is that as customers scale up, they finally get to the point where they see the sort of profound impact on their projects, the kind of thing that we're seeing internally and that our partners are seeing, and you can see the success.
Speaker Change: of our partners and the impact that's having. And like I said, that continues to fuel further growth. And also, as Geoff said, we should be very clear, and we've said this many times.
David Neil Lebowitz: And also, as Geoff said, we should be very clear, and we've said this many times, we're excited about where customers are going. And we, at the moment, have customers that are really using the software at a nice scale, but they still have a long way to go to really use the technology to realize the full benefit of it. And as we've said many, many times, to use it at the scale that we use it in our collaborative and proprietary programs. I think that's what you're getting at.
Geoffrey Craig Porges: We're excited about where customers are going.
Geoffrey Craig Porges: You know, we at the moment have customers that are really using the software at a nice scale, but they still have a long way to go to really use the technology.
Geoffrey Craig Porges: to realize the full benefit of it, and as we've said many, many times, to use it at the scale that we're using it in our collaborative and proprietary programs. I think that's what you're getting at, and it's a great question.
Speaker Change: Thank you for taking my question. Yeah, thanks.
Ramy Farid: Thank you for taking my question. Yeah, thanks. Thank you. And our next question comes from Vikram Purohit with Morgan Stanley. Hi, this is Morgan Greigon for Vikram.
Speaker Change: Thank you. And our next question comes from Vikram Purohit with Morgan Stanley .
Morgan Greigon: I have two questions related to the MALT1 program. First, for the initial MALT1 data expected in the first half of 2025, could you provide some more color on what this data set could look like in terms of number of patients, level of follow-up, and parameters of data you anticipate reporting? And then following this data readout in 1H25, are there any potential plans to establish a partnership, or do you anticipate maintaining proprietary ownership of the molecule until additional data readouts?
Speaker Change: Hi, this is Morgan Greig on for Vikram. I have two questions related to the Malt One program first.
Speaker Change: for the initial MALT1 data expected in the first half of 2025.
Speaker Change: Could you provide some more color on what this data set could look like in terms of
Speaker Change: Number of patients level follow-up and
Speaker Change: parameters of data you anticipate reporting, and then following this data readout in 1H25,
Speaker Change: Are there any potential plans to establish a partnership or do you envision maintaining proprietary ownership of the molecule until additional data readouts? Thank you.
Morgan Greigon: Thank you. Yeah, so as we've described for this phase one dose escalation in patients, we are very focused on understanding safety, pharmacokinetics, and pharmacodynamics. I think we said in our prepared remarks that we're currently comparing once daily and twice daily and collecting pharmacodynamic data. And so this first half of 2025, it will really be giving insight into what we're seeing in that. We are obviously also, in an exploratory way, looking at clinical activity, and we also hope to be able to present that. And so, yeah, looking forward to the opportunity to bring together and accumulate all of that data to share in a peer-reviewed setting.
Speaker Change: Yes, so as we've described for the phase 1 dose escalation in patients, we are very focused on understanding the safety, the pharmacokinetics and pharmacodynamics. I think we said in our prepared remarks, we're
Speaker Change: Currently comparing once daily and twice daily and collecting pharmacogenomic data and so this first half of 2025 it will really be giving insight into what we're seeing in that
Speaker Change: Phase Luctose Escalation Study
Speaker Change: We are obviously also, in an exploratory way, looking at clinical activity, and we also hope to be able to present that. And so, yeah, looking forward to the opportunity to bring together and accumulate all of that data to share in a peer-reviewed setting.
Morgan Greigon: In terms of what our plans are for MORT1, I think we've been really clear in the past that MORT1 is a mechanism that will combine well with some pretty well-established drugs, BTCA inhibitors, BCR2 inhibitors, in a range of lymphomas, and as a result of that, we think that actually the broadest potential development of MORT1 inhibitors will be in partnership with companies that own those assets, or products, actually, on the market.
Speaker Change: In terms of what our plans are for MOT One, I think we've been really clear in the past that we think MOT One
Speaker Change: is a mechanism that will combine well with some pretty well-established drugs, B2C inhibitors,
Speaker Change: BTR2 inhibitors in a range of lymphomas and as a result of that, we think that actually the broadest potential development of MORT1 inhibitors will be in partnership with companies that own those assets.
