Thank you for standing by. Welcome to Schrodinger's conference call to review first quarter and 2024 financial results. My name is Chloe and I'll be your operator for today's call. 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, Ms. Jaren Madden, Senior Vice President of Investor Relations and Corporate Affairs. Please go ahead.

Thank you, and good afternoon, everyone. Welcome to today's call during which we will provide an update on the company and review our first 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, Therapeutics. Following our prepared remarks, we'll open the call for Q&A. During today's call, management will make statements that are forward looking and made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including, without limitation, statements related to our outlook for the second 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 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. 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 due to a number of important factors, including the considerations described in the Risk Factors section and also in the filings we make with the SEC, including our Form 10-Q for the quarter ended March 31, 2024. 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. 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. 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.

Thanks, Jaren, and thank you, everyone, for joining us today. We are pleased with the start of the year, delivering revenue growth in line with our expectations and continuing to advance our proprietary pipeline. As you will hear from Karen, our first two clinical programs are progressing in Phase I clinical studies. And today, we announced IND clearance for SGR-3515, our Wee1/Myt1 inhibitor. Total revenue for the first quarter was $36.6 million, with software revenue totaling $33.4 million, and we are reiterating our full-year guidance. We are in active discussions with multiple global and emerging biopharma companies about increasing adoption of our platform. While it is too early to predict the magnitude of scale-up from customers with renewals in the remainder of the year, we continue to see high interest in computationally driven drug discovery and believe we are well-positioned to capitalize on the growing wave of research teams incorporating computation at scale into molecular discovery programs. Today, we reported that rights to the SOS1 inhibitor discovered and developed as part of the collaboration with BMS have reverted to us based on portfolio prioritization decisions. Collaborations are an important part of our business, and we are routinely assessing opportunities with existing and new collaborators and partners. Our venture activity has also been a very successful part of our overall strategy, validating our platform and strengthening our balance sheet with both cash distributions and equity from companies we have co-founded. We have been pioneering computational molecular discovery for over 30 years and continue to push new frontiers integrating physics and machine learning to extend our scientific and commercial leadership position in the industry. We have a bold vision of structurally enabling every protein in the human genome with an initial focus on the most important off-targets known to cause serious side effects that derail clinical programs. There is an emerging requirement for such models to predict drug toxicity risk before animal or human studies. We are very actively developing computational solutions to meet these requirements. Our recent advances characterizing the structure of key proteins such as hERG and cytochrome P450 enzymes are examples of these efforts. We have also extended our informatics platform. And in March, we launched a new version of LiveDesign that supports Biologics. LiveDesign is an enterprise cloud-based solution that allows drug discovery teams to centralize access to computational modeling tools and data in a single interface. LiveDesign previously only supported small molecules, and we are pleased to expand our informatics capabilities to support Biologics. We are well-positioned to advance all aspects of our business this year. We see clear opportunities to drive software adoption to extend our scientific leadership in the industry and to advance our clinical programs towards multiple data readouts. I would now hand the call over to Geoff.

