Q4 2024 Schrödinger Inc Earnings Call
Thank you for standing by.
Kelvin: Welcome to Strodinger's conference call to review fourth quarter and full year 2024 financial results. My name is Kelvin and I'll be your operator for today's call.
All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session.
Kelvin: If you would like to ask a question during this time, simply press star followed by the number 1 on your telephone keypad. If you would like to withdraw your question, simply press pound key or star 2. Please be advised that today's call is being recorded at the company's request.
Speaker Change: Now I would like to introduce your host for today's conference, Ms. Jaren Madden, Senior Vice President of Investor Relations and Corporate Affairs. Please go ahead.
Jaren Madden: Thank you and good afternoon everyone. Welcome to today's call during which we will provide an update on the company and review our fourth quarter and full year 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 Schrodinger.com. Here with me on our call today are Ramy Farid, Chief Executive Officer, Jeff Porges, Chief Financial Officer, and Karen Akinsanya, President of R&D Therapeutics.
Following our prepared remarks, we'll open the call for Q&A.
Speaker Change: of 1995, including, without limitation, statements related to our outlook for the full year 2025,
Speaker Change: Our plans to accelerate the growth of our software business and advance our collaborative and proprietary drug discovery programs, 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, as well as our future expenses.
Speaker Change: These forward-looking statements reflect our current views about our plans, intentions, expectations, strategies, and prospects, which are based on the information currently available to us and on assumptions we have made.
Speaker Change: Actual results may differ materially due to a number of important factors, including considerations described in the risk factors section and elsewhere in the filings we make with the SEC, including our Form 10-K for the year ended December 31, 2024.
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.
Speaker Change: Also included in today's call are certain non-GAAP financial measures. These non-GAAP financial measures are not prepared in accordance with generally accepted accounting principles and should be considered only in addition to and not a substitute for or superior to GAAP measures.
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-gap measures to the most directly comparable gap measures.
Speaker Change: With that, I'd like to turn the call over to Ramy. Thanks, Jaren, and thank you everyone for joining us today.
Ramy Farid: 2024 was an exciting year for Schrodinger. We exceeded our software revenue expectations, established a new drug discovery collaboration, and expanded software agreement with Novartis, and we continue to advance our collaborative and proprietary pipeline.
Ramy Farid: We advanced the science underlying our platform, including initiating a project to predict toxicity associated with off-target binding and launching a new enterprise informatics platform for biologics.
Ramy Farid: 2024 was also marked by important milestones at companies we co-founded. Ajax and Structure progressed their clinical programs and Morphic was acquired by Lilly for $3.2 billion resulting in approximately $48 million for Schrodinger.
Ramy Farid: As we look to 2025, I'm optimistic this broad momentum will continue.
Ramy Farid: Total revenue for the year was $208 million. Software revenue was $180 million, representing just over 13% growth, and fourth quarter software revenue grew 16% to $80 million.
Ramy Farid: The strength of our business is also reflected in our 2024 KPIs. The number of software customers with an annual contract value of greater than $5 million increased from four to eight.
Ramy Farid: and the number of customers with ACV of greater than 1 million increased from 27 to 31.
Ramy Farid: Total ACV increased by 24% to $191 million. Our software customer retention was 100% for customers with ACV of at least 500,000.
Ramy Farid: We believe this strong performance of our KPIs is a direct consequence of the impact our technology is having on our customers' programs.
Ramy Farid: Our priority for 2025 is driving continued increases in adoption of our computational technology and enterprise informatics platform.
Ramy Farid: It is clear that the computational landscape in the industry is changing rapidly and that our unique integration of physics and AI-ML methods is producing powerful solutions for drug discovery and materials design.
Ramy Farid: This year we plan to release several new products and solutions that reflect our continued investment in the platform, including our predictive toxicology technology, where we have already enabled more than 50 off-targets.
Ramy Farid: We are also planning to release enhancements to our biologics discovery technologies and additional applications of AIML methods that are accelerating and broadening the impact of our physics-based methods.
Ramy Farid: Our platform is having a big impact on our ability to rapidly progress a broad pipeline of collaborative and proprietary discovery programs. This year we look forward to sharing initial Phase I clinical data from our three lead programs.
Karen will provide a detailed update later in the call.
Ramy Farid: We are well positioned for a transformational 2025 and we look forward to providing updates over the course of the year. I will now turn the call over to Jeff. Thank you, Ramy, and good afternoon, everyone.
Jeff Porges: We're very pleased with Schrodinger's financial performance in 2024. Our software growth exceeded our expectations and showed the resilience of our business through changing industry cycles and the headwinds of large contract renewals in prior years.
Jeff Porges: The revenue contribution from hosted contracts continues to increase and we expect this will gradually reduce the Q4 concentration of our revenue.
Jeff Porges: The strong software results for the year is reflected in the excellent progress we have made in our KPIs and in the financial guidance we are providing for 2025.
Jeff Porges: Our drug discovery collaborations and portfolio are expanding, driven by the landmark new agreement with Novartis, and new programs added to the existing Otsuka and Lilly collaborations.