Karen Akinsanya: So, while we will continue to sell MORT2 internally, we are always talking to partners about and a more complete data set to socialize that with pharma and potentially as part of the program. Thank you. And we will take our next question from Matt Hewitt with Craig Hallam Capital Group. Good afternoon.
Speaker Change: or products actually on the market. And so, while we will continue to sell our market internally, we are always talking to partners about...
Speaker Change: projects and we think that there will be an opportunity with a more complete data set to socialize that with pharma and potentially a part of the program as we conclude the phase one study.
Speaker Change: Thank you and we will take our next question from Matt Hewitt with Craig Howlum Capital Group
Matthew Gregory Hewitt: Congratulations on the quarter and thank you for taking the questions. Maybe first up, regarding the new predictive toxicology tools. Was this something where customers had come to you looking for help?
Matthew Gregory Hewitt: Good afternoon. Congratulations on the quarter and thank you for taking the questions. Maybe first up regarding the new predictive toxicology tools.
Ramy Farid: Or was this you seeing an opportunity in the market given your strengths? And, you know, basically putting this together, I guess, is the first part of the question. The second part is, as you know, this gets adopted; as you launch this, this gets adopted. Do you see that changing the methods for traditional toxicology studies? Will there be a cost benefit to utilizing your software versus traditional, traditional methods? Or is this in addition to those traditional toxicology studies?
Matthew Gregory Hewitt: Was this something where customers had come to you looking for help?
Speaker Change: or was this you seeing an opportunity in the market given your strengths?
Speaker Change: And, you know, basically putting this together, I guess, is the first part of the question.
Speaker Change: The second part is...
Ramy Farid: Thank you. Thanks, man. Those are great, great questions. So, first of all, with regard to your first question, absolutely both. This is widely known in the industry as a very serious problem, and customers and everybody that's doing drug discovery have been complaining about this forever, and it's a problem that everybody encounters in their drug discovery projects. So, what happened is that our technology, and a number of different pieces of the technology actually, got to a certain level of performance that we recognized this seemingly impossible problem. You know, it seemed like an impossible problem a few years ago, but it all of a sudden seemed possible.
Matthew Gregory Hewitt: And a number of different pieces of the technology actually.
Ramy Farid: It's a very ambitious project, but we think, given what we've already done with a number of targets, that it's now the right time. And we're excited about, not only where the science has gotten to, and not only the funding that we talked about before, but our partnership with NVIDIA, which is also really making this possible. The performance of computers, even just a few years ago, was not where it is now.
Speaker Change: done with a number of targets, that it's now the right time.
Speaker Change: not only where the science has gotten to and not only the funding that we talked about before, but our partnership with NVIDIA, which is also really making this
Ramy Farid: And where it is now is what's making this even possible. So it's bringing together, obviously, the interest and the demand for something like this with advances in science and advances in computer hardware. Now, with regard to traditional methods, there are basically two methods that are used now.
Speaker Change: this possible, the performance of computers.
Speaker Change: Even just a few years ago was not where it is now, and where it is now is what's making this even possible. So it's bringing together, obviously, the interest and the demand for something like this, with advances in the science and advances in computer hardware.
Ramy Farid: One is obviously experimental, and that's what most people are doing, and, of course, you can imagine that it's pretty slow, not very high throughput, and obviously costly. I mean, to actually make the molecule and run it through panels of off-targets one at a time to determine the sort of profile of the molecule with regard to off-target toxicity. The other approach has been one that involves using purely machine learning. So this is basically collecting as much experimental data as possible and then just building ML models. The problem with that is that it has a severe limitation, which is that you can only get reasonably reliable predictions for molecules that look a lot like the molecules that have already been synthesized.
Speaker Change: Now, with regard to the traditional methods, there are basically two methods that are used now. One is obviously experimental.
Speaker Change: to determine the sort of profile of the molecule with regard to off-target toxicity. The other approach...
Speaker Change: and then just building ML models. The problem with that...
Speaker Change: And that has a severe limitation.
Speaker Change: which is that you can only get reasonably reliable predictions for molecules that look a lot like the molecules that have already been synthesized. What that means is...