Thank you, Ramy, and good afternoon, everyone. We kicked off a solid Q1 with software revenue meeting our expectations. A handful of software renewals were bumped into Q2 from Q1 and reduced some of the upside opportunities for the quarter, but we should see the benefit of these in Q2 and the balance of the year, underpinning our confidence in our full-year revenue growth guidance. Our business in China has been below our expectations this year based on the challenging commercial environment there. But we have many opportunities to offset that impact with larger renewals in the U.S. and Europe. We continue to enhance the capabilities of our software and see multiple paths to secure multimillion-dollar increases in contract size with global and emerging biopharmaceutical companies in 2024 and beyond. We are also very excited to have advanced our proprietary portfolio to now have a third program entering the clinic, and we are in sight of our first clinical data for our proprietary programs in patients later this year or in 2025. Finally, the return of our SOS1 program from BMS gives us further opportunities to evaluate for our proprietary portfolio and to consider for external partnership and combination development opportunities. In Q1, software revenue was $33.4 million, an increase of 4% compared to Q1 last year. Q1 last year benefited from a significant revenue contribution from multiyear renewals that did not recur in Q1 this year. Hosted software revenue was 22% of total revenue and grew more than 60% compared to Q1 2023. The faster growth in hosted software was in line with our expectations and consistent with our prior comments about an anticipated gradual transition to hosted software licenses across our customer base over a number of years. Maintenance and professional services were relatively constant as new service and maintenance agreements largely offset the negative effects of projects that were completed or transitioned to hosted licenses. Drug discovery revenue was $3.2 million in the quarter compared to $32.6 million in the same quarter last year. The first quarter of 2023 included a large collaboration milestone payment associated with the progression of a collaboration project with BMS. We continue to expect our drug discovery revenue to be variable from quarter to quarter due to the timing of milestones and challenging to forecast, given uncertainty about partner decisions and the timing and value of new business development activity. Total revenue was $36.6 million in Q1 compared to $64.8 million in Q1 of 2023. The difference was due to drug discovery revenue. Our cost of software revenue was $8 million compared to $7.1 million in Q1 2023. The increase was mainly due to higher technology costs. Our software gross margin was 76% for the quarter compared to 78% in Q1 2023, also mainly due to higher technology expenses. Our cost of drug discovery revenue was $9.7 million compared to $12 million in Q1 2023. The decrease in the cost of drug discovery was due to the shift in allocation of staff from collaboration to proprietary programs and also lower CRO expenses related to collaboration programs. Our drug discovery margin was negative compared to a profit in Q1 2023 when the quarter benefited from a single, relatively large milestone payment from BMS. Overall, our gross margin was 52% compared to 71% in Q1 2023. The decline was driven by lower drug discovery revenue. Turning to operating expenses. R&D expense was $51 million compared to $41 million in the same period of 2023. Most of the increases were for our therapeutic R&D and were partly driven by changing allocation between our collaboration investments and our proprietary programs as well as by higher headcount and higher CRO expenses. Overall platform and therapeutic R&D continue to be approximately balanced in their contributions to our total R&D. Sales and marketing expense was $10.2 million for the quarter and increased by 11% compared to the prior year. The increase was mainly due to higher headcount and associated costs. G&A expense was $25.5 million in Q1 2024 and decreased slightly compared to the same period a year ago. The decrease was due to royalty payments associated with member distribution in Q1 2023, which flows through G&A by accounting convention. Net of this effect, underlying G&A expenses increased by approximately 5%, mainly due to higher full-time equivalent expenses. Total operating expenses were $86 million in Q1 2024 compared to $76 million in the same period in 2023. The increase was mainly due to higher R&D. For the quarter, our operating loss was $67 million compared to $31 million in the same period a year ago. The change in fair value of equity method investments was $8.1 million compared to $35.7 million in Q1 2023. The change in Q1 2024 was due to changes in the value of our equity ownership in Structured Therapeutics and Morphic during the quarter. In the same period of 2023, the change in fair value was driven by the evaluation of our ownership position in Structure associated with the successful IPO. Other income consisted of $5 million in Q1 2024, mainly from our cash balance. In Q1 2023, other income was $2.9 million. Gain on equity method investments was $0 in Q1 2024 compared to $147 million reported in Q1 2023 driven by the member distribution. Total other expenses were $13.2 million in Q1 2024 compared to $186 million in Q1 2023. Our loss before taxes was $54.3 million compared to a pretax profit of $155 million in Q1 2023. Our tax expense in Q1 2024 was $0.5 million compared to $26 million of tax expense in Q1 last year. Our net loss diluted share was $0.76 in Q1 2024 compared to a profit of $1.75 million in Q1 2023. On a non-GAAP basis, excluding gains and changes in fair value for equity method investments, our loss per share was $0.86 in Q1 2024 compared to a loss of $0.39 per share in Q1 2023. Our cash used in operating activities was $39 million in Q1 2024 compared to $31 million in 2023, and our total cash and marketable securities balance declined by $33 million in Q1 as our operating cash was offset by $7.6 million in cash realized from the sale of equity during the quarter from our ATM. At the end of Q1, we had $436 million in cash and marketable securities compared to $469 million at the end of Q4 2023. Our previously provided financial guidance for the year is unchanged. We are confident about the outlook for our software business and see multiple opportunities for significant setups in contract size at many of our customers. We are encouraged by the interest and opportunities in front of our drug discovery business and by the potential of our proprietary medicines. And we believe the trajectory of our expenses and cash use this year are consistent with our original expectations. For Q2 2024, we expect our software revenue to be in the range of $31 million to $33 million. I'll now turn the call over to Karen to comment on our therapeutic R&D.

