Thank you for standing by. Welcome to Schrödinger's conference call to review second quarter 2022 financial results. My name is Deedee, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one one on your telephone. 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, Jaren.
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 2022 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 www.schrodinger.com. Here with me on our call today are Ramy Farid, Chief Executive Officer, Jenny Herman, Senior Vice President, Finance and Corporate Controller, and Karen Akinsanya, President of R&D Therapeutics. Following our prepared remarks, we'll open the call for Q&A.
I'd like to remind you that during today's call, management will make statements related to our business that are forward-looking and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including without limitation, statements related to our future financial performance, our outlook for the full year 2022 and for the third quarter ending September 30, 2022, our strategic plans to accelerate the growth of our software business and advance our collaborative and internal drug discovery programs, the timings of potential IND submissions and the initiation of clinical trials for our internal drug discovery programs, risks related to the COVID-19 pandemic, our expectations related to the use of our 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 what we project today 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 period ended June 30, 2022. These forward-looking statements represent our views only as of today, and we caution you that we may not update them in the future, whether as a result of new information, future events, or otherwise. With that, I'd like to turn the call over to Ramy.
Thanks, Jaren, and thank you everyone for joining us today. At Schrödinger, we have developed a computational platform that is transforming the way therapeutics and materials are discovered. We license our platform to biopharma and materials companies, as well as government and academic institutions around the world. Today, we reported second quarter software revenue of $30 million, a 25% increase over the prior year. We also recognized milestones from multiple collaborative programs during the second quarter, which helped drive drug discovery revenue of $8.5 million. The strong performance across both aspects of our business led to total revenue of $38.5 million for the second quarter and $87.1 million for the first half of 2022, representing 29% and 41% growth over the respective prior periods.
We are very pleased with the performance we've had in the first half of 2022, and we are maintaining our full year financial guidance. We have built a highly differentiated company that we believe enables us to continue to innovate while providing a solid foundation for growing revenue. We ended the quarter with approximately $513 million in cash. We believe our strong financial position provides sufficient runway to fund our operations for the foreseeable future, including advancing our wholly owned programs into clinical studies. We are pleased that revenue growth from both our software business and drug discovery collaboration enables us to make continued investments in our platform and pipeline while also providing a path to profitability. As you'll hear shortly from Karen, we are also continuing to make progress across our wholly owned pipeline.
During the second quarter, we submitted the IND for our MALT1 inhibitor, SGR-1505, and we are now clear to proceed with our phase I clinical trial. This was our first internal IND submission and represents a tremendous achievement for Schrödinger. We are looking forward to initiating the phase I trial for SGR-1505 in patients with relapsed or refractory B-cell lymphoma in the fourth quarter of this year. We are continuing to invest in the science underlying our platform. For example, we've broadened the applicability of our platform through an important advancement with our induced fit docking methods to optimize homology models to enable predictive modeling of targets where experimental structures have been unavailable. We have already successfully applied this method to advance a collaborative drug discovery program for a target that was not structurally enabled.
We were pleased to advance the project from early discovery to lead optimization entry nearly six months ahead of the originally targeted schedule. Our scientists continue to publish our independent and collaborative scientific advancements and recently co-authored a manuscript with Nimbus Therapeutics based on data from our ongoing collaboration describing how our predictive computational methods accelerated the discovery of Nimbus' potent selective TYK2 inhibitors with activity in preclinical models of psoriasis.
We are excited by the progress we have made, and we expect continued achievements across all aspects of our business throughout the year as we advance our vision of transforming drug discovery and materials design. I will now turn the call over to Jenny to review our second quarter financial results.
Thank you, Ramy, and hello, everyone. I'm pleased to discuss our financial results for the second quarter of this year. Total revenue was $38.5 million for the quarter, up 29% compared to the second quarter of 2021. Software revenue was $30 million, representing 25% growth compared to the second quarter of 2021. As in prior quarters, the growth in software revenue was primarily driven by increased adoption of our software solutions by existing customers, as well as the addition of new customers during the quarter. Drug discovery revenue was $8.5 million for the second quarter of 2022, compared to $5.7 million in the second quarter of 2021.