Ramy Farid: What that means is that these predictive computational methods only start to work very late in projects after you've accumulated a ton of experimental data, and that obviously is missing a huge opportunity to catch these problems early in projects. With the physics-based approaches that we've developed and published... That allows for any novel molecule, of any molecule, it can be completely novel; there doesn't need to be any experimental data existing yet to be able to accurately predict whether it binds to a panel of off-targets. So that's what this sort of breakthrough is. There is never going to be a complete replacement for experimental methods.
Speaker Change: That allows for any novel of any molecule, it can be completely novel, there doesn't need to be any experimental data existing yet to be able to accurately predict whether it binds to a panel of off targets.
Speaker Change: So that's what the sort of breakthrough is. There is...
Ramy Farid: Eventually, you have to do the experiments. But the idea behind this technology is that it will significantly reduce the need to do those, and it will allow for prediction of this toxicology profile very early in the project and actually be able to fix it instead of just throwing your hands up and saying, oh, well, this is yet another series that's dead. Hope that makes sense. Absolutely. Thank you. That's very helpful.
Speaker Change: There's never going to be a complete replacement for experimental methods. Eventually, you have to do the experiments.
Speaker Change: But the idea behind this technology...
Speaker Change: is that it will...
Speaker Change: significantly reduce the need to do those, and it allows for prediction of this toxicology profile very early in the project, and actually be able to fix it, instead of just throwing your hands up and saying, oh, well, this is yet another series that's dead.
Speaker Change: Hope that makes sense.
Speaker Change: Absolutely. Thank you. That's very helpful.
Chris Shibutani: And our next question comes from Chris Shibutani with Goldman Sachs. Thank you very much.
Speaker Change: Thank you. And our next question comes from Chris Shibutani with Goldman Sachs.
Geoffrey Craig Porges: Two questions, if I may, in terms of how you think the gross margin is being improved and strengthened by some of the shifting of the allocation of employees that you described. Can you give us a sense of where you are in terms of the right sizing or the right distribution or shaping of that distribution, so to speak, so that we can think about where on the forward this may continue to provide some gross margin benefit?
Chris Shibutani: Thank you very much. Two questions, if I may. In terms of how you think
Speaker Change: The Gross Margin is being...
Chris Shibutani: improved and strengthened by some of the shifting of the allocation of employees that you described. Can you give us a sense for where you are in terms of the right sizing or the right distribution or shaping of that distribution so to speak so that we can think about where on the forward this may continue to provide some gross margin benefit?
Geoffrey Craig Porges: And then secondly, I'm curious to know, particularly as Karen and her team continue to advance her proprietary pipeline into the clinic. You guys, in essence, represent the, you know, sort of the leading edge of a master class or the ability to apply artificial intelligence-based modalities. And we often observe and wonder whether or not in clinical development there is a smarter, better, leaner, quicker way of approaching it. And if so, what is it that you guys are doing?
Karen Akinsanya: And then secondly, I'm curious to know, particularly as Karen and her team continue to advance her proprietary pipeline into the clinic.
Speaker Change: You guys, in essence, represent the, you know, sort of the leading edge of the master class or the ability to apply artificial intelligence type informed modalities, and we often observe and wonder whether or not in the clinical development stage,
Speaker Change: There is a smarter, better, leaner, quicker way of approaching it. And if so, what is it that you guys are doing?
Karen Akinsanya: And is it something that you're even contemplating expanding your own portfolio with? Just kind of understand if you could be the best in class example of utilizing this to the max of taking drugs from discovery all the way to the clinic. What happens in the clinical development phase, what's your mindset now? Thank you.
Speaker Change: And is it something that you're even contemplating expanding your own portfolio with? Just kind of understand if you could be the best-in-class example of utilizing this to the max, of taking drugs from discovery all the way to the clinic, what happens in the clinical development phase, what's your mindset now? Thank you.
Geoffrey Craig Porges: Geoff, would you like to take the gross margin question first? Sure. Chris, thanks for your question. The gross margin, as you kind of gathered from my prepared remarks, on the drug discovery side, there has been a reduction in the cost of services associated with the drug discovery revenue, as some of the project teams that were working on collaborations have shifted over to work on proprietary programs. And so the expense associated with those employees but also any CRO services or other services associated with their work has shifted from the cost of services over to R&D. I don't think that there is a lot more to shift there.