Thank you, Geoff, and good afternoon, everyone. Our therapeutics team continues to advance our pipeline, both collaborative and proprietary programs. With the IND clearance of SGR-3515, our Wee1/Myt1 inhibitor, we now have three clinical-stage proprietary programs. In addition to our proprietary pipeline, several collaborative programs are advancing in clinical trials at companies we have co-founded or partnered with, providing continued validation of our platform. As Ramy reported, we have received full rights to the SOS1 development candidate that we discovered as part of our collaboration with BMS. As you know, BMS acquired a clinical-stage SOS1 inhibitor when it completed its acquisition of a clinical-stage oncology company earlier this year. We received a milestone upon completing the SOS1 development candidate package, and BMS has been conducting IND enabling studies. The transfer of information from BMS to Schrödinger is ongoing. We will determine the next steps and plans for further investment in this program based on our assessment of the updated data package from BMS as well as the opportunity within the context of our overall proprietary portfolio and the evolving therapeutic landscape. As we look ahead, we expect collaborations to continue to be an important component of our portfolio and we continue to evaluate new partnerships where the science, project scope, and value are consistent with our strategy. Turning to SGR-1505, our MALT-1 inhibitor. Our Phase I study in patients with relapsed refractory B-cell lymphomas is progressing well. We've expanded the study to 15 sites globally, and dose escalation is ongoing. As a reminder, the primary objectives of the study are to evaluate the safety, tolerability, PK/PD, and determine the recommended dose; measures of clinical activity are secondary endpoints. We are on track to have clinical data in late 2024 or in 2025. Our CDC7 inhibitor, SGR-2921, is also advancing in a Phase I dose escalation study in patients with acute myeloid leukemia or myelodysplastic syndrome. The study is progressing well with multiple dose escalation steps completed, and we also expect to report initial data from this trial in late 2024 or 2025. Today, we announced that we received FDA clearance of our IND for SGR-3515, our Wee1/Myt1 inhibitor. Our preclinical data package demonstrated that SGR-3515 exhibited sustained tumor growth inhibition while maintaining a favorable safety profile and using an intermittent dosing schedule. Activities are underway to open clinical study sites, and we expect to begin patient enrollment in the third quarter. The Phase I study is designed to evaluate the safety, PK/PD, and establish a recommended dose for SGR-3515 in patients with solid tumors. The study population will include patients with advanced solid tumors predicted to be sensitive to Wee1 or Wee1/Myt1 inhibition, including breast cancer, ovarian cancer, uterine cancer, and solid tumors with elevated replication stress. In addition, we are advancing several discovery programs in areas of high interest, including inhibitors of EGFR C797S, PRMT5-MTA, and NLRP3. We have identified potent and selective inhibitors that may become product profile design challenges observed across other programs. We are on track to select development candidates to support an additional IND submission in 2025. In our collaborative portfolio, we are excited about the progress we have made in identifying small molecule inhibitors for targets previously addressed by antibodies or that required intravenous administration, and we anticipate advancing early-stage proprietary modality switch programs across multiple disease areas. In summary, we are pleased with the progress we are making across our collaborative and proprietary pipeline. With Phase I studies of SGR-1505 and 2921 advancing and 3515 poised to enter the clinic this year, we are excited to be advancing towards clinical readouts and inflection points from three programs. Behind our clinical-stage programs, we have a next generation of molecules with opportunities to generate value through partnerships, new ventures, or by advancing them independently. We are excited about our first-in-class and best-in-class opportunities within our portfolio and look forward to updating you on our progress in the coming months. I'll now turn the call back to Ramy.

