SDGR - NASDAQ

Thank you for standing by. Welcome to Schrodinger's conference call to review second quarter 2025 financial results. My name is Rob, and I'll be your operator for today's call. [Operator Instructions] 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, Chief Corporate Affairs Officer and Head of Investor Relations. 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 second quarter 2025 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; Richie Jain, Chief Financial Officer; and Karen Akinsanya, President, Head of Therapeutics, R&D and Chief Strategy Officer, Partnerships. 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 financial outlook for the full year 2025 and third quarter 2025, 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. These forward-looking statements represent our current views and reflect 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 elsewhere in the filings we make with the SEC, including our Form 10-Q for the quarter ended June 30, 2025. 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. And with that, I'd like to turn the call over to Ramy.

Thanks, Jaren, and thank you, everyone, for joining us today. We made very solid progress in the first half of 2025. Total revenue was $54.8 million in the second quarter, a 16% increase from the second quarter of 2024. Software revenue was $40.5 million, representing 15% year-over-year growth. Drug discovery revenue was $14.2 million, highlighting the progress and growth of our collaborative portfolio. While the macroeconomic environment has been highly uncertain, we continue to see demand of our software platform driven by the industry's need for validated computational approaches that are critical for innovation and efficient R&D. We believe we are uniquely positioned at the forefront of the ongoing transformation of integrating predictive methods into all stages of molecular discovery. We are maintaining our full year software revenue growth guidance, reflecting the productive conversations we're having with our software customers around renewals and scale-ups in the second half of the year. As you will hear from Karen, we continue to make progress across our pipeline and recently presented encouraging Phase I data from SGR-1505, our proprietary MALT1 inhibitor. The emerging profile of SGR-1505 shows best-in-class potential and we are exploring strategic opportunities to accelerate clinical development and maximize the potential of this program. We expect to report initial Phase I data from our other 2 clinical programs, SGR-2921 and SGR-3515 in the fourth quarter. We are continuing to make significant improvements to the performance and usability of our software platform and continue to add streamlined workflows to enhance the user experience and make our software more accessible to scientists without a computational chemistry background. We are also advancing our predictive toxicology initiative in support of the FDA's efforts to modernize drug discovery through its new alternative methods program to reduce reliance on animal models, including through the development and deployment of predictive computational models. To this end, we recently released the beta version of a virtual kinase panel to prospectively identify potential liabilities for an initial set of approximately 50 representative kinases. Our platform now also supports prediction of binding to the known off-targets hERG, PXR and 3 common SIPs. We expect to expand the number of supported off-targets as we continue to advance the technology. Overall, we have made considerable progress during the quarter, and we are excited about the opportunities ahead. I want to thank our employees who are critical to achieving our goals for their hard work and dedication. I will now turn the call over to Richie Jain, who was appointed Chief Financial Officer in May. Richie has made significant contributions during his tenure at Schrodinger, including working across the company to pursue strategic initiatives and secure and expand strategic collaborations, and I'm very pleased to have him on the call today. Richie?

