Schrödinger, Inc. — Q2 2023 Form 10-Q
Business context and reporting period. The unaudited filing covers the three and six months ended June 30, 2023. Schrödinger operates a software business licensing its computational platform and a drug discovery business comprising collaborations and proprietary programs.
Financial performance and liquidity
Amounts below are in millions of dollars except per-share data. Comparisons are with the corresponding 2022 period.
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenue | $35.2, down 9% from $38.5 | $100.0, up 15% from $87.1 |
| Software revenue | $29.4, down 2% | $61.6, down 2% |
| Drug discovery revenue | $5.8, down 31% | $38.4, up 60% |
| Gross profit / gross margin | $13.8 / 39.2%, versus $17.1 / 44.5% | $59.5 / 59.5%, versus $45.1 / 51.8% |
| Operating expenses | $74.9, up 24% | $151.1, up 29% |
| Operating loss | $61.1, versus $43.5 | $91.6, versus $72.1 |
| Net income (loss) | $4.3, versus a $47.7 loss | $133.4, versus an $82.1 loss |
| Basic / diluted earnings (loss) per share | $0.06 / $0.06, versus $(0.67) / $(0.67) | $1.86 / $1.79, versus $(1.15) / $(1.15) |
- Reported earnings were substantially affected by investment and tax items. Six-month results included a $147.3 million gain on the Nimbus investment and $76.4 million in fair-value gains, mainly on Structure Therapeutics and Morphic. Q2 included $40.7 million in fair-value gains and a $20.4 million income-tax benefit. These items substantially offset operating losses and are not equivalent to recurring operating profit.
- Q2 software revenue was supported by hosted software and maintenance growth, offset by lower professional-services revenue. Six-month drug discovery revenue included a $25.0 million BMS development milestone for the SOS1/KRAS program; Q2 drug discovery revenue fell partly because of milestone timing and collaboration progress.
- Software gross margin was 77% in Q2 and 78% for the first half. Drug discovery segment gross profit was negative $8.8 million in Q2 but positive $11.7 million for the first half, reflecting the timing and amount of milestone revenue.
- Research and development expense rose 37% in Q2 and 42% for the first half, as the company expanded proprietary programs and related CRO activity and reallocated discovery personnel. Management expects R&D expense to increase substantially.
- At June 30, cash and cash equivalents were $286.0 million, restricted cash $5.1 million, and marketable securities $262.7 million, totaling $553.7 million. Six-month operating cash use was $49.5 million; investing cash provided $239.4 million, including $147.1 million of Nimbus distributions and net maturities of marketable securities. Financing cash provided $5.4 million, primarily from option exercises.
- Total liabilities were $230.3 million, including $121.2 million of operating lease liabilities. The balance sheet reports no borrowings or other financial debt. Future minimum operating lease payments were $189.2 million before imputed interest.
- Management says available cash, cash equivalents, and marketable securities should fund operating expenses and capital expenditure requirements for at least 24 months. The company had $250 million remaining available under its ATM offering at June 30 and had sold no shares under it.
Material changes, outlook, and risks
- Revenue for the first half grew despite a slight decline in software revenue, primarily because of the BMS milestone. Q2 revenue declined year over year, while operating losses widened as expenses increased.
- Management expects to share preliminary healthy-volunteer SGR-1505 data by the end of 2023. The FDA cleared the SGR-2921 IND in July 2023; the company expects to have U.S. Phase 1 sites open for screening and enrollment by year-end. It plans to submit an SGR-3515 IND in 2024, subject to favorable enabling-study results.
- In July 2023, after quarter-end, Zai Lab gave notice terminating its collaboration. Rights to the program reverted to Schrödinger; the former agreement had provided eligibility for up to approximately $338 million in milestones. The filing does not quantify the financial impact of the termination.
- Management cautions that drug discovery revenue and investment gains may fluctuate substantially. The company has a history of operating losses, expects losses over the next several years, and has no product sales from approved drugs.
- A royalty partner audit was ongoing. Management considered a contingency probable but not estimable. Routine litigation was not expected to have a material adverse effect, and the company reported no material legal proceedings.
- Disclosure controls were not effective at June 30 because of an unremediated material weakness in controls over assessing whether drug discovery milestones become probable. The weakness had caused a $1.7 million understatement of 2022 revenue and contract assets, corrected before issuance. Management expected remediation before year-end 2023, subject to successful testing.
- Other significant risks include clinical and regulatory uncertainty, dependence on collaborators and milestone timing, software renewal and competitive risks, cybersecurity and data protection, and the possibility that equity investment values or distributions may decline. Three customers represented 25%, 21%, and 16% of contract assets at June 30; one customer accounted for 30% of first-half revenue.
Important facts for investors to verify
- Separate recurring business performance from Nimbus proceeds, fair-value gains, and the Q2 tax benefit when assessing profitability and cash generation.
- Track software renewals, hosted-software growth, professional-services trends, and the timing and concentration of drug discovery milestones.
- Monitor R&D spending and operating cash use against management’s stated 24-month liquidity expectation and the company’s lease and other contractual commitments.
- Follow SGR-1505 and SGR-2921 clinical progress, SGR-3515 IND-enabling results, and the consequences of the Zai Lab termination.
- Check progress and testing of the revenue-control remediation, and any developments in the royalty-partner audit or its unestimable contingency.