Thank you, Karen. As you heard, we are off to an excellent start this year and are continuing to make progress against our goals for the year. We appreciate the hard work and commitment of our employees, which are instrumental to our mission. We look forward to providing further updates throughout the year. At this time, we'll open the lines for questions.

We'll take our first question from Michael Yee with Jefferies.

Thank you for the question and for the update. Regarding software and the pipeline, Geoff mentioned that some business may have been shifted from Q1 to Q2. Can you elaborate on that and how it connects to current trends, keeping in mind that the fourth quarter is typically your strongest? Additionally, Karen, could you discuss the MALT-1 study and what would be considered positive and promising efficacy for a new small molecule for B-cell lymphomas?

Mike, just on the contracts that I mentioned, a couple of relatively small contracts really made the difference between the quarter meeting our expectations and then being a little bit lighter. I don't think it reflects any underlying trends in the business. These were contracts that we knew would renew and for logistical reasons did not renew at the very end of Q1 and then shifted into Q2. We don't think that there's any increase in the number of non-renewals or anything like that. We continue to have very high conviction about the outlook for the full year and just don't see anything in the external environment that affected our outlook. I did highlight the effects in China; our online business in China is relatively small, the smallest of our geography and, given what's going on there, it's not a surprise that the renewals have dropped off somewhat, but it's not going to have a big impact, and the big driver for us is as I highlighted, those large renewals that will tend to be concentrated in the fourth quarter.

And Mike, as you're aware, we are currently in our Phase I dose escalation trial for the MALT1 mechanism. I believe your question was broader concerning the mechanism. We view this as a clinically validated mechanism, supported by data published over the last few years, indicating monotherapy responses in the range of 28% ORR and combination activity with BTK yielding around 30%. We also know there have been complete responses in previous trials. What we find exciting are the monotherapy activities and the combination activities, either with BTK inhibitors or BCL2 inhibitors. We demonstrated a lot of this preclinically, but in preclinical settings, we can see progression, so we hope to see similar data emerging from the MALT1 mechanism in the upcoming years.

Could you comment on the trends we should expect? I know there was an effort to shift the nature of contracts to create a smoother revenue stream. Would that lead to even more smoothing? How are those efforts progressing, and how should we expect that to unfold?

Thanks very much. That's a great question, David. Indeed, we are seeing some transition over to hosted from on-prem. You can see it in the breakup in the Q, and hosted in this most recent quarter grew by 16% year-over-year and accounted for about 21% of total software revenue. Whereas in the first quarter of last year, it was only 14% of software revenue. It was much more of a percentage in the fourth quarter. So when we do have these large quarters with multiyear contract renewals, the hosted proportion is going to go down. However, the long-term trend is that we think the proportion of business that is hosted will gradually increase. We did have a number of significant customers switch over from on-prem to hosted last year. Now, as we've said, our business has been around selling software for nearly 30 years, perhaps longer than that, way before my history with the company. But we have complex contracts, and every contract is different, to be honest. So we can't just go in and immediately change all of those contracts over, but we do think that over a number of years, that proportion of hosted will continue to increase. It won't be rapid, certain, or a single-year transition, but we do think that it will increase over time.

Could you give us an update on what you're seeing on the biotech end markets? We've had some peers in the space that have noted potentially some recovery or mixed commentary. So I wanted to hear from what you guys are seeing, and then remind us what's baked into your guidance in terms of the biotech end markets.

Sure, for the last year, we did highlight that there's an increase in the number of small companies that were non-renewing, and you could see that in the KPI data that we provided for the companies in the tier between $100,000 and $500,000 of ACV, indicating an increase in non-renewals in that tier. We don't provide quarterly ACV numbers or call it booking summers, but we've seen a stabilization of that trend. We're not seeing any sort of continued increase in the number of non-renewals. That being said, we are seeing an offsetting increase in the new inquiries. I will say we're seeing companies coming forward at a venture that are asking if there are any creative ways they can get access to our software. And when engaging in those discussions, we do think over time they will result in software contracts. It may take longer than we normally would have expected, perhaps back in 2020 or 2021, to see that realized in our results, but we're definitely hearing about those opportunities coming forward. So I would still characterize it as green shoots rather than anything that we can harvest, but we're definitely seeing some of those opportunities.