Thank you, Ramy, and good afternoon, everyone. I'm happy to join my first earnings call as Schrodinger's CFO. Broadly, the industry is navigating a complex macroeconomic landscape, including regulatory and tariff uncertainties, challenging capital markets and drug pricing pressures, such as most favored nation provisions. Notwithstanding this backdrop, we are very pleased to deliver strong results for the second quarter of 2025. Total revenue for the quarter was $54.8 million, an increase of 16% compared to Q2 2024. The increase was driven by both higher software and drug discovery revenue. Software revenue was $40.5 million, an increase of 15% compared to Q2 2024 and in line with our expectations for the quarter. The increase was primarily driven by higher revenue from hosted contracts and contribution revenue from the Gates Foundation grant related to our predictive toxicology initiative. Revenue from on-prem contracts was slightly lower year-over-year, primarily due to the timing and size of renewals. Consistent with prior periods, our growth primarily reflects increasing utilization and adoption at existing accounts with minimal contribution from new customers given the persistent biotech environment challenges. Drug discovery revenue was $14.2 million, an increase of 19% compared to Q2 2024. The increase reflects continued recognition of the $150 million upfront payment from the Novartis collaboration that began in late 2024 and execution across the collaboration portfolio that we continue to expand. Software gross margin was 68% compared to 80% in Q2 of 2024. This lower margin reflects the change in revenue mix and investment associated with the predictive toxicology initiative, which began in the third quarter of 2024. R&D expenses were $43.1 million in Q2 2025, a greater than 15% decrease from the $50.8 million in Q2 of 2024. The decrease was primarily due to the continued shift in expenses from the predictive toxicology initiative into software cost of goods sold from proprietary R&D programs into collaborations and lower CRO and FTE spend following the $30 million expense reduction initiatives announced in May. Sales and marketing expense was $10.7 million, an increase of approximately 11%, primarily due to higher FTE expenses. G&A increased by 7% to $25.2 million, driven by higher professional services. Total operating expenses were $79 million in the quarter, a decrease of 6% compared to Q2 2024, largely due to lower R&D expenses. Total other income was a gain of $10 million compared to a loss of $1.2 million in Q2 last year due to mark-to-market changes in our equity investments. Taxes were minimal, resulting in a net loss of $43 million or $0.59 per share versus a net loss of $54 million or $0.74 per diluted share in Q2 2024. The fully diluted share count for Q2 was 73.4 million compared to 72.7 million in Q2 2024. We remain well capitalized with $462 million in cash and equivalents as of June 30. We are maintaining our software and drug discovery revenue guidance for the year of software revenue growth of 10% to 15% and drug discovery revenue of $45 million to $50 million. We continue to have encouraging discussions with customers about scale-ups at renewal, most of which take place in the fourth quarter. Shifting to operating expenses. We now expect them to be lower in 2025 than in 2024, driven primarily by our $30 million expense reduction initiative that we announced in May. Cash used in operating activities in 2025 is still expected to be significantly lower than in 2024. For the third quarter, we expect software revenue to be in the range of $36 million to $40 million. We continue to expect the balance of drug discovery revenue to be approximately evenly distributed through the third and fourth quarters. With that, I'll turn the call over to Karen to discuss our therapeutics R&D and pipeline updates.

Thank you, Richie, and good afternoon, everyone. We achieved strong pipeline progress during the quarter, reporting our first clinical data and advancing our portfolio of collaborative and proprietary programs. Our platform empowers our scientists to discover differentiated molecules with remarkable efficiency. To date, 15 development candidates from our collaborative and proprietary portfolio have entered Phase I clinical development. Six of these have advanced to Phase II and one is currently in Phase III. These programs represent distinct value creation opportunities for Schrodinger, offering the potential for additional future milestones, royalties and cash distributions from equity. Turning now to our proprietary pipeline. I'll begin with SGR-1505, our MALT1 inhibitor. The presentation of initial Phase I clinical data was an important milestone for the program. And our conversations at EHA and ICML reaffirmed our belief that MALT1 inhibition represents a promising novel therapeutic strategy in the hematology armamentarium beyond BTK, BCL2 and standard of care agents. The initial Phase I dose escalation data were highly encouraging, showing a well-tolerated profile with clear monotherapy signals in heavily pretreated chronic lymphocytic leukemia, where 3 of 17 patients responded and in Waldenstrom's macroglobulinemia, where all 5 patients responded. Importantly, 2 of the 3 CLL responders were double exposed to BTK and BCL2 inhibitors and all 5 Waldenstrom patients were last treated with a BTK inhibitor, providing early evidence supporting an opportunity for STL-1505 in patients with refractory disease. The FDA Fast Track designation for SGR-1505 for the treatment of adult patients with relapsed/refractory WM that have failed at least 2 lines of therapy, including a BTK inhibitor, also reflects the medical need. The emerging best-in-class profile of SGR-1505 and preliminary activity in indolent and aggressive lymphoma solidifies our conviction in the potential of MALT1 inhibition as a well-tolerated oral approach to treat patients with limited options. The strength of the early development package, including current PK/PD, safety and efficacy data supports our plans to align with the FDA on the recommended Phase II dose. To ensure SGR-1505 receives the dedicated focus and resources required to pursue mid- and late-stage development, we are exploring a range of strategic opportunities for this program rather than initiating these studies independently. In the meantime, we expect to provide an update on the complete dose escalation study, translational data and feedback from the regulatory interactions later this year. We are also advancing Phase I dose escalation studies for SGR-2921, our CDC7 inhibitor and SGR-3515, our Wee1/Myt1 co- inhibitor. We expect to share initial Phase I data from both programs in the fourth quarter of 2025. SGR-2921 is being evaluated in patients with acute myeloid leukemia and myelodysplastic syndrome, while SGR-3515 is being evaluated in patients with advanced solid tumors predicted to be sensitive to Wee1/Myt1 inhibition, including ovarian, uterine and breast cancer in addition to other solid tumors. The primary goal of both studies is to evaluate the safety, tolerability and preliminary clinical activity. Both studies are progressing with multiple dose escalation steps completed. Turning to our advancing portfolio of discovery stage assets. In the fourth quarter of 2024, we licensed an undisclosed early-stage program to Novartis, which continues to advance along with other joint discovery programs. Earlier this year, we expanded our collaborations with Lilly and Otsuka, and we recently announced the expansion of our relationship with Ajax Therapeutics, a company we cofounded. The expansion builds on our joint success with AJ1-11095, which is in Phase I for myelofibrosis and adds another JAK family target for autoimmune and inflammatory disease to the collaboration. We also recently established a collaboration with the Novo Nordisk Foundation Center for Basic Metabolic Research at the University of Copenhagen. We have a strong track record for delivering differentiated clinic-ready molecules, which underpins the growing number of new collaboration programs across a range of therapeutic areas and target classes working on high potential targets. In summary, we are pleased with the progress we have made this quarter and expect continued advancements in our proprietary and collaboration pipelines over the remainder of 2025. We look forward to updating you on our progress. I'll now turn the call back to Ramy.

