Thank you for standing by. Welcome to Schrodinger's Conference Call to review the company's First Quarter Financial Results. My name is Kevin, and I'll be your operator for today's call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session.
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 Call, Jared Madden, Senior Vice President of Investor Relations and Corporate Communications. Please go ahead.
Thank you, and hello, everyone. Welcome to today's call, during which We provide an update on the company and review our financial results for the Q1 of 2021. Earlier this morning, we issued a press release Summarizing our financial results and progress across the company, which is available on our website at www.schredinger.com. Here with me on our call today are Rami Farid, President and Chief Executive Officer Karen Akansanya, Executive Vice President, Chief Biomedical Scientist and Head of Discovery R&D and Joel Lebowitz, Executive Vice President and Chief Financial Officer. Following our prepared remarks, we'll open the call for Q and 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 The Securities Litigation Reform Act of 1995, including without limitation, statements related to our future financial performance, including our outlook for the year 2021, the potential advantages of our platform, our strategic plans to accelerate the growth of our software business and advance our Collaborative and internal drug discovery programs risks relating to the COVID-nineteen pandemic our expectations related to the use of our cash, cash equivalents, marketable securities as well as our other future operating expenses. These forward looking statements reflect our current views about our plans, intentions, expectations, Strategies and prospects, which are based on the information currently available to us and on assumptions we have made. Actual results may differ materially from those described in Forward looking statements and are subject to a variety of assumptions, uncertainties, risks and factors that are beyond our control, including the demand for our software solutions, our ability to further develop our computational platform, our reliance upon our drug discovery collaborators and other risks detailed under the caption Risk Factors and elsewhere in our most recent Securities and Exchange Commission filings and reports.
Except as required by law, we undertake no duty or obligation to update any forward looking statements discussed on this call as a result of new information, future events, These forward looking statements should not be relied upon as representing our views as of any date subsequent to today. And with that, I'd like to turn the call over to Ronny.
Thanks, Jaren, and thank you, everyone, for joining us today. At Schrodinger, we have developed a computational platform that Transforming the way therapeutics and materials are discovered. The platform is enabling our customers and our internal drug to discover high quality molecules for drug development and materials applications faster, at lower cost And with, we believe, a higher probability of success compared to traditional methods. We license our platform to pharmaceutical, biotech and materials companies And universities and government labs worldwide. We are also leveraging our platform in a number of drug discovery programs in collaboration with pharmaceutical and biotech companies.
And we are advancing an internal drug discovery pipeline, which Karen will review shortly. As we look out at the next decade, We believe that increasing speed of computing, expanding access to high resolution three-dimensional protein structures, Coupled with our platform's ability to predict molecular properties with a high degree of accuracy will allow us to broadly explore even greater chemical space and Ultimately, enable us to identify novel high quality development candidates for a broad range of targets within as little as 1 year from program launch. Beyond the progress we are making across our internal drug discovery pipeline, we are continuing to see exciting examples of the power of our Results from one of their integrin programs for the treatment of inflammatory bowel disease. We also recently expanded our collaboration With AstraZeneca to fully deploy our platform across all their structurally enabled discovery programs. We are making continued investments in the science Underlying our platform to maintain our leadership position in physics based computation and machine learning with a focus on increasing accuracy of the predictions and expanding the domain of applicability to wider range of therapeutic targets and industrial applications.
We also continue to look for opportunities to make supercomputing even more accessible for our customers. Last month, we established a strategic collaboration with NVIDIA As you'll hear shortly from Joel, we are in a strong financial position, ending the quarter with cash resources of 649,000,000 This allows us to continue to invest in our science, invest in growing our software business, advance our internal pipeline And add new talent to support our strategic initiatives. We're excited by the progress we've made so far this year across all aspects of our business. We are continuing to navigate the challenges of COVID-nineteen and are planning for a return to several of our offices in the Q4. We appreciate the dedication of all our employees, and we are optimistic about the ability to return to working together in person again.