Jeff Porges: Finally, our proprietary clinical programs are reaching key data milestones, with significant clinical disclosure from free programs coming this year.
I'll now summarize our financial results, beginning with Q4.
Jeff Porges: Total revenue in Q4 was $88.3 million, an increase of 19% compared to Q4 2023. The increase is driven by higher software and drug discovery revenue.
Jeff Porges: Software revenue was $79.7 million, an increase by 16% compared to Q4 2023. The increase was mainly due to higher hosted revenue from large customers who have transitioned from on-prem to hosted licenses over the last two years.
Jeff Porges: On-prem software revenue increased by 3% to $55.4 million as new multi-year deals that closed in Q4 2024, including Novartis, matched the contribution of multi-year deals closed in Q4 2023.
Jeff Porges: Hosted revenue increased by 86% to $11 million. Maintenance revenue was $5.9 million and increased by 3.5%. Maintenance revenue was driven by support for on-prem contracts from prior periods and offset reductions in maintenance from customers switching to hosted licenses.
Jeff Porges: Services declined by 23% as the existing services projects were completed or expired. Contribution revenue is $4.9 million, reflecting the new predictive talks project funded by the Bill and Melinda Gates Foundation.
Jeff Porges: Overall, hosted revenue contributed 14% of total software revenue in the quarter, compared to 9% in Q4 2023.
Jeff Porges: We are very encouraged by the software result, with strong growth in the top 30 global pharma accounts, offsetting continued churn in our small and mid-cap customer segments.
Jeff Porges: Small biotech companies continue to embrace our software, but equally each year we are seeing a number of our biotech software customers being acquired. These outcomes are positive for the industry and add to the validation of our platform, but also contribute to the churn in our SMITCAP biotech segment.
Jeff Porges: Drug discovery revenue was $8.7 million in Q4 compared to $5.5 million in Q4 2023. The increase was due to milestones received in the quarter and amortization of up-front payments from existing collaborations.
Jeff Porges: Very little revenue was recognized for the New Nevada's collaboration in the quarter.
Jeff Porges: Turning to margins, the software cost of revenue is $13.3 million in the quarter, compared to $8.7 million in the same period in 2023. The increase is mainly due to the costs associated with the predicted tax project, along with higher royalties.
Jeff Porges: The software gross margin was 83% in Q4 compared to 87.4% in Q4 2023. The decrease in gross margin was due to the lower profitability of the Predictive Tox project.
Jeff Porges: Drug discovery cost of goods was $10.9 million, compared to $7.9 million in Q4 2023. The increase was due to higher royalties as well as some increases in FTE and technology expenses.
Jeff Porges: Overall, our cost of revenue increased by 46% compared to Q4 2023, and the overall gross margin declined from 77.6% in Q4 2023 to 72.6% in Q4 2024.
Jeff Porges: The decline was due to higher drug discovery expenses and the higher cost of software.
Jeff Porges: Looking ahead, we expect this trend to continue for the balance of this year as more of our R&D expenses associated with internal projects moves into cost of goods for drug discovery and as the Predictive Talks project continues in 2025.
Jeff Porges: Our largest operating expense remains R&D. R&D declined from $51.5 million in Q4 2023 to $49.4 million in Q4 2024. The decline was due to lower CRO spending and lower FTE allocation for projects that were discontinued during the year.
Jeff Porges: Sales and marketing expenses in Q4 decreased by 2.5% to $9.7 million based on relatively stable headcount and associated expenses, and G&A was essentially flat at $25.8 million, mainly associated with higher professional services being offset by decreases in royalties.
Jeff Porges: Total operating expenses were $84.8 million compared to $87.2 million in Q4 last year. And the loss from operations was $21 million compared to $29.6 million in Q4 last year.
Jeff Porges: The change in fair value was a loss of $22 million based on the mark-to-market of our equity in structured therapeutics and the small changes in private company valuations. This compares to a loss in value of $8 million in Q4 of 2023.
Jeff Porges: Other income was $3.5 million in Q4 compared to $6.6 million in Q4 2023. The lower income was due to a lower cash balance and the unfavorable effect of currency fluctuations and foreign currency balances.
Jeff Porges: Total other expense was a loss of $18.5 million compared to a loss of $1.9 million Q4 last year.
Jeff Porges: Resulting in net loss before taxes for the quarter $39.3 million, net loss after taxes of $40.2 million or $0.55 per diluted share. This compares to a net loss of $31 million or $0.43 per diluted share in Q4 last year.
Jeff Porges: The fully diluted share count for Q4 was $72.9 million and for the year was $72.7 million. The share count increased by 1% compared to the same periods in the prior year.
Jeff Porges: I'll now summarize the full year 2024 financial results. Full year revenue was $208 million compared to $217 million in 2023.
Jeff Porges: Software revenue grew by 13.3% from 159 to 180 million with two-thirds of the growth coming from hosted software and one-third from contribution revenue.
