Schrodinger Inc (SDGR) 2020 Q1 法說會逐字稿

Good morning and welcome to the Schrödinger first-quarter 2020 earnings conference call. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to turn the call over to the Schrödinger team. Please go ahead.

Thank you, operator. And thank you all for listening in on our first-quarter earnings call. Today you will hear from Ramy Farid, President and Chief Executive Officer; Karen Akinsanya, Chief Biomedical Scientist and Head of Discovery R&D; and Joel Lebowitz, our Chief Financial Officer.

Before we begin I would like to remind you that management will make statements related to our business that are forward-looking under federal securities laws and are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, including: statements related to the potential advantages of our platform; our strategic plans to accelerate the growth of our software business and advance our collaborative and internal drug discovery programs; risks related to the COVID-19 pandemic; our expectations related to the use of our cash, cash equivalents and marketable securities as well as our future operating expenses.

These forward-looking statements reflect our current views about our plans, intentions, expectations, strategies and prospects which are based on the information currently available to us and on assumptions we have made. Actual results may differ materially from those described in the forward-looking statements and are subject to a variety of assumptions, uncertainties, risks and factors that are beyond our control, including those risks detailed under the caption Risk Factors and elsewhere in our most recent Securities and Exchange Commission filings and reports.

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

Thank you. And thank you, everyone, for joining Schrödinger's earnings call to review our results for the first fiscal quarter of 2020. This is an exciting time for the Company and the first quarter was an important one for us. In early February, we raised $232 million in gross proceeds through our IPO, positioning us well as we continue to execute on our mission of improving human health and quality-of-life by transforming the way therapeutics and materials are discovered.

Our leading physics-based computational platform enables discovery of high quality novel molecules for drug discovery and materials designed more rapidly at lower cost and with, we believe, a higher likelihood of success compared to traditional methods.

We license our software to pharmaceutical and biotech companies, industrial companies, academic institutions and government labs all around the world. We also apply our computational platform and a broad pipeline of drug discovery programs in collaboration with pharmaceutical and biotech companies and in a pipeline of internal wholly-owned drug discovery programs.

We achieved record total revenue of $26.2 million in the first quarter, which represented 26% growth over the first quarter of 2019, demonstrating how well we executed on our strategy to invest in our platform, grow our software business and advance our drug discovery programs. Joel will present our Q1 results in more detail later in the call.

As companies increasingly recognize the potential impact of our platform, we are seeing deeper engagement from our software customers. Feedback on the performance of our software and the value it is bringing to their projects continues to be very positive. Pharma and biotech customers are adopting our platform on a larger scale and we are adding new customers, helping us to achieve record software revenues this quarter of $23.8 million, representing 28% growth over the first quarter of 2019.

We remain excited about the opportunity for growth in our software business from both new customers and the continued larger scale adoption of our computational drug discovery platform by pharmaceutical companies who have been our long-term customers.

While we focus on helping our software customers and drug discovery collaborators advance their projects and progress our own drug discovery programs, we also remain strongly committed to advancing the science that underlies our platform. With nearly half the Company, approximately 200 people, involved in advancing our computational platform, we continue to make scientific breakthroughs, enabling us both to improve the accuracy of our methods while expanding and accelerating its applicability into new domains and industries.

We, for example, released last quarter a major improvement to our virtual screening application that in our test is producing higher screening hit rates. We also released a next-generation version of our protein refinement software package that is being used to predict protein ligand complex structures in advance of obtaining crystal structures, potentially accelerating drug discovery programs by months.

We have also made advances in ADME/Tox property predictions. The result of these advances is that the number of protein targets we and our customers can work on has expanded. And we continue to unlock the potential for higher quality molecules and accelerated discovery timelines.

And finally, before handing it over to Karen, I'd like to say a few words about what we are doing to help address the COVID-19 crisis. Like so many other companies, we felt at this critical moment that, in addition to growing our own business and creating value for our shareholders, we needed to do something meaningful to address this devastating disease.

