Schrödinger, Inc. 2019 Annual Report (10-K) Summary
Business Context and Reporting Period
This summary covers the fiscal year ended December 31, 2019. Schrödinger, Inc. operates a dual business model: (1) a software segment providing physics-based computational platforms for drug discovery and materials science, and (2) a drug discovery segment involving collaborative programs with biopharmaceutical companies and internal, wholly-owned programs. The company is an emerging growth company and a smaller reporting company. As of the filing date, the company had recently completed its Initial Public Offering (IPO) in February 2020.
Key Financial Metrics
| Metric | 2019 | 2018 |
|---|---|---|
| Total Revenue | $85.5 million | $66.6 million |
| Software Revenue | $66.7 million | $59.9 million |
| Drug Discovery Revenue | $18.8 million | $6.8 million |
| Gross Profit | $49.1 million | $42.9 million |
| Net Loss | $(25.7) million | $(28.4) million |
| Operating Loss | $(38.7) million | $(28.0) million |
| Cash, Cash Equivalents, and Marketable Securities | $86.3 million | $84.1 million |
| Accumulated Deficit | $(105.1) million | $(80.5) million |
Note: The company reported a net loss attributable to Schrödinger stockholders of $24.6 million for 2019, compared to $28.4 million in 2018.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 28% year-over-year. This was driven by a 178% increase in drug discovery revenue (due to milestone achievements) and an 11% increase in software revenue.
- Software Mix Shift: Hosted software revenue grew 153% to $7.4 million, while on-premise software revenue grew 6% to $42.6 million. Professional services revenue declined 28%.
- Operating Expenses: Total operating expenses increased 24% to $87.8 million. General and Administrative (G&A) expenses rose 46% to $27.0 million, partly due to $3.3 million in non-comparable costs (including a $1.5 million gift to Columbia University and costs related to a Nimbus distribution).
- Other Income: The company reported a $9.9 million gain from changes in fair value of equity investments, primarily driven by a $14.1 million gain on its investment in Morphic Holding, Inc. following Morphic's IPO.
- Liquidity: Cash and marketable securities increased slightly to $86.3 million. The company raised $110.0 million in gross proceeds from Series E preferred stock issuances in late 2018 and early 2019.
Guidance, Outlook, and Risks
- Outlook: Management expects operating expenses to increase substantially in the foreseeable future due to investments in internal drug discovery programs, sales and marketing, and platform development. The company plans to initiate IND-enabling studies for internal programs by the first half of 2021.
- Capital Resources: As of December 31, 2019, the company had $86.3 million in cash and marketable securities. Following the February 2020 IPO, the company received net proceeds of $209.9 million. Management believes these funds are sufficient to operate for at least the next 12 months.
- Risks:
- Profitability: The company has a history of significant operating losses and may never achieve profitability.
- Drug Discovery Uncertainty: Internal programs are in early stages; success depends on preclinical and clinical trial outcomes which are uncertain.
- Collaboration Dependence: Revenue from collaborations depends on milestones outside the company's control. A Phase 2 trial failure by collaborator Gilead for a Nimbus program (firsocostat) in December 2019 created uncertainty regarding future earnout payments.
- Internal Controls: The company previously identified a material weakness in internal controls over financial reporting related to equity method investments, which it is actively remediating.
Key Facts for Investor Verification
- Revenue Concentration: The top 20 pharmaceutical companies accounted for 28% of total 2019 revenue. No single customer represented more than 5% of software revenue.
- Customer Retention: Retention rate for customers with an Annual Contract Value (ACV) over $100,000 was 96% or higher for 2019 and the previous six years.
- Equity Investments: Significant non-operating gains were driven by the fair value adjustment of the Morphic Holding, Inc. investment. Investors should monitor the volatility of these holdings.
- Intellectual Property: The company relies on license agreements with Columbia University for core technology. Royalties are paid on gross revenues from specific products.
- Internal Pipeline: The company has five wholly-owned internal drug discovery programs focused on oncology (DNA damage response and genetically defined cancers).