Thank you, Karen. We are pleased with the advancements we have made across all aspects of our business. We have reported very promising data for SGR-1505 and are exploring strategic opportunities to expand and accelerate clinical development for this potentially best-in-class molecule. We expect to report data from our other 2 clinical programs, SGR-2921 and SGR-3515 in the fourth quarter. We continue to invest in our platform to strengthen our leading position in computational molecular discovery, and we are encouraged by the tenor of conversations we are having with customers, collaborators and partners. We look forward to updating you on our progress in the coming months. At this time, we are happy to take your questions.

[Operator Instructions] Your first question comes from the line of Evan Seigerman from BMO Capital Markets.

Two for me. One, as you think about kind of your conversations with your customers, how has the tone and tenor changed with regard to investments kind of in your platform? Kind of a follow-up to a question that I had on a prior quarter, just seeing how that's changed. And secondarily, as you think about kind of out-licensing, why do you decide to out-license the product kind of at this stage of development versus [indiscernible] an early Phase II trial?

Okay. I think we picked up on that. It's a little hard here, but I think we got it. Yes, as far as the tenor of the discussions with customers, it's a good question because, of course, there's concern about sort of macroeconomic conditions. And what we can tell you right now is that the discussions are quite positive. There is a clear demand for advanced technology, predictive technologies. And so far, we're really pleased with the discussions.

And if I heard you correctly, Evan, the question, I think, was about the potential to out-license our Phase I program at this stage.

Yes.

Right. Thank you. Yes, so we have been discussing this program with partners for a very long time. Obviously, it's really important that we align with companies around the strategy for the further development of these assets. And with respect to 1505, we believe that this program is best developed in mid and late-stage development by a partner who has expertise in development and commercialization in hematology, and that includes the opportunity to expand into different indications. And so we think that partnership, as we've said in the past, is probably the best approach to accelerate the program and realize the full potential.

Your next question comes from the line of Scott Schoenhaus from KeyBanc Capital Markets.

It seems like your model is resilient on the software side despite the macro uncertainties and what's going on regulatory-wise. But my question, I guess, is on the back half setup and the demand that you're currently seeing now by cohort. Is it pretty consistent with what you saw 90 days ago across from large pharma all the way down to biotech? Has things changed? And then you mentioned in your prepared remarks about encouraging discussions on renewal season in fourth quarter. Just wanted more color there may be on the cohort of clients for renewals.

Yes. Richie, you want to?

Yes, Scott, thanks for your call. I think demand for our technology remains strong, and it's delivers proven value, lowers cost for our customers and drives efficiency. If you break that down by cohort, we continue to have really good conversations with our customers about the renewals and potential for scale-ups. Most of those, as you noted, take place in the fourth quarter. The biotech segment of the market has been more challenging for us. That's not anything new. We've seen that in the last couple of quarters. I think some of the macroeconomic landscape has impacted that cohort more than the others. But within pharma, there's obviously a lot of uncertainty between policy and tariffs and drug pricing. We're obviously monitoring all of that very carefully. But the conversations continue to be constructive heading into year-end around some of the big renewals that we're expecting.

And as my follow-up, more of a housekeeping question, but you mentioned that the quarter, I think so on-prem was down year-over- year. That implies that your cloud is now is probably a bigger percentage. Just kind of a housekeeping item on where we stand on the cloud versus on-prem as a percentage of the software revenue book?