Consequently, after considering several different approaches, we have made the decision to participate in a multi-company philanthropic effort to develop novel small molecule antiviral therapeutics. We have chosen this project because we believe it most effectively leverages both our computational platform and the expertise that resides within our drug discovery group. The intent of the license alliance formed between us in several pharma companies, including Takeda, Novartis and Gilead, is to make any discoveries available to the public.

While there is no expectation that this effort will generate revenue for any of the companies involved in the alliance, including Schrödinger, we are proud to be involved in this alliance and hopeful that we can contribute meaningfully to combating this global health crisis. I will now turn it over to Karen who will update you on our drug discovery programs.

Thank you, Ramy. Good morning, everyone. As Ramy just discussed, we continue to make good progress across our diversified portfolio of drug discovery collaborations and our internal wholly-owned programs. We have been pleased with the availability of data from our wide network of contract research organizations to support our internal programs despite COVID-19-related changes to working arrangements.

Our globally connected teams comprised of Schrödinger and external scientists have been able to continue working together with minimal delays in the design, synthesis and testing of our molecules by leveraging our live design informatics platform. This enables global collaboration and large-scale data management.

A key achievement for the quarter is the strong progress we have made in advancing our internal portfolio. Several programs have met the planned criteria, including improved potency, selectivity and other properties designed to address limitations of existing clinical stage inhibitors. I'll take a few moments to highlight some examples.

In our next generation WEE1 kinase inhibitor program we have leveraged our physics-based technology, including recent advances in selectivity predictions, to design higher affinity, structurally differentiated leads that are selective versus PLK-1 when compared to existing WEE1 inhibitors. Our leads have good drug-like properties including now observable time-dependent inhibition of key liver enzymes like CYP3A4. We believe that this more optimized profile is a key differentiator.

Recent publications indicate that selective WEE1 inhibition or degradation with diminished or absent PLK-1 activity is anti-proliferative in lung and ovarian tumor models. We believe that an improved therapeutic index can be accomplished through more potent and selective inhibitors.

Clinical stage WEEI inhibitors being advanced by third parties have demonstrated efficacy in multiple cancer types in combination with other agents, but improved tolerability of these regimens is desirable.

In addition to the progress we have made on lead compound profiles, we have also generated combination data with our potent and selective DNA damage repair WEE1 and CDC7 molecules, which we believe provides compelling opportunities for further study in the clinic.

Now moving on to our MALT1 program. We have advanced to later stages of discovery ahead of schedule. We have continued to expand the available data in models of hematological malignancies.

As a reminder, activated B cell diffused large B-cell lymphoma is the most common type of aggressive non-Hodgkin's B-cell lymphoma. These tumors are associated with a number of mutations that trigger constitutively active NF-κB signaling and increased MALT1 protease activity.

We have shown that our small molecule allosteric MALT1 inhibitors drive anti-proliferative effects in models of resistance to the marketed BTK inhibitor Ibrutinib.

In addition, we have shown synergistic effects in combination with first, second and third generation BTK inhibitors and other standard of care agents. We believe this anti-proliferative profile strongly supports the potential of our MALT1 inhibitors to benefit patients with aggressive B-cell lymphoma who are in need of new treatments.

Based on the progress across our wholly-owned portfolio, we plan to begin nomination of candidates for preclinical development by year-end 2020 with the goal of initiating our first IND enabling studies by the first half of 2021. We continue to strategically evaluate advancing programs into the clinic ourselves or out-licensing them in order to maximize clinical development and commercial opportunities.

We have also continued to make progress in our collaborative pipeline. I would like to highlight the neurodegeneration program that we are advancing with Takeda. Our novel lead molecules have greater affinity for the target in question when compared to published molecules and have been shown to be protective in preclinical neuronal injury models. Based on the results generated to date, the program has progressed into late stage discovery and we are advancing towards identifying a development candidate.

We have continued to expand our drug discovery group's expertise to meet the translational, scientific and operational needs of our late stage discovery programs. We have engaged and onboarded experts in oncology, biology, drug metabolism, toxicology and formulation sciences to help guide the transition of our programs into preclinical development and to prepare for interactions with regulators.

In addition, we have continued to evaluate program opportunities and have identified a pipeline of future programs across multiple disease areas that will benefit from our computational platform. With that I will turn the call over to Joel to discuss our financial results.