Drug discovery revenue for the quarter included $5.4 million in revenue recognized from our ongoing collaboration with Bristol Myers Squibb, as well as revenue from preclinical milestones related to two of our collaborative programs. Gross profit was $17.1 million in the second quarter, up 43% over the second quarter of 2021. Software gross margin was 76% in the second quarter of 2022, compared to 77% for the second quarter last year. We continue to make investments to support the rollout of large-scale deployments of our platform. Operating expense was $60.6 million, compared to $42.3 million for the same quarter last year.
This reflects our continued investment in R&D to advance the science underlying our platform and to progress our internal drug discovery programs, as well as infrastructure costs and the addition of staff and G&A functions to support our business. We recorded a net loss of $47.7 million for the second quarter of 2022, compared to a loss of $35 million for the same period in the prior year. As we mark-to-market the equity stakes we hold in our collaborators each quarter, we can experience significant fluctuations in the value of our holdings. Included in our $47.7 million net loss was a loss of $15.7 million on our equity holdings in the second quarter of 2022, compared to a loss of $4.9 million on our equity holdings in the second quarter of 2021.
We ended the quarter with cash equivalents, marketable securities, and restricted cash balances of approximately $513 million, compared to approximately $529 million on March 31, 2022. In February, we provided our financial outlook for the full year, and today we are pleased to reaffirm our 2022 financial guidance. Before reviewing our financial outlook in detail, I'll remind you that our software revenue fluctuates quarter to quarter due to the seasonality of our business, with the second and third quarters historically being our quarters with the lowest software revenue. For the third quarter of 2022 specifically, we expect software revenue to range from $23 million-$25 million, similar to software revenue for the third quarter of last year, which was $24.3 million.
We have fewer customers up for renewal in the third quarter, and anticipated growth is expected to be offset by multi-year contracts executed over the past two years. The fourth quarter is expected to be our largest quarter for software revenue, which was the case in the last two years. We have a high level of visibility into our existing accounts, which have been the primary driver of growth, given our broad customer base. We are pleased with the level of engagement by software users as well as the heads of R&D, and we are encouraged by the continued scale-up of adoption of our software platform. Let me now review our 2022 financial outlook in more detail.
We continue to expect total annual revenue to be in the range of $161 million-$181 million, corresponding to 17%-31% growth over 2021. We expect software revenue to range from $126 million-$136 million, representing 11%-20% growth over last year. We continue to expect drug discovery revenue to range from $35 million-$45 million, representing 42%-82% growth over last year. Drug discovery revenue fluctuates from quarter to quarter, largely based on the timing of achieving certain milestones within our collaborative programs. Finally, we continue to anticipate that operating expense growth will be slightly lower than the 42% annual growth we saw in 2021. We expect our software gross margin percentage to be in the mid-70s.
We are very pleased with the strong start to our year, and we expect continued progress in the second half of this year. I'll now turn the call over to Karen for an update on our drug discovery programs.
Thank you, Jenny, and good afternoon, everyone. We are continuing to make important advances on many fronts across our portfolio. We are pleased to see a growing number of our collaborative programs advance through discovery, preclinical, and clinical development. With respect to our collaborations, three programs are currently in phase II and five are in phase I clinical development. There has also been significant progress across our collaborative discovery portfolio, with several programs expected to reach development candidates over the next year. As you heard from Ramy, in one program, transitioning to lead optimization ahead of schedule was enabled by a modeled protein structure and our brain penetration predictions, which has exciting implications for future programs. Today, I will review our three most advanced wholly-owned programs, starting with SGR-1505, our MALT1 inhibitor.
MALT1 is emerging as a potential therapeutic target for the treatment of certain B-cell lymphomas, including relapsed or resistant B-cell and mantle cell lymphoma. MALT1 inhibition also has potential in solid tumors and autoimmune disease. During the second quarter, we submitted our IND for SGR-1505 to the FDA, and we recently announced that we are clear to proceed to phase I. Our early clinical development team is currently working through clinical site activation in preparation to begin dosing patients with relapsed or refractory B-cell lymphomas in the fourth quarter of this year. This will be the first clinical study emerging from our internal pipeline, and we look forward to reaching this important milestone. This multi-center dose escalation trial will evaluate the safety, pharmacokinetics, pharmacodynamics, and early signals of antitumor activity of SGR-1505 as a monotherapy.