Jeff Porges: Hosted revenue grew from $20 million to $35 million due to an increasing number of large accounts transitioning to hosted licenses.
Jeff Porges: Hosted contracts contributed 20% of software revenue for 2024 compared to 13% in 2023.
Jeff Porges: On-prem contract revenue was flat at $104 million. As new, large, multi-year on-prem contracts signed this year more or less offset those signed last year. Contribution revenue increased due to the impact of the Predictive Tax Project funded by the Gates Foundation.
Jeff Porges: Drug discovery revenue is $27 million for the year compared to $58 million in 2023. The reduction was due to the impact of non-recurring milestones received from partners in 2023.
Jeff Porges: Software gross margin for the year was 79.5% compared to 81.5% in 2023. The change in gross margin was due to the higher costs associated with the contribution revenue in 2024 compared to 2023.
Jeff Porges: Overall, gross margin was relatively stable at 64% compared to 65% in 2023.
Jeff Porges: Operating expenses increased by 7.3% compared to 2023 with R&D increasing by 11% to $202 million, sales and marketing increasing by 7% to $40 million and G&A increasing by 1% to $100 million.
Our operating loss for the year was $209 million.
Jeff Porges: compared to $177 million in 2023. Other income was $23.6 million this year compared to $220 million in 2023 and our net loss in 2024 was $187 million or $2.57 per diluted share.
Jeff Porges: compared to net income of $41 million, or $0.54 per diluted share in 2023. The profit in 2023 was driven by the gains associated with the distribution from Nimbus and the gains in the value of our stakes in Morphic and Structure during 2023.
Jeff Porges: Our net cash used in operating activities was $31 million in Q4 compared to $37 million in Q4 2023. Our net cash used in operating activities for the year was $157 million in 2024 compared to $137 million in 2023.
Jeff Porges: A cash and marketable securities balance was $367 million at the end of Q4 2024 compared to $469 million at the end of Q4 2023.
Jeff Porges: Our cash position at the end of Q4 2024 did not reflect the effect of the receivable from Novartis, which added $150 million to our cash balance in January.
I'll now provide our initial financial guidance for 2025.
Jeff Porges: We expect our software revenue growth to be in the range of 10-15%, and currently expect drug discovery revenue to be in the range of $45-50 million.
Jeff Porges: We expect a further increase in the proportion of our revenue from hosted contracts, which should slightly reduce our fourth quarter weighting of software revenue, and bolsters our revenue in earlier periods.
Jeff Porges: Our current expectation is that software revenue will be in the range of $44 to $48 million in Q1, and that drug discovery revenue will be weighted towards the later quarters of the year.
Jeff Porges: Our software gross margin is likely to be in the range of 74 to 75 percent compared to 79.5 percent in 2024. The reduction is driven by the increase in the contribution revenue from the Predictive Tax Initiative.
Jeff Porges: Our operating expenses are likely to grow by less than 5% in 2024, as certain expenses shift from R&D to cost of goods in associated with the Predictive Talks Initiative and newly announced collaborations.
Jeff Porges: We now expect net cash used in operating activities in 2025 to be lower than 2024.
Jeff Porges: In 2025, we expect the growth of our software business to continue to be driven by increasing adoption of our technology by large customers.
Jeff Porges: Many of these companies have not scaled up their investment in our technology and are increasingly interested in improving the productivity of their drug discovery efforts.
Jeff Porges: We are already having encouraging discussions with many of the companies who have not yet adopted our technology at scale and anticipate that the enhancements to our platform
Jeff Porges: including capabilities for biologics and expanded integration of AI and machine learning with our physics based methods should contribute meaningfully to our growth this year. While we are fielding inquiries from new and emerging biotech companies we don't expect small companies to contribute meaningfully to our growth this year.
Jeff Porges: Our exposure to China is less than 5% of revenue, and we don't expect significant growth from that market this year either.
Jeff Porges: To conclude, Schrodinger had an excellent year in 2024 with strong results that leave us well positioned operationally, financially and strategically entering 2025.
Jeff Porges: We have many opportunities to drive continued growth in our software business and our collaborations are poised to contribute significant value in 2025 and beyond. Our balance sheet is strong and our operating metrics, including KPIs and operating expenses, are trending in the right direction.
Jeff Porges: I'll now turn the call over to Karen to comment on a therapeutics R&D.
Karen Akinsanya: Thank you, Jeff, and good afternoon, everyone. 2024 was a productive year as we advanced our collaborative and proprietary pipeline. In November, we signed a significant new drug discovery agreement with Novartis, and we recently expanded our collaborations with Otsuka and Lilly.
Dose escalation studies for SGR 1505 and SGR 2921 progressed.
Karen Akinsanya: and we initiated our Phase I study for SGR 3515. These achievements laid the groundwork for important milestones this year, with the expected presentation of initial Phase I data from all three clinical stage programs.
Karen Akinsanya: Beginning with our Collaboration Portfolio, we are pleased with the addition of another target to our Discovery Collaboration with Lilly.