I'll now turn the call over to Karen for an update on our drug discovery programs.
Thank you, Rami, and good morning, everyone. We are continuing to make important advances on many fronts across our internal pipeline and portfolio of collaborative programs. We have collaborations with both small biotech and large pharmaceutical companies spanning a broad range of target classes. And in these collaborations, we are leveraging our platform at the same scale we do internally. We believe this level of large scale deployment enables us to more rapidly identify high quality development candidates.
We expect several collaborative programs to continue to advance in the clinic and new programs to enter the clinic this year. We have also made significant progress in our own internal oncology programs targeting solid tumors and hematological malignancies. Today, I will highlight 3 of our most advanced programs, MULT-one, CDC-seven and V1. Based on the strong data we have generated to date, we plan to move forward with IND enabling studies for these programs. Subject to completion of the preclinical data packages, we expect to submit up to 3 IND applications in 2022, with our first submission expected in the first half of next year.
Starting with our MORT1 inhibitor program, today we announced we have To give you a sense of how we explored chemical space to identify a novel potent selective MORT1 inhibitor With favorable drug like properties, our team triaged over 8,000,000,000 compounds, scored approximately 12 1,000 compounds using our most advanced multi parameter optimization methods and synthesize just 78 molecules to identify those suitable for development candidate nomination within 10 months of program initiation. MALT-one has emerged as an interesting target Because it is downstream of BTK in the NF kappa B signaling pathway, constant activation of NF In December, we presented preclinical data from our MORT1 inhibitor program at the American Society of Hematology Annual Meeting. We reported potent in vitro inhibition of MORT1 enzymatic activity and in vivo anti tumor activity in nalzenograft models of diffuse large B cell lymphoma. Additionally, in in vivo mouse models, our MOLT1 inhibitors demonstrated dose dependent anti proliferative effects in combination with Ibrutinib and venetoclax, which are approved BTK and BCL-two inhibitors, We are excited about evaluating the potential of combining our MORT1 development candidate with BTK or BCL-two inhibitors in the clinic. Our GLP tox studies are expected to begin shortly, And we are beginning to make plans for Phase 1 studies in patients with hematological malignancies.
We expect to share more details about the clinical study cdc7 is a protein kinase that has been shown to be required in DNA replication initiation. CDC-seven is thought to be linked to cancer cells' proliferative capacity and ability to bypass normal DNA damage responses. Targeting proteins that play important roles in DNA replication and replication stress is gaining momentum as a new therapeutic approach Last month, we presented preclinical data from our CDC-seven inhibitor program At the AACR Annual Meeting, our compounds demonstrated dose dependent picomolar potency and were highly selective. They also showed synergy with several approved and investigational cancer therapies that modulate apoptosis, DNA repair mechanisms and DNA checkpoints. These compounds significantly inhibited tumor growth in mouse models of both acute myeloid leukemia And colorectal cancer.
The data we have generated to date suggests that we have an opportunity to develop a best in class inhibitor with a very favorable pharmacokinetic profile. Our other DNA damage repair program targets V1, Atarosine kinase regulator of the G2M cell cycle checkpoint. The therapeutic objective of targeting is to reduce cell viability by inducing G2M Phase arrest and apoptosis of cancer cells. Others have shown clinically meaningful tumor regression in uterine serous carcinoma, ovarian and other solid tumors through V1 inhibition. However, existing inhibitors have profiles that may make dosing and combination therapy more difficult.
The design challenge in our program was to develop highly In an effort to minimize off target effects, limit drug drug interactions and maximize the potential for combinations. We have identified multiple potent molecules that are highly selective for V1 and show strong pharmacodynamic responses and antitumor Our molecules also have optimized drug like properties, including no observable inactivation of CYP-three eighty four, a key liver enzyme. We believe this profile limits the potential for accumulation and the need for dose adjustment of combination products. As these programs advance and transition into development, we expect to initiate new programs. We have prioritized several new program opportunities with human genetic support and emerging pharmacology data in oncology and immunology.