Thank you, Karen. Hello, everyone. It's a pleasure to be speaking with you to share our first-quarter results. As a reminder, we report revenue for both our business segments, software and drug discovery. Our software business includes pharmaceutical and biotech customers as well as a large number of academic and government labs and an increasing number of industrial companies for material science applications.

Our software is generally licensed through annual subscriptions paid upfront. We record a majority of our revenue from these licenses when the contract period begins with the remainder recorded as deferred revenue. The revenues associated with ongoing software maintenance and support we recognize revenue over the contract period.

We also record revenue for our drug discovery business. Currently this segment reflects revenues from research fees and milestones associated with our collaboration programs ranging from early discovery to clinical stages. Our holy and programs, which are all in discovery, are not yet generating revenue.

As Ramy indicated, we are executing on our strategy across our business. In the first quarter we recorded total revenue of $26.2 million, an increase of 26% versus the first quarter of 2019. This was powered by record software revenue of $23.8 million representing 28% growth versus the first quarter of 2019. This growth reflects the continuing trends of increased adoption of our software by pharmaceutical, biotech and industrial companies.

We believe our solutions can be especially beneficial in the current environment. We continue to see expanded adoption of Live Design, our enterprise solution that enables full private access and interactive collaboration among discovery teams at multiple sites and across many traditionally siloed areas of research.

As we look forward to the rest of the year, it is important to note that typically the first quarter tends to be our largest quarter of the year for software revenue, and we expect that will again be the pattern this year. Moving to drug discovery, revenue was $2.4 million, growing 11% versus the first quarter of 2019. Revenue from this segment depend heavily on the timing of specific program milestones which fluctuate significantly from quarter to quarter and even year to year.

In addition, we ended the quarter with deferred revenue of $23.8 million, down $3.4 million versus the fourth quarter of 2019. Deferred revenue was up $5.9 million versus the first quarter of 2019, reflecting our strong underlying year-on-year performance.

Gross profit reached $15.6 million in the first quarter versus $13 million in the first quarter of 2019. This growth was driven by the increase in revenue offset by higher drug discovery expenses recorded as cost of revenues as we continue to invest in advancing our collaboration programs. Our software gross margin in the first quarter was 83%, unchanged from the first quarter of 2019.

Moving to operating expenses, we saw an increase of 47% to $27.4 million in the quarter versus $18.6 million in the first quarter of 2019. This growth reflects the ramping up of our investment in research and development throughout 2019 and the first quarter of 2020 as we advance our technology and our wholly-owned drug discovery programs. It also reflects an increase in general and administrative expenses primarily to build the necessary infrastructure to support the transition of the Company from private to public company status.

When we consider expense trends for the rest of the year, it is important to note that generally we do not have large variable components driven by revenue fluctuations in our expense lines, which include cost of revenues, research and development, sales and marketing and general and administrative expenses. Looking forward in general, we expect expenses to rise gradually during the year as we continue to invest in key capabilities in our workforce and technology.

Loss from operations was $11.8 million in the first quarter versus a loss of $5.6 million in the first quarter of 2019, again reflecting our increased investment in our technology and our discovery programs as well as general and administrative expenses associated with building a public company infrastructure.

We recorded non-operating expenses of $2.4 million in the first quarter of 2020 versus $0.2 million in the first quarter of 2019. This was primarily driven by the conversion and mark-to-market revaluation of our shares in Morphic Therapeutic which became a public company in June of 2019.

Our quarterly reevaluation of our Nimbus therapeutic equity investment also contributed to the loss. Net loss after adjusting for non-controlling interest was $13.8 million versus $5.8 million in 2019. And of course that includes these non-operating items I just discussed.

As you know, we successfully completed our IPO on February 10 raising approximately $232 million in gross proceeds, approximately $210 million in net proceeds after deducting underwriting discounts, commissions and offering expenses. Accordingly, we ended the first quarter with $288.8 million in cash and marketable securities, providing significant resources to execute on our long-term strategy.

I'd also like to make a few comments in relation to the COVID-19 crisis. Early in March, we issued a global work-from-home policy. As a technology enabled company, we are well-equipped to work remotely, engage with our customers and continue to advance our drug discovery programs.