Karen Akinsanya: Today's announcement of an exciting new program in a high-value therapeutic area builds on the agreement initially signed in 2022 and the advances made by the team on a challenging initial target.
Karen Akinsanya: Last month we announced the expansion of our collaboration with Otsuka, adding another program to the existing agreement.
Karen Akinsanya: The expansion of these two partnerships, as well as our collaboration with Novartis, reflect the excellent track record we have established for delivering differentiated molecules and robust preclinical packages for high-value targets.
Karen Akinsanya: Malt 1 is a clinically validated target for leukemias and lymphomas.
Karen Akinsanya: It is downstream of the BTK pathway and regulates NF-κB signalling.
Karen Akinsanya: which is elevated in B-cell malignancies and in patients with BTK inhibitor resistance. Our ongoing Phase 1 dose escalation study is evaluating SGL1505 in patients with relaxed refractory B-cell malignancies.
Karen Akinsanya: As a reminder, the objectives of this Phase 1 study are to evaluate the safety and tolerability of SgR2921 and to determine the recommended Phase 2 dose and schedule. The study is progressing well, with multiple dose escalations completed, and we continue to anticipate reporting initial clinical data in the second half of this year. Third, our Phase 1 study of SgR3515, our We1Mit1 co-inhibitor, is also advancing.
Karen Akinsanya: Our ongoing dose escalation study will evaluate the safety PKPD, preliminary anti-tumor activity and dosing schedule in patients with advanced solid tumors, predicted to be sensitive to WI-1, MIT-1 inhibition. This includes ovarian, uterine and breast cancer, in addition to other solid tumors with elevated replication stress.
Karen Akinsanya: We are pleased with our progress in this study and anticipate reporting initial data in the second half of this year.
Karen Akinsanya: Beyond our clinical programs, we are also progressing early discovery programs for targets involved in inflammation and neurodegenerative diseases. Recently, we selected a development candidate for our EGFR-C797S program for osimertinib-resistant non-small-cell lung cancer, including brain metastases.
Karen Akinsanya: Over the past three years, we have advanced several programs into the clinic and partnered some of our early stage programs.
Karen Akinsanya: We continue to see additional opportunities for value creation emerging from our portfolio through outlicensing, new ventures or collaborations.
Ramy Farid: We are very much looking forward to sharing clinical results from all three clinical programs throughout the year. I'll now turn the call back to Ramy.
Ramy Farid: Thank you, Karen. As you heard, we had a very successful 2024. And I would like to take this opportunity to thank our dedicated employees for their hard work and accomplishments.
Ramy Farid: I'm very excited about our outlook for 2025, and we look forward to providing further updates across the business throughout the year. At this time, we'd be happy to take your questions.
Ramy Farid: Thank you. Ladies and gentlemen, we will now begin the question and answer session.
Speaker Change: At this time I would like to remind everyone to ask a question, press the star button followed by the number 1 on your telephone keypad. If you would like to withdraw your question, please press the pound key or star 2. One moment please for your first question.
Speaker Change: Your first question comes from the line of Michael Yee of Jeffries. Please go ahead.
Speaker Change: Hey guys, this is Kyle Yang for Michael Yi. Thanks for taking our questions.
Congrats on the quarter.
Speaker Change: your 2025 Drug Discovery Revenue Guidance. And could you please share what proportion of the guidance comes from revenue from the Novartis Partnership?
Speaker Change: And second is, could you please tell us a little bit about your updated thoughts on...
Speaker Change: We understand that you previously sort of used Jane's first-generation molecule data as a bar. We understand that you previously sort of used Jane's first-generation molecule data
Speaker Change: So how should we think about the bar now, knowing that J&J has initiated a second-generation molecule and also AbbVie has a malt wine as well. Thank you so much.
Speaker Change: Let me start off with your question about the 2025 Revenue Guidance for Drug Discovery.
Speaker Change: The increase in the drug discovery revenue that we're forecasting is pretty broad-based
It comes from quite a few different collaborations.
Speaker Change: As you would imagine, part of it is the amortization of the upfront payment from the Devadas collaboration,
Speaker Change: We've indicated it's going to be sort of over multiple years.
Speaker Change: I wouldn't want you to think that it's most of that revenue, because we're just scaling up all of those activities on those projects. I imagine we're going to be sort of at peak recognition of that upfront payment, probably 18 to 24 months.
Speaker Change: But there are a number of other programs, as we announced today, we have a new collaboration with Lilly Agreement. We announced a new collaboration, a new program, sorry, in the Lilly Agreement, a new program in the Otsuka Agreement at the beginning of the year, both of those contribute.
Speaker Change: and the progress that we're making in some of the other collaborations such as DMS also contributed. So it's really pretty broad-based, and that's similar to the guidance that we're provided on software, frankly, as well.
Speaker Change: As you point out, there is a lot of excitement I think about Mortwaugh as a mechanism, that's reflected I think in the number of companies that are suing this company.
Speaker Change: as well as initial signs of clinical activity. Now in terms of the bar, I would say that we're really focused on understanding the performance of our molecule in this trial. As you point out, there are other companies entering this space, but our focus this year was focused on describing the profile of our molecule, and as you heard, we will be sharing some of that data in the second.