We expect to launch these programs during the year. In summary, we have multiple programs advancing into GLP toxicology studies to enable IND submissions and the initiation of Phase 1 clinical studies next year. Activities to support expansion of our pipeline into additional These areas are well underway. We look forward to updating you on our R and D activities throughout the year. I will now turn the call over to Joel to review our financial results.
Thank you, Karen, and hello, everyone. This morning, I'm pleased to discuss our financial results for the Q1 of 2021, and I'll also review our outlook for the year. We reported total revenue of $32,100,000 for the Q1, up 23% compared to the Q1 of 2020. Software revenue was $26,300,000 representing 11% growth compared to the Q1 of 2020. The growth in software revenue was driven by increased Deployment of our solutions, including FEP Plus and Live Design as well as growth in new customers.
Drug Discovery revenue was $5,800,000 for the quarter compared to $2,400,000 in the Q1 of 2020. Of note, Drug Discovery revenue this quarter included recognition of $2,200,000 from a collaboration milestone related to the advancement of a preclinical program. We recognized this revenue 1 quarter earlier than anticipated. 1st quarter Drug Discovery revenue also included $2,400,000 recognized from our collaboration with Bristol Myers Squibb. As a reminder, the BMS agreement, which we signed in November 2020, included a $55,000,000 upfront cash payment, which we expect to recognize over a 4 year period as we progress the BMS programs to development candidates.
Gross profit was $16,200,000 in the Q1 of 2021, up 3% over the Q1 of 2020. Software gross margin was 78% in the Q1 of 2021 compared to 83% for the same period in the prior year, reflecting our investment to support the rollout of large scale deployments of our platform. Operating expense was $40,100,000 compared to $27,400,000 in the Q1 of 2020, reflecting our investment in R and D to Our technology and our pipeline, the addition of staff to drive long term software sales growth and expenses required to support a public company Other income was $23,500,000 versus a loss of $2,400,000 in Q1 2020. During the quarter, we recorded $24,800,000 of income from the mark to market of our shares in Morphic Therapeutic. As we mark to market our shares each quarter, We can experience significant fluctuations in the value of our holdings depending on stock price movements.
We recorded a net loss after adjusting for non controlling interests of approximately $29,000 compared to a loss of $13,800,000 for the same period in the prior year. We ended the Q1 with cash, equivalents, marketable Securities and restricted cash balances of $649,000,000 up from $643,200,000 at the end of the 4th quarter 2020. In March, we provided our financial outlook for the full year, and today, we are reaffirming that guidance. We expect total annual revenue in 2021 to be in the range of $124,000,000 to $142,000,000 which includes software revenue of $102,000,000 to $110,000,000 and Discovery revenue of $22,000,000 to $32,000,000 We continue to expect software revenue growth to be higher in the second half of the year with the majority of second half growth in the 4th quarter. Drug Discovery revenue is expected to be highly variable based on the timing of potential milestones related to collaboration agreements.
As we said before, we anticipate that operating expense growth will be higher than the 42% annual growth rate we saw in 2020, primarily driven by our commitment to fund R and D to advance our technology and our internal drug discovery pipeline. We also anticipate that software gross margin We are pleased with the progress we have made so far this year, particularly the advances we have seen across our collaborative programs and internal pipeline. We We are also excited about the potential for large scale utilization of our software and drug discovery and material science applications. And finally, we have the resources to invest in our growth I'll now turn the call back over to Ronny.
Thanks, Joel. We are excited about the significant impact our technology is having on our internal and collaborative drug discovery programs. It is exciting to see the power our platform has to advance the discovery of new therapeutics with the potential to improve treatment paradigms across a broad range of disease areas. We are also excited about the potential of our platform to to impact sustainability initiatives across multiple industries. We have an exceptional team committed to advancing our vision,
Our first question comes from Michael Yee with Jefferies.