Our software solutions continue to be leveraged efficiently by customers in a distributed environment. Also our CRO network has to date been able to continue to support the progress of our internal wholly-owned programs with minimal delays.

While during the quarter we did not see material impacts to our business from the crisis, certain market risks are beginning to emerge that could affect our software growth and the timing of our drug discovery revenues in 2020. Some software customers may come under budget pressures over the next couple of quarters and potentially delay decisions about purchases in general, which could impact our software sales growth. Software sales could also be impacted by our inability to engage with customers in person.

Relative to our collaboration programs, the crisis could delay the progress of certain programs, particularly ones that are in clinical studies or preparing to enter clinical studies, as has been reported generally. Delays in these programs could result in delays achieving milestones and related revenue.

While we are monitoring these risks, we view them as temporary and we believe we have ample resources to manage effectively during this time. We do not envision a long-term impact on our ability to execute on our strategy and the crisis only makes clearer the need for efficiency and speed in drug and materials design and the benefits of our technology. With that we would like to open the call to your questions. Operator?

(Operator Instructions). Do Kim, BMO Capital Markets. David Lebowitz, Morgan Stanley.

Given the pretty big step-up in revenue from Q4 to Q1 for the software business, I guess how should we look at that business going forward considering -- I mean, I would imagine a lot of that business is probably already in a lot of ways in the books for the rest of the year. So, is that kind of a starting point for what we should look (technical difficulty) software business?

And then as far as your commentary on COVID-19 impacts, look at that as potential impact on incremental revenues (technical difficulty)? I guess how should we look at that number again vis-à-vis what occurred in 4Q?

Joel, do you want to take that?

Sure. So, thanks, David, for the question. So, clearly were pleased with the first quarter, but I think more than that we are also very happy about the underlying momentum that we saw in the first quarter. So, we saw growth from across the business including most of our regions primarily driven by the US and Europe, which are our largest two regions. We also saw strong growth in both the life sciences and material science business.

So, as customers continue to increase adoption of our solutions, including Live Design which I mentioned in my comments, and we also saw the addition of new customers in both life science and material science. So, all of these are key growth drivers of our business and set up strong momentum for the rest of the year.

That being said, I'll make a couple of comments as we look forward. First, the first quarter is typically the highest revenue quarter for software for the rest of the -- for the year and I do expect that to be the case again this year.

Second, you referenced I did mention COVID-related risks. We think these are going to be company specific over the next couple quarters as specific companies come under pressure. And we do believe they are going to be short-term. But we are monitoring them and we are continuing to engage. But it could impact our growth rate over the next couple quarters.

But I will point out, though, that the crisis highlights the continued need for efficiency and speed in drug discovery and materials design. And of course that's central to our strategy. And we believe we are well-positioned to execute on that strategy and we have ample resources to do that over the long term.

On the drug discovery business, you had mentioned comments about the deferred revenue. Is the deferred revenue in large part related to the drug discovery business, the payments from that? I guess how can we have perspective for the remainder of the year on how we can look at revenues from that particular business?

So, in fact our deferred revenue is mostly -- the majority of it is from our software business, partially because it's the majority of our revenue in general this quarter. I'll just make a few comments about our drug discovery revenue and how we might be able to think about it.

So, we did achieve 11% growth this year, which -- and just a reminder, it is highly dependent on the timing of individual project milestones. So, last quarter we had a -- in the fourth quarter we had a concentration of multiple programs hitting milestones and -- but that won't be linear quarter-to-quarter or period-to-period as I've talked about.

At the same time the emerging COVID-related risks that I mentioned, we could start seeing specific program-related delays and we are monitoring that. But at the same time, as you heard from Karen, we are very happy with the portfolio progress, both on the collaborations and the internal pipeline. So, we really feel good about our ability to drive value over the long-term and we have the resources necessary to do that.

Do Kim, BMO Capital Markets.

I know you've talked about the coming risk caused by COVID. Could you speak more to what you saw in the first quarter? Were you seeing any changes in the utilization of your software by customers? I mean, we have a pretty good visibility on COVID's impact on the clinical side of things and how patients are having trouble enrolling or getting assessments. How has COVID been affecting the drug discovery side in the industry?