Speaker Change: Thank you for joining us for the first half of the year at a medical conference with an update on the profile so far from this dose escalation study.
and Matthew Luchini.
Okay, thanks.
and Jaren Madden. Thank you. Thank you.
and Jaren Madden.
Speaker Change: Your next question comes from the line of Manny Forohar of Learing Partners. Please go ahead.
Speaker Change: Thank you for watching. Go to Beadaholique.com for all of your beading supply needs!
Speaker Change: Hi, this is CJ Onfermani. Congrats on the progress and thanks for taking our question.
Speaker Change: Our question is, you previously noted that seasonality becomes more or Q-weighted over time. Is this something that's happening at a pace that we would start to show this year, or this is something we would see a more longer term over the next half decade?
Okay.
So,
Speaker Change: You suggest that our seasonality becomes more weighted, but perhaps you...
Speaker Change: mean that it becomes less weighted over time? We actually do think that it will gradually become less. Our revenue distribution will become less Q4 weighted.
Speaker Change: It's hard because we keep coming up with great opportunities in the fourth quarter as we've seen the last couple of years.
Speaker Change: but we think that this year we will see more distribution. That's why we emphasize the hosted revenue because of course the hosted revenue is a foundation that continues through all four quarters of the year. So I do think that the Q4 weighting will come down but similarly I do want to point out that Q2 and Q3 are still going to be sort of
Speaker Change: cyclically lower quarters than the other quarters of the year this year.
I'll add to that.
Speaker Change: The Q1 guidance that we've provided also reflects the impact of some deals that we signed in Q4 and revenue being recognized for quite a number of things that we closed in Q4, particularly, as you would imagine, hosted deals. So, you know, some of that is a tale coming out of Q4 and Q1.
Great, thank you.
and Jaren Madden. Thank you.
Speaker Change: The next question comes from the line of Scott Shonas of Quebec Capital Markets. Please go ahead.
and Ramy Farid. Thank you. Thank you.
Speaker Change: Hey guys, this is Steve on for Scott. Thanks for taking our questions.
Speaker Change: What do customers take into consideration when potentially moving from on-prem to hosted? And how do you see the percentage of your book transitioning to hosted progressing over the next couple of years? And then as a follow-up, what has the level of demand been like for combination drug discovery and software arrangements from existing and new customers? Thanks.
and Jaren Madden. Thank you. Thank you.
Thank you. Thank you. Thank you.
Speaker Change: So maybe I'll give you a sense of the cadence of the transition from on-prem to hosted, and then, Ramy, maybe you can talk a little bit about the basis of making that decision, and then, Karen, you can talk about the discovery question.
Speaker Change: So, in terms of the cadence, I pointed out in my prepared remarks, I think that there was about a 5 to 7 percentage point difference.
Speaker Change: hosted contracts in 2024 compared to 2023, and also about the same in Q4 compared to Q4. I think that that's a reasonable goal.
Speaker Change: terms of the continuation of the trend. We previously indicated that we don't envisage a coast.
Speaker Change: sudden or even rapidly accelerated switch, but that sort of cadence of transition we think is reasonable as a current-based assumption going forward. Yeah, and let me just remind you...
Speaker Change: What we mean by hosted, in the large majority of cases, what this means is that we're hosting the license server, not the underlying software.
Speaker Change: When we do host, the license server does allow us to...
Speaker Change: Extremely small. Remember, it's just hosted in a license server, not the software itself.
Yep, yeah.
Speaker Change: I mean, I just, you know, I think that's what I was just saying. It's just, it is a little bit more seamless to deliver the software, deliver the license, right? Yeah. Cool. Yeah.
And I think the last question was about combination deals.
Speaker Change: Yeah, the demand for, what do we do to accommodate demand for a combination?
and Subway customers.
for really showcasing our programs.
Speaker Change: how we execute drug discovery and I think as you are aware that's led to a number of these combined deals over the last few years.
Speaker Change: And not just to see them scale up the platform, but actually to have this front row seat and watch us use the platform so that they get the most out of it.
Speaker Change: Your next question comes from the line of Brendan Smith of TD Callan. Please go ahead.
and Jaren Madden. Thank you. Thank you.
and Matthew Luchini.
Speaker Change: The technology is having an impact on projects. We're getting constant reports from our customers that...
Speaker Change: They're making fewer molecules to get to a development candidate, quality of the molecules are improving, the ability of success is improving, they're getting to development candidates.
or rapidly. It's very simple. It's impact.
Speaker Change: And what that means is they become very, very dependent on it. And the option to not continue to use it, of course, isn't there when you have that kind of impact. The other aspect of it is, of course,
Speaker Change: whether there are alternatives. And obviously this kind of retention rate certainly suggests that there are not viable alternatives to the technology that we're.
Speaker Change: We are, as we indicated in our remarks and you're asking your question, continuing to advance the platform in a number of very important areas.