Hey, guys. Good morning, and thanks for the update. Maybe two questions for us. First, I guess, on software. I noticed that you maintained the guidance We're short of into May now.
You gave an update, I think, March 23 and also in January. Do you get the sense that things are picking up? You feel more confident about the range of the guidance or the higher end as it relates to either people getting back to work, COVID, The adoption, just all of those things, do you have any sense of how things are going, whether better or not, here we are Midpoint of the year, that's question 1 on software as it relates to the guidance. And then question 2, maybe for Karen or the team. You have a candidate now For MALT 1, that's fantastic.
Do you feel you'd like to get these things into IND before you consider partnering? Is that kind of a I don't say a line in the sand, but kind of a good place to think about where it's most optimal IND and greater? Maybe just talk to that
Joel, do you want to take Mike's first question or?
Sure. Thanks, Thanks Mike. Good morning. So, yes, of course, we did maintain our guidance for the full year. If you look at the quarter, we came in slightly above what we had guided to back in March at 11% versus high single digit.
And as we look out over the rest of the year, we also reaffirmed the color around the pacing And it's important to keep in mind, so we believe that the second half will we see the second half unfolding to be higher growth than the first half And most of that growth in the Q4. And as we the way we Look at the year is we look at the customers that we are interacting with, the renewal timing, Whether those renewals are on premise or hosted, so that determines whether revenue is recognized in a particular quarter or over time, Whether there are upsizing opportunities within those renewals and also the prospect for new customers And at this time, we feel comfortable with the guidance that we provided for the full year, so we're maintaining it.
Karen?
Yes. Good morning, Mike. So on our MULT1 program and others, as we've discussed in the past, We do plan to move these programs forward ourselves. And at this moment, we are looking towards IND Opening studies next year as we discussed in the call. However, we do stay very cognizant of the landscape.
Each of these mechanisms, as you're aware, from AACR and ACS, a lot of information coming out, And we stay in contact with potential partners. As you know, each of these mechanisms has the potential to combine with We expect to see combination trials be a part of the clinical development program. And so we remain interested in the potential to benefit from those combination compounds. There's a number of ways to accomplish that. And so at this point, we are planning to open those IND studies ourselves and stay in touch With potential partners.
Great. Thank you, guys. Appreciate that. Thanks, Mike.
Our next question comes from Michael Raskin with Bank of America.
Hey guys, thanks for taking the question. I want to follow-up on the last one on just Real quick on the software pacing through the year. I want to make sure I think about this correctly because I know this was a big point of debate last quarter and So as we started the year, typically there is a little bit of seasonality where 1Q tends to be a little bit stronger than As far as software revenues goes, is that a fair way to think about that just because I know that some of the comps last year with COVID could have been a little bit messed up. So I just want to confirm that a mild step down 1Q to 2Q software is appropriate. And then I've got a follow-up for Terren.
Sure, Mike. Good morning. So you're right. We have seen that kind Seasonality in the past and I think the other thing is that we have guided to back half being higher growth During the first half and fourth quarter being the majority of that growth. So, I think as you think about the pacing of the year, I think it's important to keep that in mind.
Also if you look at the performance in the Q1, as I mentioned, it's Just slightly above what we had guided to in the Q1 in terms of high single digit. So I think that hopefully that's helpful in thinking about the pacing throughout the year.
Okay, thanks. And Sharon for you, it sounds like you're you can see and emphasize that beyond the 3 week compounds in the internal pipeline, You've got more and more potential candidates ramping up, that you're sort of finding some early hits for. I'm just wondering how should we think about the breadth of that Early pipeline, how many assets can you do you currently have the headcount and the ability to run at the same time? So how should we think about that going forward?
Yes. Thanks, Mike. So as we've described in the past, our Capacity to run discovery program, we can run around 20, 25 of these programs. Those are both in collaboration And wholly owned pipeline. This year, we've been really ramping up the team that's looking at these earlier stage programs, Well, we're able to initiate HIT ID and HIT TO LEAD.