Yes, so I can take that. A couple of things. One is on the software side, what we saw was a pretty significant increase in, for example, the number of requests for support from the software, which was a pretty good indication of increased usage. We've seen a huge increase in the number of people signing up, for example, for courses that we hold online obviously now on molecular design.

So, there seems to be an increased interest in using the software and learning how to use it and in actual usage. Karen can address the question about the impact on the drug discovery part of the business.

So, with respect to the drug discovery business and the conduct of drug discovery studies, we have not seen any slowdown in terms of access to data. The results that we require for our program come from a distributed network of contract research organizations. And as such those contract research organizations are actually using Live Design with us and we've been able to access those results and compounds are being synthesized around the world.

We don't have visibility into obviously what other companies are doing, but, if they are using Live Design, we anticipate that there is a similar story there in terms of synthesis of compounds, analysis of results using the online data management platform.

In your recent expanded deal with AstraZeneca, could you speak more to the opportunity in biologics drug discovery? And where are the extent of your software capabilities in that direction and what limitations do you still have to work on?

Yes, sure, that's a great question. So as you know and as was reported in the press release, a component of that partnership does involve biologics research. As I've said a number of times in other venues, one of the sort of exciting advantages of physics-based methods is the fact that they're really agnostic to the system or to the modality. Physics is physics and if there are atoms involved then the technology in principle should work.

And so, we are seeing the same thing. As we expand small molecule discovery into biologic discovery, we were finding that the technology is working. Now the challenge of course is going from -- essentially from the software development phase into real world drug discovery programs. There are always things that you learn from that.

And that's what is happening in the collaboration with -- or the partnership with AstraZeneca where we are able to take technology that's working in our hands and apply it in real programs. And as is always the case with any type -- any time that transition occurs is it is very helpful to have access to experimental data to validate the models and to improve them and to continue to improve the technology. And so, that's what that partnership is about. Does that answer your question?

Yes, definitely. And my last question is on the internal program. When you look at your lead drug, the CDC7, where is that in terms of licensing and partnership talk?

Karen, do you want to take that?

Yes, happy to answer that. So, we have a number of programs in late stage discovery and as such we have been interacting with a number of companies around the profile of our molecule. As we've described in the past, we expect to select a candidate for preclinical development by the end of this year with the goal of initiating IND enabling studies in the first half of 2021.

We continue to discuss the programs -- actually all of our late stage programs with potential partners. And despite the situation where people are working remotely, we've been pleased with the pace and intensity of discussions that we've been able to have.

Thanks for my taking my questions and congrats on a great quarter.

Michael Yee, Jefferies.

I will keep it to two questions. One is, just trying to understand sequential revenue growth, how to think about Q2 versus Q1 when you look back last year. Of course a seasonality decline there in Q2. So how do you think about (technical difficulty) Q2 either sequentially or year-over-year?

And then second question is thinking about what happened Q1, how to think about that software revenue and what percentage recurring versus big quarter? Was there any sort of specific milestone that happened there that might have resulted in such a big jump up? So just to think about that as Q2. I appreciate it.

Michael, thanks for the questions. Joel, would you like to --?

Sure, I'll talk about that. So, I assume both questions are around the software business. First of all, we are excited about, as I said, not just the results but the underlying momentum that we saw in the first quarter. The key growth drivers of increased customer count and increased adoption by our customers of our solutions really drove the quarter and that's fundamental to our strategy going forward.

As I mentioned, the first quarter is the highest -- does tend to be the highest quarter of the year for software revenue. We do expect that to be the case again this year, so there is some seasonality there, which you mentioned that you saw last year. So, that's how we expect the -- and then there's the additional risk from COVID that could affect the next couple of quarters of growth.

But again, because of the underlying momentum of the business, we are excited about the continued prospect for being able to drive growth over the longer term. I think your other question was also about was there -- were there any major drivers or step-up drivers in the software growth in the first quarter, major milestones or deals that we may have signed in the first quarter. Actually it was really broad-based growth.