Speaker Change: And then, of course, also helps with retention. When customers see that we continue to improve the platform.
Speaker Change: And they continue, you know, then it becomes more of a partnership, right? They're investing.
Speaker Change: And also, they know that by continuing to work with us, giving us feedback, they're going to see continued improvements to the software and new technologies. And we talked about, for example, enhancements to our biologics offering, in particular in the enterprise informatics.
Speaker Change: Space, that's been really well received. The predicted toxicology, you know, this off-target panel that we're developing is there's a lot of excitement around that. It's a real there's a real need to improve that aspect of drug discovery.
Speaker Change: And that taps into new budgets, which is also a part of stickiness, right, as you start to, as the technology starts to have a broader impact across the whole enterprise, not just in one specific area. The other area that's in that category is formulations, in particular crystal structure prediction. That's an exciting new technology that we released last year, receiving a lot of great feedback from customers. They're seeing that we're advancing the science, we're making, you know, we're doing good science, and it's having an impact on their projects.
Speaker Change: Your next question comes from the line of Michael Reisman of Bank of America. Please go ahead.
Thank you.
Michael Reisman: Great, thanks. Thanks for taking the question, guys. I want to ask about some of the KPIs you released in terms of 2024 performance. Just taking a look at...
Michael Reisman: You know, number of customers with ACV over 5 million, ACV of top 10 customers.
Speaker Change: It seems like, you know, really jumped in those top, you know, top five, top ten accounts from a software perspective. Maybe this is a follow-on to the prior question, but just sort of, what are you seeing there? Why does that, you know, feel like a little bit of a step function?
Michael Reisman: Just sort of how sustainable is that, and is this a little bit of a one-time jump, or are you seeing something that's making you reassess that?
Michael Reisman: Yeah, I know we can address that. It's a great question.
Michael Reisman: see impact from this technology. It has to be used at scale. You have to explore huge numbers of molecules to solve this incredibly complicated drug discovery and materials design problem that we all face, this multi-parameter optimization problem. It requires exploring huge amounts of chemical space.
Michael Reisman: And that can only be done by using the technology at scale. And it's become very clear that in some sense, there's an inflection in the value that gets created when you reach that 5 million.
Thank you very much.
spend. That gives you access to enough technology to
Michael Reisman: to support enough programs to really see an impact. But as we said over and over again, that's not, we don't think that's the TAM.
Michael Reisman: We don't think that's the limit. We know internally in our 25 to 30 programs or so that we're working on internally, we're using the technology at a much larger scale even then. So yes, these companies can see impact at the 5 to 10 million range or so, but it turns out there's still room for to experience significantly more impact by actually spending quite a bit more than that. And again, we have
Michael Reisman: evidence of that through our own partnerships, and our partners experience that. They get access to that level of technology. Companies like Lilly and now Novartis and so on, and I think they're going to start to see
Karen Akinsanya: What's required to achieve the kind of outcomes that we've achieved, and that Karen mentioned this, that's reflected in our track record?
Got it. Thanks so much. Appreciate it.
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Thank you.
Speaker Change: Your next question comes from the line of Vikram Parohit of Morgan Stanley. Please go ahead.
and Jaren Madden.
Hi, good afternoon. Thanks for taking our questions.
Speaker Change: First, on the revenue guidance, I was wondering if you could just talk us through what drives the bookends there. I just wanted to understand.
Speaker Change: some of the sensitivities that flow into each end of the range. And then secondly,
Speaker Change: On Malt 1, so you mentioned that the data update here is going to be a medical meeting in 2Q.
Speaker Change: I was just wondering, do you think you'll be in a position to evaluate partnerships for that program, post that data cut, or do you think you'd want to see...
More follow-up or more data.
data points before evaluating potential PD for MOL1. Thanks.
Speaker Change: Jeff will cover the first, yeah. So on the revenue guidance...
Speaker Change: We provide revenue guidance to Q1 and then for the full year.
about the book.
and for the full year.
Speaker Change: We're still going to have a pretty big chunk of revenue that we'll have to deliver in the fourth quarter.
Speaker Change: and the confidence we have in that is based on several things.
Ramy Farid: You heard Ramy talk about the under-penetration in much of the industry. Yes, we have eight customers, over five million dollars, but that still leaves an awful lot of the industry that is well below that, in fact, substantially below that, where we think we have an opportunity to advance discussions.
Ramy Farid: The second is that, of course, we are deploying all the new capabilities into the technology, which results in new customers coming in and saying, hey, that would be really useful. We'll step up. And then existing customers have already stepped up, taking their utilization to a higher level.
Ramy Farid: The third thing I'll say is that we, because of the hosted contracts that we put in place,
Ramy Farid: A hosted contract in a strange way puts future revenue in the bank, rather than an on-prem contract where you take all the revenue up front. So compared to prior years...
Ramy Farid: The situation we're in, in terms of the base of revenue that we have a high degree of certainty about for 2025, is actually higher than it's been in prior years because of that hosted revenue contract.
Ramy Farid: So all of those elements give us a very high degree of confidence.