And I would say that right now, we have the capacity for around 5 study state programs that are wholly owned, and we intend to maintain that study state over the next couple of years. And as the team grows, that gives us the ability to further expand our internal pipeline. Obviously, as these candidates move forward and into development, clinical development, our plan is to replace them. So The team is very busy right now working on additional programs that you'll be hearing more about in the future.
Okay. And one last quick one for Joel, if I could squeeze it in. You had some comments in the prepared remarks on sort of going back to the office post COVID and returning to normal operations. Should we be assuming any significant impact for the Should we be assuming any significant impact to the operating expense line as we go into 4Q from those activities? Or is it going to be a more gradual transition?
Thanks, Mike. Sure. So we are planning to be back in the office In the Q4, and we,
of
course, had these plans in place, Not knowing the exact timing at the beginning of the year, but as we planned out the whole year expenditures. So I think it is more of A gradual thing, as we get back to the office. I mean, obviously, other than being in the office, we're operating At full strength, so there really shouldn't be much change, in kind of the way we are Supporting our operations, just the fact that we're able to collaborate together, will be kind of a welcome change. The other thing is more the thing that will drive variability in expense to a greater degree is really our R and D side and Timing of pacing and timing of our programs as they move towards the clinic This is hiring throughout the year as we build up our capabilities for our early clinical operations and Also the timing of CRO expenses as we advance our internal programs in that regard. So I think those core operating metrics have more of an impact than perhaps return to the office at the end of the year.
Great. Thank you. Our next question comes from Do Kim with BMO Capital Markets.
Hi, good morning, everyone. Just wanted to ask about the expanded AstraZeneca collaboration. Could you provide a little more detail on that? How much of a step up in usage would AstraZeneca Be involved in the platform and what does the expansion mean in terms of economics for Schrodinger?
Yes. So first of all, thanks, Joe, for the question. This was a really highly successful Pilot program, if you will, and it was really great to see how successful it was in the rollout To the entire company, we're of course not revealing the details of the agreement, but I think it speaks very Well to the and not just the short term impact of the expansion, but really the long term expansion. As you know, we've talked a lot about The relative usage of our software at pharma companies relative to what we're using, as Karen said, in our collaborations internal program And seeing this kind of transition to a much larger scale deployment is a very good indicator of us achieving that as we've talked about sort of in some sense the TAM of the software. So we're really very excited About that transition from a sort of pilot program to a real broad deployment across their whole set of programs.
Great. And you've talked previously about how Schrodinger has the ability to use their own software platform in an unlimited fashion. Could you Quantify for us how much it would cost an external company to construct the internal program that you have currently just Like in terms of dollar figures, number of licenses to your short term or theoretically used?
Absolutely. That's a good question. So As Karen said, we're running around 2025 programs. And at the moment and this is going to increase by the way with I'll explain that in a second. But at the moment, that turns out the usage of the software to support that number of programs It's around $30,000,000 to $40,000,000 of software.
That doesn't include the compute costs, just the software licenses. Now a couple of things that's important to keep in mind. One is that's just 20 to 25 structuring labor programs. Of course, pharma companies Typically have more than that number of programs, certainly the bigger companies, but the incredible thing is that this keeps increasing at a pretty rapid pace. As we've discussed before, the performance of computers, the availability of computers, the availability of structures of proteins, which is a key input So these methods are increasing exponentially and continue to and have been for a long time and still continue today to increase exponentially.
So that's what it is right now. But as we see, we've talked about this before, a year ago or so, we were exploring around single digit billion number of molecules. Now we're exploring 100 of billions of molecules. And of course, As the as computer performance goes up, as the number of structural labor programs goes up, that $30,000,000 to $40,000,000 will continue to increase. So that's
And for Karen, you previously said that you expect A number of your collaborations that are in lead optimization to move into GLP tox studies, is that still your expectation over the next few quarters? And The milestones that you expect to achieve, will they be cash payments or just recognition of prior payments?