Geoffrey Craig Porges: Thanks, Chris. Geoff, would you like to take the gross margin question first? Sure. Chris, thanks for your question.
Geoffrey Craig Porges: And as I mentioned in my prepared remarks, the outlook very much depends upon what we do with respect to collaborations. In future periods, if there is another collaboration that engages a number of those employees, then that shift might move back the other way. I don't think it's going to be a seismic shift back the other way. But, as it has been over the past few quarters, could it trend back the other way?
Geoffrey Craig Porges: The gross margin, as you have gathered from my prepared remarks, on the drug discovery side, there has been a reduction in the cost of services associated with the drug discovery revenue.
Geoffrey Craig Porges: as some of the project teams that were working on collaborations.
Geoffrey Craig Porges: have shifted over to work on proprietary programs.
Geoffrey Craig Porges: And so the expense associated with those employees, but also any CRO services or other services associated with their work has shifted from cost of services over to R&D.
Geoffrey Craig Porges: I don't think that there is a lot more to shift there, and as I mentioned in my prepared remarks, the outlook very much depends upon what we do with respect to collaboration.
Geoffrey Craig Porges: In future periods, if there is another collaboration that engages...
Geoffrey Craig Porges: a number of those employees, then that shift might move back the other way. I don't think it's going to be a seismic shift back the other way, but as it has been over the past few quarters, could it trend back the other way? Yes, somewhat.
Geoffrey Craig Porges: Yes, somewhat. The larger question, of course, related to R&D spend, you saw R&D was flat in Q2 over Q1. And I think we generally feel that we're in a really good place in terms of the investment we're making in the platform and the investment we're making in proprietary medicines. Depending upon what happens with the clinical programs and their progress and what we decide to advance, et cetera, there could be a step up associated with the clinical side.
Geoffrey Craig Porges: The larger question, of course, related to R&D spend, you saw R&D was flat Q2 over Q1.
Speaker Change: And I think we generally feel that we're in a really good place in terms of the investment we're making in the platform and the investment we're making in proprietary medicines.
Speaker Change: [inaudible]
Geoffrey Craig Porges: But I don't see that as being an imminent step up because we've given you a timeline for seeing the clinical data, and so we're continuing with those current trials to turn over those cards. So I don't think that there's a big change in either the R&D line or in the cost of services. And then lastly, I think I alluded to the puts and takes on the gross margin line on software, where I hopefully managed to explain that there would be a temporary reduction associated with the funding for the Predictive Talks Initiative and that that would reverse itself at the conclusion of that funding. That's just an anomaly of the different profitability between a software research project and a software contract for a customer.
Speaker Change: Step up because we've given you a timeline to seeing the clinical data And so, you know, we're continuing with those current trials to turn over those cards. So
Speaker Change: I don't think that there's a big change in either the R&D line or in the cost of services.
Speaker Change: And then lastly, I think I alluded to the puts and takes on the gross margin line on software, where hopefully I managed to explain that there will be a temporary reduction associated with the funding for the Predictive Talks Initiative, and that that will reverse itself at the conclusion of that funding.
Speaker Change: That's just an anomaly of the different profitability between a software research project and a software contract for the customer. So hopefully that's clear. And Karen, do you want to talk about AI? Thank you.
Karen Akinsanya: So hopefully that's clear. And Karen, do you want to talk about AI? Thank you. I'm certainly yes, so you're quite right that obviously as we move our programs into the clinic, our mindset, I'm going to start off by saying that we need to predict first and be as efficient as possible. We ourselves are not building those types of capabilities; as you know, our platform is very much for chemistry. However, we are engaging with companies who have built those kinds of platforms and evaluating whether they are additive to the sort of regulated way of doing things. Can these help accelerate or improve efficiency in how we run trials, including things like patient selection and site selection?
Karen Akinsanya: I'm certainly yes so you're quite right that obviously as we move our programs into the clinic our mindset is
Karen Akinsanya: We ourselves are not building those types of capabilities, as you know, our platform is very much chemistry focused. However, we are engaging with companies who have built those kinds of platforms and evaluating.
Speaker Change: Whether they are additive to the sort of regulated way of doing things, can these help accelerate or improve efficiency in how we run trials?