Once the recommended dose is determined, an expansion cohort is planned to evaluate SGR-1505 in combination with other therapies such as BTK and BCL-2 inhibitors. Moving to our WEE1 program. We share the enthusiasm of physicians and scientists studying WEE1 inhibition in multiple solid tumor types. We are encouraged by the clinical activity demonstrated to date in third party WEE1 inhibitor trials. We view the side effects and pharmacokinetic profile of WEE1 inhibitors as crucial to the therapeutic potential and the opportunity to be combined with chemotherapy and other anticancer agents. We are using our computational platform to identify molecules that are highly selective with balanced properties, which we believe may help avoid some of the drug-drug interactions and off-target effects that have been observed with other WEE1 inhibitors.
We have already identified compounds from multiple lead series that are potent, selective, and demonstrate antitumor activity with desirable pharmacokinetic and pharmacodynamic properties in multiple preclinical models, including models of lung, ovarian, and breast cancer. We are currently conducting additional preclinical studies to ensure we select a development candidate with the most desirable differentiated properties. We believe conducting these additional studies gives us an opportunity to advance a potential best-in-class WEE1 inhibitor into the clinic. We expect to select a WEE1 development candidate by the end of this year and submit an IND at the end of 2023. Now I'll turn to our CDC7 program. Our CDC7 development candidate, SGR-2921, has demonstrated strong antitumor activity in preclinical models of AML in combination with venetoclax and other marketed agents.
Our timeline for IND submission has been impacted by supply chain issues, including delays at the CRO that is conducting certain required GLP toxicology studies. We now expect to submit an IND for this program to the FDA in the first half of 2023 and subject to regulatory clearance, initiate a phase I study in the second half of 2023. These shifts represent approximately a one-quarter delay. As our wholly-owned programs progress, we are continuing to add new programs to our discovery pipeline. In the first half of this year, we've added four new programs in precision oncology and immunology for a total of six early discovery programs. Our growing portfolio reflects our strategy to select and enable targets with substantial human validation and solves key design challenges with our platform, positioning us to selectively advance first-in-class and differentiated programs.
We maintain a high bar for what we will progress beyond the lead optimization stage. Our focus is on projects with a strong line of sight to value-inflecting data in discovery or in phase I to support potential partnering or that merit continued internal development. In summary, our diverse portfolio of programs is advancing and activities to support expansion of our pipeline are well underway. We are pleased with the progress that we and our collaborators are making and look forward to providing updates on our R&D activities throughout the year. I will now turn it back over to Ramy.
Thanks, Karen. 2022 has the potential to be another strong year for Schrödinger. We are very pleased with the progress we have made across all aspects of our business in the first half of the year, and we remain focused on the key objectives that we believe can generate value and position us for continued success. We will be hosting a webcast on October sixth to provide a deeper dive into our computational platform, and we hope you will join us to learn more about how we are solving grand challenges in drug discovery. At this time, we'd be happy to take your questions. Operator?
Thank you. As a reminder to ask a question, you will need to press star one one on your telephone. Please stand by while we compile the Q&A roster. One moment. Our first question comes from Michael Ryskin of Bank of America. Please proceed.
Great. Thanks for taking the question and congrats on the quarter. My first question is gonna come back to the software guide for the third quarter. I just want to make sure I have all the moving pieces down. You have some comments about fewer customers up for renewal and some multi-year contracts. I'm just wondering if you could sort of give a little bit more clarity on that, sort of how much of that variability is specific to 3Q, and you know, just looking at the year numbers, you did about 25% in the first half, both in 1Q and 2Q software growth. You know, is this really just a comp issue from last year? How do we think about that variability going forward? And then I got a follow-up.
Yeah, thanks for the question. Jen, do you wanna?
Yep, I can take that.
Thanks.