Ramy Farid: about the revenue guide for the year. Now, top and bottom end, it just depends on what the magnitude of the step up in those large customers is, particularly towards the end of the year. And as those discussions mature, we'll think about where we actually think the year's going to end up. But we've got a very high degree of confidence at this stage.
Ramy Farid: So, on MORT 1, I think it's important to just restate that this is an ongoing bioseculation trial. As you know, we spend a lot of time with potential partners aligning on what kind of profile people are looking for, what would be impactful in the humanoid space for MORT 1.
But I will emphasize again that...
Ramy Farid: We'll get an interim update I think at the medical meeting.
and Jaren Madden. Thank you. Thank you.
Got it, thank you.
and Jaren Madden. Thank you. Thank you.
Speaker Change: Your next question comes from the line of Evan Siegerman of BMO Capital Markets. Please go ahead.
and Jaren Madden. Thank you.
Speaker Change: This is Malcolm Hoffman on for Edmund, thank you for taking our question.
Speaker Change: I wanted to ask if you guys could think of any impacts that you could foresee from recent proposed U.S. tariffs, you know, the exposure to China is, you know, only roughly 5 percent of revenue. Would any of this be meaningfully impacted by those ongoing disputes? Just trying to get your context there. Appreciate it.
Yeah
Speaker Change: I appreciate the question. I think it's a sensible one given the context.
Speaker Change: I think our total revenue to China is actually substantially less than 5%. It's in the low single digits.
Speaker Change: We aren't expecting that to sort of recover in the immediate future but we equally we don't see ourselves as having a lot of risk associated with that.
I would assume.
Speaker Change: dovetail your question with another answer, which is our exposure to
NIH is less than 1%.
Speaker Change: Our total exposure to U.S. academic institutions across all different parts of our business is about high single digits, mid-single digits.
Speaker Change: and our total U.S. government exposure, including NIH, is still considerably less than 1%. So there's a lot of turmoil out there and it looks like it's going to be a tough environment for academic medical research, but we don't expect that to have a lot of impact on our business.
Appreciate it. Thanks, guys.
Speaker Change: Your next question comes from the line of Matt Hewitt of Craig Hallam Capital Group. Please go ahead.
Speaker Change: Good afternoon and thanks for the update. I actually have three different lines of questions So I'm going to ask them and then I'll let you answer and then I'll come back with the follow-ups But first as far as the drug discovery revenues are concerned
Speaker Change: Should we be thinking, how should we be thinking about the cadence for those? Obviously you don't know when milestones are necessarily going to hit, but with the Lilly contract signing in January, is there anything attached to that? I'm just trying to think how we should be dispersing those those revenues over the course of the year.
Speaker Change: I indicated in my prepared remarks that they are likely to, again, be somewhat backend-weighted.
Speaker Change: As you can imagine, I mentioned that the Nevada's revenue, Nevada's contract is going to contribute, and that will of course scale up.
Speaker Change: during the year as we spin up all of those project teams and similarly frankly with with even for example the new program the Lilly-Natsuka collaborations you know while we're ready to go it takes you know a period of time to scale up those project teams as well and then you recognize that revenue as those teams scale up.
Speaker Change: So, you know, I think that I would, yeah, I don't think it's, they're not going to subside very heavily back in later, but it will gradually increase throughout the year.
Speaker Change: Got it. And then secondly, the predictive toxicology, can you provide any feedback that you're getting from some of the initial beta customers, and when do you think that could be ready for prime time?
Yes, as I indicated in the feedback.
Speaker Change: has been really excellent. It's clear there's a wide recognition that this solves a real challenge that essentially every single project faces at some point.
Speaker Change: as far as the quality of the science and the accuracy of the methods.
It's impressive and that's also being recognized widely
Speaker Change: When it will be released, we're not in the habit of announcing ahead of time, you know, dates for actual releases, but we are committed to releasing it this year.
Speaker Change: and look forward to sharing with you announcements around that release and more information as we have more and more customers using it. I will say, this is kind of important, maybe you can hand it over to Karen, we are using it already, so our collaborators have access to it and it's had a big impact on a number of our projects.
Speaker Change: Yeah, that's correct. As you know, the internal drug discovery team gets early access to the technology.
Speaker Change: It is actually something we've been using in ongoing programs, both our own and as collaborators, as Ramy said, and being able to dial in and dial out the profiles we want and those we don't want is really a very powerful tool.
Speaker Change: their balance sheets? Is there some other hurdle that you think that needs to be kind of overcome? What's it going to take there? Thank you. I'll hand it over to Jeff to give some thoughts, but let me just first make clear, and this is something we've talked about before, that we have a number of small companies.
Speaker Change: that are using the software, potentially, if you think about the number of programs they have, at a higher scale than the large majority of our pharma customers. So the good news there is that
There are...
Speaker Change: Plenty of relatively small companies that are recognizing the value and using it. That's a good sign, but the broader Question maybe Jeff you can yeah, yeah, so I may have conveyed the wrong impression It's it's not that small farmer or biotech companies are reluctant to use the software or actually even lagging
is that segment as a whole has churned.