We have two questions, one regarding the pipeline and the other about the full-year software guidance. Regarding the pipeline, when do you expect to have more clarity on when the late 2024 or 2025 data might be available for MALT1 and CDC7? Additionally, how are you currently assessing the initial size and scope of that dataset? On the software guidance for the year, now that Q1 is complete, how are you viewing the scenarios that contribute to the bookings in your guidance of 6% to 13% year-over-year growth?

So I can start. So I think it's too early to commit to specific data that we're going to be sharing. As you know, this is a dose escalation trial with respect to safety, PK, and PD. Our goal is to determine a recommended Phase II dose, and clinical activity as a secondary endpoint. However, we are gathering more PK, safety, and PD data in the trials that we're running. And so that's ongoing and it's going well. Over the course of the period that we've shared from 2024 through 2025, we will be in a position to share an update, but it's too early to give you any color on what that might look like at this time.

Let me chip in and give you an answer on your second question about the full-year guidance and the circumstances that would lead us to either of the bookings. First of all, just to remind you, the guidance philosophy is to guide to the range of most likely outcomes. We have defined guidance to either extreme as a very low probability outcome, either on the high side or the low side, but we want to share with you what we think is most likely. And the range we provided is that right now. We do think we'll get more information as we progress through the year. Ultimately, we hope to narrow that range, but we don't know until we get that information. When we have to incorporate it, in terms of the circumstances that are drivers to either of those extremes, it does depend on the nature of the renewals. For example, if we have customers who are on-prem customers who come to us and ask to renew on a multiyear basis, that would drive revenue towards the high end of the guidance range. If they come forward and say we want to renew as we already have on an annual contract basis, then it would be more towards the lower range. The other factor we are considering in the guidance that we provide is some of the conditions that we discussed concerning the biotech financing environment. If we see some of those conversations about providing our software to relatively early-stage companies come to fruition and if those companies are successfully financed, that might trigger a revenue purchase, that would also drive us towards the upper end of the range. So those are the two variables that we're mainly contemplating. I hope that's helpful.

This is Conor MacKay on for Evan. Congrats on the IND approval for 3515. With the number of assets either in the clinic or soon to be in the clinic, can you just talk a bit about how you're thinking about P&L management as it relates to your broader business? And then also, how are you thinking about the potential for collaborations and partnerships with your internal assets, while of course, balancing data maturity and preserving economics?

Maybe collaborations for that is how...

Yes. Each of the mechanisms we have disclosed serves a population that already has existing drugs, and we believe additive mechanisms will lead to more significant responses. As you know, we do not possess those mechanisms, like BCL2 and BTK inhibitors. We see collaborations as a valuable way to combine our assets with other companies' products or development assets to capitalize on the opportunities these programs present in various indications. Therefore, we are very open to collaboration and are currently engaged in discussions while also gathering important data on all of these programs.

And Conor, let me just add to that on collaborations. It is a very dynamic deal environment for companies in the computational drug discovery space generally. That dynamic environment, I think, is to our advantage, and we do see a lot of opportunities for a wide variety of different types of deals as we contemplate the business. Now I said previously that we aren't guiding to that, as we have forecast timings, values, probabilities, and those discussions, but that dynamic environment is actively evolving.

Maybe first up, and this kind of goes back to Geoffrey, some of your comments about the R&D expense kind of leveling off a little bit. As we look out over this year and maybe into next year, you've got a couple of Phase I trials that will be wrapping up, and then you've got Wee1, obviously kicking off. Is that part of the flattening of the R&D expense over the next, call it, a year, one to one and a half years? Or is it more a function of looking at those programs and trying to figure out where do we go next? And which one do you want to move on to Phase II? Just help us out there.