You know, looking at Q3 specifically, it is generally our lowest quarter. Second quarter and third quarter are our lowest quarters. We do not have any large customers up for renewal in Q3. It's just historical timing and that is one of the large sources of growth we see is our largest existing customers. We do have some growth in Q3. It is offset by some of your deals signed in the last couple of years, but it really is a combination of it's just a lower revenue quarter and there's not a lot of large customers in Q3, you know, which doesn't create the same kind of opportunity for growth as we see in some of the other quarters.
Okay. Just to follow up on that, have you seen any weakness in general in terms of customers indicating appetite for renewal? You know, when we think about the broader market and, you know, balance sheets among biotechs and sort of some of their willingness to spend versus cut back on some of their operating expenses, are you seeing any change in order patterns, renewals, customer expansion? Sort of as a follow on of that, you keep pointing to ACV growth of over 20% in 2023. Any way you can give us a sense of how that's trended this year, just so we can get a feel for how that's going? Just trying to get at the underlying demand among pharma and biotech and sort of their willingness to spend. Thanks.
Sure. As far as ACV, it isn't something that we guide to in the year. We'll report that with the Q4 numbers. We did directionally give that number for 2023, just as an indication of kind of the overall growth for the software business to expect in 2023. As far as customers' spending patterns, we are not seeing any indication. We do think that the Q4 is going to be our largest quarter. We are maintaining our guidance and that range does reflect the variety of outcomes that could happen with the affinities that we have with our existing customers in Q4.
Okay, great. Thanks. I'll get back in the queue.
Thank you. One moment. Our next question comes from Michael Yee of Jefferies. Please proceed.
Hi, this is [inaudible] on for Mike. Just wondering if you have more visibility into the 2023 drug discovery guidance. You know, it's previously guided to $100 million. Wondering how confident you feel about that as we're nearing 2023.
Yeah, we're not changing that guidance. We're still feel as confident as we were when we first announced that we were expecting in 2023, $100 million+ revenue from the drug discovery business. That excludes any revenue that may come from partnering of our internal programs. Yeah, still maintaining that guidance.
Got it. Thank you.
Thank you.
Thank you. One moment. Our next question comes from Gary Nachman of BMO Capital Markets. Please proceed.
Hi, good afternoon. First, what has the pace been for new business wins, both in life sciences and materials sciences? Just if you could give some more color there, Ramy. Where are you seeing a greater uptick with these new wins and, you know, trying to get a sense of what the funnel looks like, to the extent that you have visibility on that. Then I have a couple for Karen after.
Great. Yeah, no, it's a good question. Let me remind you first, though, that the majority of our growth does come from scaling up our existing customers. That's a very important point in that, and that we continue, you know, we expect to continue to see that again, to the extent that, you know, we have so many customers on the life science side, of course, all the pharma companies, a really large number of biotech companies, that's where the growth comes from. We are still seeing, but it's still some of the growth does come from new customers. We're still seeing that happening in the last two quarters. That was on the life science side.
On the material side, as we said before, to the extent that that's an earlier business, we still see a larger portion of the growth coming from new customers. We're not seeing any
Impact of any sort of macro headwinds impacting that to date.
Okay. That's good to hear. For Karen, you know, as you're moving to the clinic with your lead internal candidates, just talk about your capabilities internally, just in terms of drug development and, you know, have you hired some new people recently, now that you're gonna be starting a phase I pretty soon? Talk broadly about the four new oncology immunology early discovery programs, when we could have visibility on those, and would they be similar to the three you talked about that are moving into the clinic? Is that a typical cadence for you, when we think about those new programs? Thanks.
Thanks, Gary. Your first question around the capability build. We have continued over the last year, actually, to add additional experts to our team. We're very pleased with the early development team. We have obviously a physician working on the protocol who's a member of our team, as well as clinical operations, regulatory, clinical science, biomarkers, and clinical PK/PD. We have what we believe to be the right team to advance this first protocol. We will, over the next year, be adding additional expertise to the team as we look to expand the number of programs in the clinic and obviously advance the trials that we are going to be conducting. With respect to the new programs, if I can turn to that.