Speaker Change: Frankly, because some of them are so successful, they just keep being acquired.
Speaker Change: and you know that that is a lot of validation for our platform and then the acquirer finds out how they discover their molecules so that's fooling some Jaren.
Speaker Change: But the other thing is that we're all seeing the headlines about companies that are restructuring and focusing on advancing just a clinical program or concentrating down just to one core therapeutic area or something.
Speaker Change: And naturally, that has an effect on their appetite for investing in discovery. So my direct answer to your question would be for that segment to again be a growth driver for us.
Speaker Change: What we want to see is kind of a renewed commitment to providing capital for drug discovery in emerging biotech companies, which is sort of, I would say, still pretty tepid, the environment for that.
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That's super helpful. Thank you.
Thank you very much.
Speaker Change: Your next question comes from the line of Chris Tributani of Goldman Sachs. Please go ahead.
Chris Tributani: Great, thank you very much. Two questions if I may. With the predictive toxicology business, you made several announcements in 2024 about the partnership and the revenue, the contribution that's being made by the Gates Foundation. With that, you mentioned that the majority of quote revenues will be recognized in 2025.
Speaker Change: Jeff, can you just clarify for us, from a modeling perspective, how we should think about that revenue recognition, where it appears in the model, and anything to do with sequencing? And then a second question for Karen, perhaps, but still tied to Jeff as well.
You have three clinical assets you've talked about.
Speaker Change: a little over a year ago at your R&D day about having multiple potential candidates that you could advance into the clinic.
Speaker Change: What is currently the gating factor for you to decide to choose another one to enter into the clinic, and currently is there a favorite child? Thank you.
Speaker Change: Great, thanks Chris. In terms of the predicted tax revenue, you are 100% correct.
Speaker Change: We indicated that most of the revenue would be recognized in 2025.
Speaker Change: We recognized $6 million in revenue for that initiative in 2024 between Q3 and Q4.
Speaker Change: and then the total grant I believe we've disposed around $19.5 million. So most of the balance of that will be recognized in 2025. There is a bit of a tail that will continue into 2026, but that's kind of the cadence of that recognition.
Yeah, I'd say on the programs...
Speaker Change: I think the focus in 2025 is really on the three programs that we have in the clinic. As we've said, we're excited about the progress and we intend to share data on those programs this year. With respect to the pipelines that will find those programs,
Speaker Change: We have, as you know, last year partnered some of our early programs with Live Artists.
Speaker Change: We want to stay flexible in terms of the decision when to partner, when to advance programs to the clinic. We've got our hands pretty full right now in the clinical space with our three advanced assets.
Speaker Change: But we do have other opportunities that will emerge from the pipeline over the coming years.
Speaker Change: of each of those assets, not just within the sort of target product profiles that we've been focused on, but also within the landscape. There are a lot of companies pursuing similar exciting targets, and we'll have to decide when the time's right, whether that's one that we will take into the clinic ourselves, or whether we will partner.
Thank you.
Thank you. Thank you.
Speaker Change: Your next question comes from the line of David Lebovitz of Citi. Please go ahead.
and Ramy Farid. Thank you. Thank you.
Speaker Change: Hi, this is Ike Leon for David Lebowitz. Thanks for taking our question. We have one on the WE1-MIT1 inhibitor, the 35.5. For the Phase 1 study results coming out later this year, are there any safety signals that you are going to be very focused on given, particularly given past discontinuations in this class?
Speaker Change: To what degree do you think you have an advantage there based on the work that you've done with the dual mechanism approach? And then two, I guess on a related note as well, when you say you're canvassing different solid tumors, is there one of particular interest that stands out to you before we see the data? Thanks.
Speaker Change: We are currently exploring that in our Phase 1 trial. We are not going to genome splicing.
Speaker Change: Thank you so much for joining us today, we're going to be talking a little bit about the profile, that's something that we're reserving for later on this year, but you'll like to say that it's very clear, we want to have efficacy, the focus is on how do we maintain efficacy while ensuring that people can tolerate the drug.
and Matthew Luchini.
Speaker Change: or at least initial clinical activity coming out of a dose escalation trial.
Speaker Change: I also want to just answer this question on tumours and on tumour types.
Speaker Change: I think what we've seen time and time again with WIWA is that there's activity there in
Speaker Change: platelet-resistant ovarian cancer, uterine serous carcinoma. We're seeing repeatedly with different molecules of both activity there, and that's something that we will be looking to replicate with our proof of mechanism aspect of our trial. But as you know from previous comments, we're also excited about other genotypes that have the potential to respond to WE1.
Speaker Change: I think we also know that CCME incurs some additional sensitivity. We are interested, of course, in exploring that in other genotypes, but we haven't been sharing a lot about...
Speaker Change: beyond ovarian and uterine strategy at this time that will emerge later on.
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Speaker Change: Once again, ladies and gentlemen, if you have a question, please press star 1 on your telephone keypad.
We will pause just for a moment.