Yes. I think on-prem being lower year-over-year, this was really due to some of the deals we signed last year in Q2 that were just multiple year deals. So the comparison year-over-year looks lower there. But in this quarter, we had strong growth in hosted revenue and are continuing to grow those relationships with our existing customers. So these are things that we'll see quarter-over-quarter bounce around. But overall, we're happy with the trend of increased growth when you look across both hosted and on-prem revenue.

Your next question comes from the line of Mani Foroohar from Leerink Partners.

This is Lili Nsongo on for Mani. Staying on the software side of things, can you -- so 2 questions there. Can you give us a little bit on how the predictive tox feature? How much adoption you've seen there and how much growth you expect from it in the mid to short term? And then secondly, you mentioned that most of the growth on the software side come from existing customers. I was wondering how much -- if you could quantify that, how much more room is there for increased usage among the average customer?

Yes. So with regard to predictive tox, as we said, we're very pleased that we had the beta release, which was pretty recent. We have users now. And it's very clear that there's a lot of excitement around this technology, demand for it. We're, of course, very pleased to see the FDA sort of insisting that the industry develop predictive technologies to lower or reduce the use of animal models. So that's progressing. We'll get the feedback. That's how beta releases work and look forward to reacting to that feedback. The second question, I think, was -- yes.

Yes. I think about just the growth within the existing customers, I think there's a lot of excitement about computational drug discovery. We are central to that theme, and there's a lot of excitement about the solutions that we're developing. This has been a focus of ours is growing within existing customers. We continue to see kind of different levels of adoption within our largest customers, and our focus is to grow customers from our smaller and medium tiers into the larger tiers.

Your next question comes from the line of David Lebowitz from Citi.

This is [ Ike Lee ] on for David Lebowitz. We have one regarding your predictive toxicology solution. There's a few parts to this. So wondering how many clients overall have access to the beta version. How do you think about pricing this product in relation to your currently existing software? Is it bundled? Is there discounts? What is the setup like? And then you mentioned getting feedback from the beta version as how it goes. What's the time line for doing that and potentially rolling out the full version as well?

Yes. Thanks for the questions. With regard to how many clients, that's really not something that we disclose. What we can tell you, though, and we said this before, is there -- all of our collaborators have access to the technology through the collaboration. So we've been using it internally. And as we've said before, we can share with you that it's having an impact. It works. There's still a lot of work to be done to expand the number of targets that are supported. But yes, so -- sorry, we can't tell you about the number of clients. Now with regard to pricing, what we can tell you, without obviously getting into the details, is that it will be separately priced. This is not -- this is an add-on module. It would not be -- it won't just be that customers will automatically get access to it. I think there was a third question about the beta.

Feedback on the beta testing.

Feedback on the beta. If there is feedback, is that what the -- yes. No, not yet other than what I just mentioned earlier about the feedback sort of from collaborators. But it's a little early for that. It was really released very recently in the beta form.

Just the last part was mostly about the time line. Just what's the time line for getting the feedback and rolling out the full version? I think especially as it pertains to the gross margins, you're saying your gross margins are being impacted by the spend, right? So just wondering how long should we look for those gross margins to remain depressed because of that outlook?

Okay, there are 2 separate concepts here, yes. So with regard to beta feedback, really, we don't know. That will happen on the pace that it happens. Now with regard to the margins, that's tied really to the grant and the time period of the grant. So maybe, Richie, you can comment on that.

Yes. So as we've said before, I think the --

The grant from Gates.

Yes. Our efforts around predictive toxicology that are related to the Gates grant, those expenses have -- are realized within cost of goods sold. The timing of that grant started in Q3 of last year and was roughly about 2 years. So you can model that out on the gross margin impact from that grant.

Your next question comes from the line of Michael Ryskin from Bank of America.

I want to go back a little bit to your announcement from May late to mid-May, the restructuring, the headcount reductions, just kind of thinking of that in context of the quarter you just reported. You're having steady results. You reiterated the -- all the key components of the full year guide. It sounds like you're more resilient on the pharma customer front than a lot of your peers and a lot of what we expect. Just put the headcount reduction in that context of you've got a strong balance sheet. You don't really need to implement cost savings to save cash. So just what's the -- walk us through the rationale and the thought process there?

Yes. I'll try and take a crack at that, and then I'll hand it over to Richie if there's something more to add. As we said when we announced this, this -- it didn't -- the reduction in force didn't have -- it wasn't focused on a particular project. It was sort of across the board, and it didn't have an impact on our sort of strategic initiatives and strategic direction. And we said this at the time, too, we felt that we had after the rift, the right team to deliver on the software growth to advance the software and the platform and to advance the collaborative and proprietary programs. So I think that might be answering your question, but if not, let us know. Richie, do you want to answer that?