The addition of these programs is pretty exciting for us. As you know, we have spent time thinking very hard about the types of programs we want to work on with our platform. This includes some opportunities that we think are again opportunities for differentiation on very well-validated targets where there are, we think, really interesting chemistry challenges to solve. It also includes some first-in-class targets where we think that we could be the first people in the world to have agents against targets that are particularly well-considered in the biology and sort of genetics community. We're very pleased with those projects. We still would describe them as precision oncology and to some extent precision immunology targets that we'll be moving forward.
In terms of when you can expect visibility, we've got some work to do in terms of moving these to the stage where we would feel comfortable sharing. As we have done over the last couple of years, we've been submitting obviously to scientific meetings on our existing programs. We plan to continue doing that as we have data packages that are appropriate.
Okay. Just lastly on the cadence, was that a particularly productive first half of the year to have four of these new programs? Or is that basically, you know, a reasonable assumption going forward of what you can do?
We actually are continuously looking at targets and thinking about enablement of those targets, both for the platform, and more broadly, to conduct those through discovery. Last year, we spent a lot of time building up our early discovery team, and we expect, as I think we've discussed on previous calls, to have a steady state of programs in the lead-up space. We are expanding our options in the early space so that we can pick the very best programs to move forward into LO. Yes, we expect to see a lot of new programs entering the pipeline and our strongest options moving forward into late-stage discovery.
Okay, great. Thank you.
Thank you. As a reminder, to ask a question, please press star one one on your telephone. One moment. Our next question comes from Vikram Purohit of Morgan Stanley. Please proceed.
Great. Good afternoon. Thanks for taking my questions. I had two, both on the proprietary pipeline. First on the MALT1 inhibitor. Now that the IND has been cleared and you're moving towards dosing patients in 4Q 2022, I just wanted to see if you had any more detail you could provide us about the design of this study, the timelines to initial data here, and what the first set of data that we'll get could tell us about the molecule.
Yes. Thanks for the question. As you stated, we're moving into dosing in the fourth quarter. This study is really designed to establish the safety, tolerability of the molecule. In addition, we will be collecting pharmacokinetic, pharmacodynamic data. Those are the primary endpoints that we're collecting, and the whole point of this study is to identify recommended dose for combination studies and future study of our compound. In terms of when we would expect to see data, it's a little bit too early to say. We will be escalating through various dose cohorts, and at this point, it's a bit hard to say obviously when we will have sufficient data to be able to share that publicly.
I would say that this study is expected to run through next year and we'll keep you updated as we are getting more visibility on when we'll have data that we can share with you and the rest of the community. I think that answers your question. I don't know if there was a second part, sorry.
No, that's helpful on the first question. My follow-up was on another program in your pipeline. As you likely know, there was a discontinuation of a WEE1 inhibitor recently. We just wanted to get your thoughts on what you think the potential read-through is here for your program, and what the discontinuation might do for the opportunity set for your WEE1 inhibitor.
Yeah. As you noted, we did see the news of the discontinuation of the most advanced, I think of the WEE1 inhibitors. As AstraZeneca said publicly, they see opportunity with WEE1 in the clinical space. From what we can glean from the public announcement, this was a prioritization of their portfolio activity. From a sort of perspective of our program and where it sits in the landscape, we maintain what we have said from the very beginning about the WEE1 inhibitors that are the existing compounds. We think there's an opportunity to enhance the properties of WEE1 inhibitors. First and foremost with regard to selectivity, and then secondly, the drug-like properties.
We think that a compound with an optimized profile will allow for further study in the clinic of combinations. When I say that, I'm referring to the issues around drug-drug interactions and how selectivity may impact the safety profile of WEE1 inhibitors. We are obviously still preclinical, but we're very excited about the molecules we have and published some of that work last year or earlier this year at a scientific meeting. We continue forward with this program with optimism based on the clinical data for both monotherapy and some of the combination data that's already been studied and shown for this mechanism.
Okay. Got it. Thank you very much.
Thank you. I'm showing no further questions at this time. That concludes today's call, and you may now disconnect.