Okay. Yes, I understand the question about the R&D trajectory. In fact, the flattening is due to a different phenomenon, which is that we think we are at scale with respect to our R&D investment in our platform. As I previously indicated, this is a substantial portion of our R&D investment and we think this is such an exciting space and a dynamic industry environment. We still have a lot of opportunity in terms of new discoveries and new research that we can then translate into capabilities in the platform. We're not driving that back but we don't think that needs to get a lot larger. The second component of our R&D is the drug discovery organization, not so much the development portion, but the investment we are making to come up with the next wave of molecules and the next wave after that, same general comment there. We can't suddenly manage 10 or 15 new programs a year and keep scaling up; that is where we would have challenges. So again, we think we are at scale in terms of the ability to discover the next wave of programs and the wave after that. Both pieces mean we don’t see a lot of need to increase. Now, you correctly identified that there has been an increase in the investment in clinical programs, but that total clinical spend is a relatively small portion of our overall R&D. We do expect that piece to go up, but the rest of the R&D pace is likely to be pretty stable from here, and that’s where you get that. We just don’t see a large uptick from here. Is that clear?

We'll take our next question from Michael Ryskin with Bank of America.

Great. First, I want to just follow up on exactly that last point, the BMS discontinuation. In the past, I think when you've had some programs sent back, there might be a milestone fee or some sort of financials associated with it. I'm just curious, is there anything like that recognized in the first quarter? Or do you expect it in the second quarter? Just any other details around the process of reverting those rights?

Mike, the short answer is no, because this program has transitioned to their portfolio, and we had a milestone from previously associated with that transition. There isn't any additional milestone or fee payable on being returned to us, nor do we have any prior revenue that we accelerate. So it wasn't a contributing factor during Q1.

It's been a couple of quarters since there’s been an update on the material science part of the portfolio, so I wanted to ask if there are any new developments. I know it tends to be less visible, but I'm curious if there's anything noteworthy to share.

Sure. Yes. So the thing that we're most excited about on the materials science side is, as we talked about before, we have this collaboration with Gates. That was the initial project; it was a three-year project that went so well that it was actually renewed. That was based on real progress on the science. This is a really, really hard problem. As with all really hard problems, we think that success will have significant rewards, so we're really pleased with the progress on the basic science. But that's really the stage that we're at. And that's what we're really excited about. We think if we're successful, it has the potential to have a really big impact. As far as the core business and the revenue for the business, as we said before, we don't really break that down. We're pleased with the progress. We continue to add new customers, and there continues to be scalable growth with other customers, but we're not really disclosing specific revenue from different components.

We'll take our next question from Matt Hewitt with Craig-Hallum Capital.

Maybe first up, and this kind of goes back to Geoffrey, some of your comments about the R&D expense kind of leveling off a little bit. As we look out over this year and maybe into next year, you've got a couple of Phase I trials that will be wrapping up, and then you've got Wee1, obviously kind of kicking off. Is that part of the flattening of the R&D expense over the next, call it, a year, 1 to 1.5 years? Or is it more a function of kind of looking at those programs and trying to figure out where do we go next? And which one do you want to move on to Phase II? Just help us out there.

Yes, I understand the question about the R&D trajectory. In fact, the flattening is due to a different phenomenon, which is that we think we are at scale with respect to our R&D investment in our platform. Our investment has been substantial, and there’s much opportunity ahead. We're not driving that back but we don’t think it needs to get larger. We see ourselves at scale concerning drug discovery, and we can’t scale indefinitely. We don’t see a large uptick from here. I hope that helps clarify.

We'll take our next question from Michael Ryskin with Bank of America.

Great. First, I want to follow up on exactly that last point about the BMS discontinuation. In the past, I think when you've had some programs sent back, there’s been a milestone fee. Can you describe anything that was recognized in the first quarter? Or do you expect it in the second quarter? Just any details around reverting those rights would be appreciated.

No additional milestone or fee was accrued during Q1 since the program transitioned to their portfolio. The milestone associated with that transition was earlier received.

Thank you all for joining us today. We appreciate your continued support, and we look forward to updating you in the coming months.

This concludes today's call. You may now disconnect.