It was, as I mentioned, really across the entire business both regionally, I mentioned US and Europe being primary drivers as our largest markets. Also very strong growth in both the life science segment and the material science business, and increased customers and increased adoption in both. So, really broad-based growth and not overly dependent on any one particular event.

Okay, can I just ask a follow-up? When you look at software revenues for Q2, appreciating there's seasonality, do you essentially still expect growth year-over-year, so Q2 over Q2 and Q3 over Q3? That would be a helpful starting point for looking at where revenues could be each quarter. Thanks so much.

I think, again, I would just point to the underlying business momentum in the first quarter and that we were able to drive growth and pretty robust growth through the increased customer adoption and also through adding new customers. Of course we're not giving general guidance -- I mean, we're not giving specific guidance on the rest of the year, but I think that underlying momentum is a great business indicator for us.

Michael Ryskin, Bank of America.

I want to follow up on your earlier comments on coronavirus, potential impact to your customers across your customer base. I think it's pretty clear you are alluding to some of your smaller customers potentially coming under budget pressure. These obviously aren't the large guys that are over $1 million in annual contract value.

But have you seen anything in terms of pace of workflow, demand on the licenses and how much people are tapping into the network as a lot of these labs shift remote? And what I'm getting to is we expect some labs are not able to operate at levels that they would've been previously prior to quarantine levels. Just wondering if that has any lingering impact on the business. And then I've got a follow-up question.

Yes, what we're seeing -- it's a great question. What we've seeing -- and we've been alluding to this, but let's be more specific about it. In a situation where chemistry resources, experimental chemistry resources are diminished for a period of time, that is obviously a situation where the demand for better prioritization of a synthesis queue is actually more important.

If you are going to make fewer compounds you need to make -- you need to put more effort into making sure that the compounds that you do make are progressing the program. And we've gotten on feedback from customers. So, that is sort of indicating that it's actually a time where the demand for computationally prioritizing synthesis is going up.

And as I said before, there are these under indicators about the interest in the software, the actual usage, which is something that we can track, appears to be robust. So, hopefully that answers that question, does that make sense?

Yes, that's helpful. And you talk about your potential work on antibody development and R&D. I was wondering, could you expand a little bit on your agreement or the work you're doing with Twist. It seems like -- Twist Bioscience, it seems like a really interesting approach and a couple of novel technologies, obviously some near-term applications there for COVID as well. But could you just talk about the work you're doing there and how that fits into the bigger picture?

Yes, I think we can't get into the details, of course, of the partnership, but you're right, that does -- is another example of a partnership that is helping us get into new modalities and biologics in particular. It's an early project, it's something that's pretty early in the stages. Karen, is there anything else you think you can add to that and to answer Michael's question?

No, I think you've addressed most of it. I would say that we remain, as many others, interested in the potential for peptides and biologics to benefit from our technology. And so, working with a company like Twist gives us the opportunity to pressure test those approaches and find new ways to design those molecules that still hold an important place in new modalities for treating patients.

Okay, appreciate that. Perfectly understand you may not be able to get into details of specific units. Can I squeeze in one more on the P&L for the rest of the year? Given the equity raise and how that went earlier this year, but then also the more recent updates from COVID, can you talk about any changes to your prior expectations to pacing of R&D or sales force investment as you get through the rest of the year?

Sure, I can address that. So, we've been investing steadily in R&D through 2019 and in the first quarter of this year. And the way I would think about that is we are investing directly in the underlying technology and are continuing to develop those capabilities which power our business. And also in advancing our internal wholly-owned programs.

And so, as we think about the resources that we have relative to our execution on our long-term strategy, we believe we have ample resources to continue to execute on that strategy. And I would expect as we look forward through the rest of the year, a gradual sequential quarterly increase through the year in overall expenses driven by growth in research.

And in terms of your question about sales and marketing, it was actually down -- the expense was actually down slightly versus prior year. And I think when we think about our business model, we don't believe it requires large incremental increases in the sales force to drive the kind of growth that, for instance, we saw in the first quarter. So, rather we will look in a focused way towards targeted investments when opportunities arise.

And I'm currently showing no further questions at this time. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.