So I'll say that, first of all, we don't have full visibility into everything going on in all of our collaborations. However, we have seen and I think you've also seen the progress that's being made in the programs that are described publicly. You've seen Our progress, for example, with Morphic and, we know that these programs that we're working on with a variety of different Partners are meeting their scientific milestones moving forward with regard to the data packages. So We continue to be very confident that these programs are going to move forward through the various stage gates GLP toxin including A number that are in IND enabling studies actually moving into the clinic with the data packages supporting that. So I would say that we remain confident about a number of these programs, not just moving into lead up, but to further milestones and gates.
I would though turn over the question on the financials to Joel, if that's okay.
Sure. And Dough, if I misinterpret your question, please just clarify. But I think with regard to our discovery revenue, what we have signaled this year is Growth in our full year guidance is growth in our discovery revenue versus prior year. And what we've also said is that as we continue to advance
our collaboration
programs, Generally speaking, milestones get larger. That's certainly the case on the BMS side, as we've talked about the potential to earn up to Well over $2,000,000,000 in milestones with 2 thirds of it being roughly being pre commercial. And so We're really excited about investing and advancing those programs towards these very significant Step ups and milestones in the future. And I think we continue to see, as Karen mentioned, advancement in In the pipeline in that regard, so we're confident really across that pipeline that over time we're going to continue to see opportunities So we did see a signal in the Q1 where we were able To recognize $2,200,000 related to a single milestone, early preclinical stage Milestone 1 quarter earlier than anticipated, which I think is a nice signal in that particular case of the continued advancement of a specific program. But we're seeing broad advancement as we've talked about and so we're excited to continue to grow that side of the business.
Great. Thanks for taking my questions.
Thanks, Phil.
Our next question comes from David Lebowitz with Morgan Stanley.
Thank you very much for taking my question. Could you run us through the purchasing dynamics for a pharmaceutical company? How do they What's the typical cycle for making decisions? Obviously, they tend to make decisions on an annualized basis, but do they ever make incremental decisions Throughout the year, or is it really on a one time basis on an annual each year and then they tend to make the
Yes, it's typically the most of our Contracts are 1 year contracts, so the decisions are made on an annual basis. There's certainly examples of Cases where companies have essentially recognized in the middle of the year that they're running out of licenses and have we've done contracts That does sometimes happen, but typically it's every year. Now the interesting thing about that is that In 2020, as you know, there was quite a large increase. I think this was at a time where The validation of the technology was coming from sort of external sources. It was coming from the success of Nimbus and Morphic and our internal programs And that was catalyzing a broad adoption of the whole platform by quite a number a very large number of companies.
Now even though the decisions then are made on an annual basis of the renewals, The decision to scale up in a very significant way can actually take longer than a year because There now the validation switches over to sort of internal validation. So what does that mean? Now you have to first of all, you have to Deploy the technology at a much larger scale than they're used to. This involves obviously running the calculations on the cloud and then you have to go through these Design test make cycles where you're determining whether the technology is really having the Kind of impact that we're seeing and that they've seen from other collaborations and that can sometimes take a little bit longer than a year and that's what we have How we've talked about sort of the growth in the business, it's not necessarily completely linear. We know where it's headed, right, as we talked about before in response But it can take a sort of lumpy course to get there.
Makes sense?
Yes, it does. On the occasion when a customer does add on incrementally Would that add on be a year long contract or would it be to I guess to fit into the current contract and then conclude that in the Q4, so if that's when the contract is currently in And so that basically incorporate into the current cycle?
It really varies. It's a really good question. It varies. Sometimes the contract is start to end so that it's coincident with the earlier contract, but Just as often, it's a contract now where there are 2 renewals in the year and then later on they're merged. It's really all Every different possible way of doing it has occurred.
Sometimes it's 6 months, sometimes 3 months, 9 months, sometimes a little bit over a year. I mean, there's quite a bit of variability.
Thank you very much for taking my questions.
Sure.
Thank you. There are no further questions. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.