Yes. I'll just add. I think we've been really disciplined on cost management. You're starting to see the impact of those expense reductions into our financials that we just reported and some of the reductions in operating expenses and R&D. It's also one of the main drivers behind the change in guidance for 2025 in reducing our expectation in operating expenses to now be lower than 2024.

And for my follow-up, just real quick, apologies if I missed this in the prepared remarks. But for SGR-2921 and 3515, the CDC7 and Wee1/Myt1, I think previously, you're talking about second half '25 for initial data, now it's 4Q. I know it's not per se a delay, but it feels like a little bit of delay. So just wondering anything specific going on there? I know there's been a lot of concerns on FDA ability to sort of process data or if there's anything going on from the regulator front. Can you just talk about the refinement of the time line there?

Yes. Thanks, Mike. These are ongoing Phase I dose escalation studies, whereas you may recall, we're collecting safety, PK/PD efficacy data. That continues to progress. We just provide a little bit more clarity that we expect now based on where we are with collection of data for that to be shared with shared in the fourth quarter, really because of where we are in the development of these Phase I trials. While we are obviously guiding to discussions with the FDA on SGR-1505, which is a completed dose escalation study, we're not in that position yet for these other 2 programs. So nothing about the FDA, I think, is impacting 2921 or 3515 at this time.

Your next question comes from the line of Sean Lehman from Morgan Stanley.

On the proprietary pipeline, so is there a bit more granularity what kind of data you are going to present in 4Q? And can we expect at some point that these molecules might go the same way as the program for 1505 and you're going to look for strategic partners or strategic opportunities on those 2 programs?

Yes. So just in a way, let's sort of think about where we were in May. Once we finished the dose escalation study for 1505, we provided a pretty comprehensive update on the results that we had from that trial. Those 2 programs, 2921 and 3515 are behind 1505. And so we're still assessing the extent to which we'll be able to share complete data, but we do plan on providing an update on the data that we've collected so far by the end of the year. And as we just said on the previous question, that's likely to be the safety PK/PD and really very preliminary data around clinical activity. The second part of your question was about the strategic opportunities that we're pursuing with 1505 and whether that is something that we will be pursuing also for 2921 and 3515. First, let me take the opportunity just to say that we are looking at a range of transactions and collaboration arrangements with 1505 and so that can span a number of different approaches. But I will just reiterate that we've been consistent, I think, since the initiation of these programs that because of the combination opportunity with venetoclax and with other standard of care agents, all 3 of these programs, we believe, are best accelerated in further mid to late-stage development by working with partners. And so I think we still have that view. Obviously, we need to look at all the data, but I think that is a consistent view that we aim to work with other companies around further development of these assets.

And a quick follow-up, if I may. Just on the expanded collaboration with Ajax. How might that impact future milestones and revenue, if you can say?

Yes. Sean, thanks for the question. I think we're going to -- the way these collaborations work is, as we execute against the project that is recognized as revenue. So there will be some impact of that into our discovery revenue. The impact of that in 2025 is very modest. Over time, there will be milestones. And then in this program that we've added, there's also the opportunity for later-stage commercial milestones and royalties, but those are all further out in time.

Our next question comes from the line of Matt Hewitt from Craig-Hallum.

This is [ Tal ] on for Matt. So are you guys still seeing what you called it last quarter as level pegging with customers where some customers will increase spending and others will decrease, kind of just netting it all out?

Yes. It's very unusual for a customer to decrease spend, to be clear. We generally see increases of different amounts, but very, very, very rare for there to be a decrease.

And we have a 100% retention rate with customers greater than $0.5 million.

[Operator Instructions] Your next question comes from the line of Brendan Smith from TD Cowen.

Congrats on the quarter. I actually wanted to ask just a follow-up on the predictive tox conversation from earlier and really in the context of FDA's push on animal testing. And sorry if I missed it, but have you all been in touch with the agency at all about their proposed pilot study that they're looking to initiate? And just kind of comparing some of the computational modeling approaches with actual animal testing data. Just wondering if that's something you all could or would be involved with and maybe what kind of the potential timing for any of that might look like?

Yes. The intention, of course, is to engage with the FDA at the appropriate time when the technology is in the state where we feel that's appropriate. And we have had, I would say, sort of informal discussions is probably the way to say it, right? And they're aware of the work that we're doing. But it's premature, of course, to talk about the FDA adopting the technology, obviously, until maybe after we get feedback from, for example, from beta testers.