Karen Akinsanya: However, at this point, you know, that's not something that we will be focused on building internally. I just want to be clear about that. Thank you. And once again, if you would like to ask a question, please press star and one on your telephone keypad now. We will take our next question from Stephen Moix with T.D. Cohen.
Speaker Change: including things like patient selection and site selection. However, at this point, you know, that's not something that we will be focused on building internally. I just want to be clear with that.
Speaker Change: Thank you. And once again, if you would like to ask a question, please press star and one on your telephone keypad now. We will take our next question from Stephen Moua with T.D. Cohen.
Stephen Moix: Great, congratulations on the quarter and thanks for taking the questions. Just two quick follow-up questions on the Predictive Toxicology Initiative. One, does the Gates Foundation have any downstream rights for anything you or your partners discover? And two, is the software applicable to both small molecules and biologics? The short answer to the first question is no. With regard to the second question, The technology, at its current stage, is being developed for prediction of binding to off-targets by small molecules. Um, so, and that's where the focus, toxicity of antibodies is associated with, not this sort of mechanism of off-target binding. The toxicity is often associated, for example, with immunogenetic responses.
Ramy Farid: So it's a different kind of problem. That's what our focus is on. Okay. Yeah, thanks. Thank you. Yeah. Yeah. Okay. Yeah, that's what I figured. Thanks for the clarification. And then maybe staying on biologics.
Stephen Moua: Great. Congrats on the quarter and thanks for taking the questions. Just two quick follow-up questions on the Predictive Toxicology Initiative. One, does the Gates Foundation have any downstream rights for anything you or your partners discover? And two, is this software applicable to both small molecules and biologics?
Speaker Change: The short answer to the first question is no.
Speaker Change: With regard to the second question, the technology at its current state being developed for prediction of binding to off targets by small molecules.
Speaker Change: So, and that's...
Speaker Change: That's where the focus is.
Speaker Change: Toxicity of antibodies is associated with, not with this sort of mechanism of off-target binding. The toxicity is often associated, for example, with immunogenetic responses, so it's a different kind of problem.
Stephen Moua: That's why the focus is on so long. Okay, yeah, thank you. Yep.
Stephen Moix: Could you give us some color on the live design for biologics? You know, what has the attraction been since the launch in March? Thank you. Sorry, what was the, Yeah, but what was, what was, oh, no, the, A live design for Biologics.
Speaker Change: Okay, yeah, that's what I figured out. Thanks for the clarification. And then maybe staying on biologics, could you give us some color on the live design for biologics? You know, what has the traction been since the launch in March? Thank you.
Speaker Change: Sorry, what was the...
Ramy Farid: You guys launched that in March. The reception has been fantastic; this is clearly a product that sort of had a lot of pent-up demand for it. And all of the demos that we've been doing and discussions with customers, again, the reception has been really, really great. As with enterprise software, the fact that it is so sticky once it's in also results in the time to adoption being a little slower.
Speaker Change: Yeah, but what was, what was it? Oh, no, the...
Speaker Change: A live design for Biologics. You guys launched that in March.
Speaker Change: The reception has been fantastic. This is clearly a product that was
Speaker Change: sort of had a lot of pent up demand for it. And all of the demos that we've been doing and discussions with customers, again, the reception has been really, really great. As with enterprise software, the
Speaker Change: The fact that it is so sticky once it's in, also...
Speaker Change: results in the time to adoption being a little slower.
Ramy Farid: It's not expected that customers just sort of hear about it, and the next day, they're using the software. The sort of sales cycle is a little bit longer with enterprise software. The result of that is extreme stickiness once it's developed.
Speaker Change: [inaudible]
Ramy Farid: So, what we can tell you is that we have had customers using it, and again, the feedback is quite positive. Great. Thank you. Yes, thank you. I have no further questions at this time. That concludes today's call. You may now disconnect.
Speaker Change: Extreme stickiness once it's developed. So what we can tell you is we have had customers using it and again the feedback is quite positive.
Speaker Change #101: Great, thank you. Yep.
Speaker Change #100: Thank you. I am showing no further questions at this time. That concludes today's call. You may now disconnect.
Speaker Change: [inaudible]
Speaker Change: Thank you. Thank you.